EUR 53.02 For Business Accounts Only

UNICEM sale masks earnings challenge

FLOUR MILLS OF NIGERIA PLC                                                                   

UNICEM sale masks earnings challenge                                                                 

Despite a second consecutive quarterly decline in topline growth (Q4: -8%, Q3: -10%), FLOURMILL reported an 11% y/y revenue growth in its FY’16 period ended 31 March, above Vetiva’s 9% growth estimate. This growth was supported by the strong performance recorded in the first half of the year wherein Q2’16 delivered the strongest quarterly topline performance since Q3'13. According to press release by management, this topline improvement was driven by volume growth and gradual price increases through the year. With this, gross margin came in relatively flat y/y as price increases tapered the impact of higher input costs incurred from currency weakness (given the miller’s c.80% exposure to imported raw materials).                                                                    

Whilst operating expenses moderated 15% y/y, a N7.7 billion “other operating loss” (on the back of N6.3 billion FX loss) pulled EBIT margin 54bps lower to 2.6%. Elevated net finance charges of N22 billion (FY’15: N19 billion) also weighed on earnings, putting operational loss before tax at N12.2 billion (FY’15 loss of N6.6 billion). Nonetheless, following exceptional income of N23.7 billion from the final payment on the sale of FLOURMILL’s stake in UNICEM to Lafarge in Q2’16, net earnings for the year rose 70% y/y to N14 billion. The Board of Directors have proposed a dividend per share of N1.00 (FY’2015: N2.10).                                                                    

Whilst we are impressed with the revenue growth recorded in FY’16, we are wary as to how sustainable this run rate (on both the volume and price front) will be in the first half of 2017 amidst macroeconomic headwinds that have stifled consumer spending and increased sensitivity to changes in price. Furthermore, following the FX market liberalization in June which has seen the naira depreciate 55% (NGN307/USD), we believe FLOURMILL will struggle due to its exposure to imported inputs. We revise our FY’17 EPS estimate from a profit of N0.98 to a N1.15 loss. Consequently, our 12 month target price (TP) is revised lower to N23.41 (Previous: N43.93) to the reflect tough earnings outlook.                                                                       

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, cement manufacturing, 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 90% of its sales from its food and agro-allied businesses.