FLOUR MILLS OF NIGERIA PLC FY'18 - Gains from deleveraging to support FY’19 PAT

Gains from deleveraging to support FY’19 PAT                                                                                 

FLOURMILL recently released its FY’18 financial results showing a 3% y/y rise in revenue to ₦542.7 billion and a notable 54% y/y jump in PAT to ₦13.6 billion. The impressive y/y performance was however weaker than we had expected. Particularly, profit before tax came in 39% lower than our ₦18.3 billion estimate following a markedly weak performance in Q4 (Jan-Mar 2018 period). With revenue printing 13% lower than we had expected and gross profit down to ₦12.7 billion vs. our ₦20.5 billion forecast (Q3’18: ₦19 billion), gross margin weakened to 11.1% in the quarter (Vetiva: 14.5%, 9M’18: 13.1%). Given that wheat (predominantly imported) is FLOURMILL’s major agricultural input, we believe FLOURMILL’s input costs must have been bloated by the sharp rise in global wheat prices so far this year – up c.15% ytd. Furthermore, an unusual spike in Operating expenses as well as higher than expected debt servicing figure culminated in a ₦3.0 billion loss before tax in Q4.                                                                                                

We are less optimistic about price increases in FY’19, hence, we have revised our revenue expectation to ₦571 billion – translating to a 5% y/y growth (Previous: 7%). We expect sustained recovery in demand to support this growth. We cut our FY’19 PAT forecast for FLOURMILL to ₦19.8 billion (Previous: ₦21.8 billion) – representing a 45% y/y bottom line growth. However, given the 56% increase in shares outstanding, EPS estimate for the year comes in 7% lower y/y at ₦4.82. With a constant dividend payout ratio of c.20%, we forecast dividend per share of ₦0.96 (FY’18: ₦1.00; Dividend yield: 2.8%). Major risks to our outlook include a stronger than expected rise in global wheat prices and adverse exchange rate movements. Our 12-Month Target Price for FLOURMILL is revised to ₦40.99 (Previous: ₦45.45).                               

Flour Mills of Nigeria Plc is primarily engaged in flour milling, production of pasta, noodles, edible oil and livestock feeds, farming and other agro-allied activities, distribution and sales of fertilizer, manufacturing and marketing of laminated woven polypropylene sacks and flexible packaging materials, operating terminals A and B at the Apapa Port, customs clearing, forwarding agents, shipping agents and logistics and management of third party mills. The Group derives over 90% of its sales from its food and agro-allied businesses.