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FLOUR MILLS OF NIGERIA PLC Q1'19 - Softer Selling Prices Drive Q1’19 Revenue Lower Y/Y

Softer selling prices drive Q1’19 revenue lower y/y                                                                                       

In its recently released Q1’19 results, FLOURMILL reported an 11% y/y decline in topline to ₦133 billion, 7% below our estimate. The revenue miss was driven by a reduction in selling prices in flour and sugar businesses, which offset the impact of volume increases across certain product categories. Whilst the aforementioned drove an 11% y/y decline in the Food segment, the Agro-Allied segment also recorded a 10% y/y revenue moderation as underperformance in the Edible Oils and Animal Feeds businesses offset a good showing in the Fertilizer division. On a positive note however, Q1’19 gross margin (13.0%) came in stronger, 140bps higher y/y and above our 12.7% estimate. As such, Gross profit was flat y/y at ₦17.3 billion, albeit 5% lower than our estimate.                                                                                  

Reflecting both the Q1 run rate and a more bearish outlook for revenue, we revise our FY’19 revenue growth estimate to -3% (Previous: +5%). Particularly, we expect the challenging market dynamics in the Animal Feeds and Edible Oil businesses to keep Agro-Allied topline depressed. Furthermore, we do not expect volume performance to compensate for the reduction in selling prices even as the Sugar business (c.20% of Foods segment) continues to struggle with the influx of smuggled refined sugar. Overall, we revise our FY’19 PAT estimate lower to ₦16.1 billion (Previous: ₦19.8 billion) – 3% PAT Margin. With this, our 12-Month Target Price (TP) is reduced to ₦36.32 (Previous: ₦40.99), supported by a downward revision in our risk-free rate. We retain a BUY rating on FLOURMILL given the 48% upside to our TP, the stock also trades at a discount to our Consumer Goods Coverage with P/E of 6.4x vs 19.6x for the latter.