EUR 18.10 For Business Accounts Only

FLOUR MILLS OF NIGERIA PLC 9M'17 - Q3 earnings miss as margins contract

• In line with expectations, FLOURMILL sustained the strong y/y topline growth with 9M’16/17 revenue up 48% to ₦389 billion – already 14% better than its FY’15/16 revenue. The resilient growth from the food manufacturer has been powered by a strong mix of price hikes across product categories and volume ramp-up. Given its c.78% exposure to imported raw materials (such as wheat and raw sugar), price increases were implemented to counter rising costs following over 50% currency devaluation in 2016. On a quarterly basis, giving the mildly weaker demand for some of the company’s food products during the harvest season, revenue came in 1% lower q/q albeit 6% ahead of Vetiva’s estimate. Furthermore, FLOURMILL’s gross margin has been somewhat volatile since the start of the year, recording a 289bps moderation in Q3’16/17 after rising by 272bps in the previous quarter (Q3: 12.7%, Q2: 15.5%, Q1:12.1%).
• Though a reflection of a relatively less volatile FX environment within the quarter, FLOURMILL recorded FX losses of ₦4 billion (Q2: ₦9 billion) – translating to a cumulative ₦13 billion for 9M’16/17. Also, we highlight the 21% q/q rise in Finance Expenses following a sharp 47% rise in total debt to ₦234 billion. We forecast a further ₦2 billion rise in FX loss in the final quarter of the year, resulting in a total ₦15 billion for FY’16/17. Thus, after accounting for higher interest expense in the coming quarter, we revise our FY’16/17 EPS estimate to ₦2.86 (Previous: ₦3.88). Our Target Price is also revised slightly lower to ₦34.11 (Previous: ₦35.86) and we maintain a BUY rating.