EUR 4.00 For Business Accounts Only

Initial View - Flour Mills of Nigeria Plc - Earnings slump on cost pressures

• Over the weekend, Flour Mills of Nigeria Plc released its full year result for the period ended 31^st March 2019. The company reported a loss after tax of N3.89 billion in its Q4 18 (January – March) standalone (vs profit of N368.6 million same period in the prior year). The poor showing was spearheaded by higher cost of sales (+17.2%) due to higher raw material cost over the period. Consequently, the last quarter’s performance trimmed profits reported for FY 19 to N4 billion. On its full year earnings, the company declared dividend of N1.2, representing a dividend payout of 120% and dividend yield of 7.4% based on current pricing.
• Weaker base propel revenue growth: Over the  last quarter, the company reported a 10.1% YoY growth in revenue to N126.8 billion, largely driven by strong sales across its key businesses relative to last year (Food: 5.1% YoY, Agro- Allied: 35.9% YoY and Sugar supply chain: 20% YoY), with support services  (-37.9% YoY)  being the only exception. While we adduce revenue growth in Food to strong sales in Flour and Pasta products, we believe weak base from last year due to higher pricing largely explains the stronger showing this quarter.
• However, cost of sales (17% YoY to N120 billion) rose faster than revenue due to higher material cost (15.1% YoY), which in our view mirrors higher wheat prices (+7.8% YoY) over the period. Consequently, gross profit dipped 47% YoY to N6.7 billion with related gross margin contracting 570bps YoY to 5.3% over the period. Despite lower operating expenses (-24.9% YoY to N6.72 billion) underpinned by a 34.1% decline in administrative expenses, operating profit contracted 99.1% YoY to N33 million.
• On the positive, interest expense declined 15.9% YoY to N6.3 billion due to contraction in total loans to N126.9 billion in FY 19 vs N142 billion in 9M 19 with debt-to-equity ratio of 84% (93% as at 9M 19). Flourmill trades at a P/E of 16.1x compared to Bloomberg Middle East and Africa peers of 26.38x.