FLOUR MILLS OF NIGERIA PLC - 9M'19/20 Earnings Release

Strong volumes support Revenue

FLOURMILL in its unaudited 9M’19/20 results, posted a positive third quarter performance, with revenue growing 12% q/q to ₦152.72 billion. While the Food segment (+4% q/q) remains the biggest contributor to top line, we note that revenue from the agro-allied and the sugar businesses grew at a faster pace of 34% and 9% q/q respectively. The revenue growth in these segments did not come as a surprise, as we had anticipated better volume-supported performances from the edible oil and sugar segments, given the closure of the borders and the end of year festivities.

We acknowledge that the company had been well positioned for the increased demand from the closed borders, having expanded and regionalized their pasta and ball food product segments with the introduction of the Mai Kwabo and Dawavita brands in the North; this was in addition to their already diversified portfolio and expanded production capacity for the pasta and semovita brands. Consequently, Q3’19/20 revenue grew 17% y/y, translating to an 11% y/y increase in gross profit, although gross margin declined marginally (-0.55ppt) y/y.

However, dragged by a 33% jump in admin expenses, operating expenses advanced 26% y/y to ₦8.66 billion (Opex to sales ratio - Q3’19: 5.7%, Q3’18: 5.3%) in Q3’19/20, taking operating profit 2% lower y/y. That said, in its bid to take advantage of the low yield environment, management took up an active debt restructuring strategy, refinancing its long-term borrowings through a ₦70 billion debt issuance programme. They had also reduced short-term borrowings by ₦12 billion from ₦62 billion in Q3’19, translating to a 20% y/y decline in net finance expenses and a 35% q/q increase in PAT.

Bouyed by the impressive Q3’19/20 Revenue, 9M’19/20 revenue advanced 6% y/y to ₦423.48 billion. Although Gross margin and operating margin declined 0.34ppts and 1ppt y/y, PBT rose 9% y/y to ₦12.29 billion due to a significant reduction in Interest expense (-21% y/y. 9M’18/19: ₦11.27 billion). Overall, nine-months PAT grew 3% y/y, with PAT margin rising 0.04ppts.  

Expect border closure to drive revenue growth

We expect the land borders to remain closed for the first half of 2020 and see increased support for the food, sugar and edible oil segments in the period. Thus, we maintain a positive outlook for FLOURMILL in the final quarter of FY’19/20. Although, we expect slightly lower sales in this period for the food (down 3% q/q) and agro-allied business (down 1% q/q) segments, due to the strong base experienced in the festive quarter. That said, we project full year revenue of ₦572.52 billion (+9% y/y). Furthermore, we expect a slight increase in operating expenses given our outlook for inflation in this first half of 2020. On a positive note, with the currently diminished interest rate levels in the fixed income space, we project an 18% q/q decline in net finance expense and expect the line item to also decline 28% y/y in FY’20. Finally, our PAT projection of ₦1.46 billion for Q4’19/20 translates to a 21% q/q decline in PAT and a full-year PAT of ₦9.1 billion (+121% y/y) and we set a target price of ₦27.56 and maintain a BUY recommendation on the stock.