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Initial View - Flour Mills of Nigeria Plc - Lower interest expense propels earnings

• Yesterday, Flour Mills of Nigeria Plc released its first quarter results (FQ1 20) wherein Profit after tax rose 16.1% YoY to N4.2 billion, translating to an EPS of N1.03. The improvement in earnings stemmed from lower Finance expense (-26.6% YoY to N4.6 billion) which reflects pass through of ongoing balance sheet deleveraging.
• Strong Sugar and Agro-Allied sales to the rescue: Despite weak food (-1.6% YoY to N81.6 billion) and support services sales (-24.7% YoY to N3.5 billion), overall revenue grew 1.3% YoY to N134.7 billion. This was largely driven by impressive showing in the Sugar and Agro-Allied segment which grew 16.2% and 3.4% respectively to N24.1 billion and N25.6 billion respectively. Whilst food revenues were hindered by lower volumes, Agro-Allied sales was largely driven by higher fertilizer volumes. Furthermore, according to management, the boost in sugar sales emanated from a 15% YoY rise prices and 5% rise volumes over the period.
• Cost pressures persist: However, higher raw material cost due to rising wheat prices (+7.8% YoY) sustained cost pressures (cost of sales: +2%% YoY to N118.3 billion) for the third consecutive quarter in FQ1 20. Consequently, due to the faster rise in cost of sales, gross profit slump 4.6% YoY to N16.5 billion with related margin contracting 80bps YoY to 12.2%. Overlaying this with muted growth in Operating expenses, EBIT margin compressed 60bps YoY to 7.3%.
• In addition, interest expense declined 26.7% YoY to N4.6 billion, following the restructuring of loans in the prior year using proceeds of the right issue.

Flourmill trades at a P/E of 13.07x compared to Bloomberg Middle East and Africa peers of 25.67x.