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FLOUR MILLS OF NIGERIA PLC H1'20 - Revenue performance boosts Profits

Flourmill Nigeria recently released its FY’20 results, reporting a 7% y/y Revenue growth to ₦573.8 billion in the year, a step-up from the 2.8% y/y decline it had reported in the previous financial year. We believe that increased demand from consumers who could no longer access land border imports supported topline growth in three of their four business lines. Sugar Revenue grew 18.1%, spurred by higher prices and volumes, due to the unavailability of cheaper smuggled sugar. The closure also impacted the food business, especially pasta volumes which improved c.20% y/y. Food Revenue was also supported by improved B2C marketing as Flourmill introduced five new value brands across its staple segment, with food Revenue growing 6.8% y/y to ₦358.4 billion (FY’19:-2.9%). The best performer by segment was the Agro-allied business which expanded by 19.7% y/y to ₦105.5 billion. We believe that the increased focus on local agricultural livestock and crops increased demand for its feed and fertilizer products, especially in the last two quarters of the year.

We believe that Flourmill’s new value brands will prove pivotal at this time, given our expectation of continuously pressured consumer wallets. Maintaining positive expectations for all segments, we estimate a 6.5% y/y growth forecast for topline in FY’21 to ₦611.2 billion. However, given the company’s dollar exposure due to wheat importation, we foresee a 1ppt y/y tightening in gross margin to 10.5% due to the currency adjustment in March. Overall, we estimate that Gross profit would decline by 2.4% y/y to ₦64.18 billion in FY’20. Furthermore, we expect operating expenses to increase by 7.7% to ₦35.1 billion amid inflationary pressures, taking FY’21 EBIT 3.1% lower y/y to ₦33.9 billion. We expect interest expense to decline further by a marginal 0.2% y/y to ₦19.9 billion and project a PBT of ₦15.8 billion. Adjusting for taxes, we expect Flourmill to deliver an FY’21 PAT of ₦10.4 billion. We value the Flourmill at ₦25.43 and place a BUY recommendation on the stock.