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FLOUR MILLS OF NIGERIA PLC Q1'18 Earnings - Earnings beat despite lingering cost pressures

FLOUR MILLS OF NIGERIA PLC Q1'18 Earnings

Earnings beat despite lingering cost pressures

Despite the strong base from Q1’16/17, FLOURMILL began its FY’17/18 financial year on an impressive note, with Q1’17/18 revenue printing in line with Vetiva estimate at ₦149 billion - up 25% y/y and 11% q/q. Amidst a more stable FX environment, gross margin for the quarter came in 176bps higher q/q at 11.6%, albeit below our 12.2% estimate and the 12.8% recorded in Q1’16/17. We believe the sustained uptrend in some raw material prices (wheat and raw sugar) would have capped the recovery in margins. Also, pressured by one-off charges to administrative expenses (such as expenses incurred on the Apapa road renovation), operating expenses rose 33% y/y to ₦5.3 billion – albeit 24% lower than our estimate. Overall, Q1’17/18 PAT rose by a mild 3% y/y to ₦4.5 billion (Vetiva: ₦2.5 billion).

Noting the strong revenue performance recorded in Q1’16/17 in spite of some operational challenges, we are more optimistic on topline growth in the year and revise our FY’17/18 revenue growth estimate slightly higher to 11% (Previous: 9%). Whilst we expect the cost pressure observed to persist, we are more confident that the miller’s revenue growth will continue to offset the higher cost pressure. As such, we revise our OPEX to sales ratio to 4.0% (Previous: 4.7%). With this, coupled with the boost from FX gains, we revise our FY’17/18 PAT estimate higher to ₦13 billion (Previous: ₦10 billion). Our 12-month Target Price is revised higher to ₦33.07 (Previous: ₦31.71).