03 July 2018 ( Lagos ) : According to analysts at ARM Securities Limited, Flour Mills of Nigeria Plc reported earnings growth of 54.1% YoY to N13.6 billion. However, analysts note that the growth in earnings was largely boosted by non-core activities as the company reported foreign exchange gains of N1.2 billion and deferred income1 of N2.2 billion. Core performance for the financial year was slightly weak with EBIT margin down 36bps to 7.8% while related profit declined 1% to N42.5 billion. 

After-tax earnings of N13.6 billion translates to an Earnings per Share (EPS) of N4.83 (vs. N3.03 in FY 17). Accordingly, the Board of Directors recommended a Dividend per Share of N1.00, representing a dividend payout of 20.7%. Proposed dividend translates to a dividend yield of 3.2% based on current pricing.

 ( FLOURMILL ) performance over the fourth quarter was broadly weak. Precisely, revenue for the quarter declined 14.4% YoY with pressure stemming from the food sub-segment which dipped 27% to N96.4 billion. Management had earlier stated that its product pricing remained flat since the beginning of the year hence, analysts believe the company faced volume pressures over the quarter. 

Cost of Sales, however, declined faster (-15.6% YoY to N102 billion) relative to revenue which led gross margin to expand 125bps to 11.1%. However, due to soft topline, related gross profit was lower 3.4% YoY to N12.7 billion. Furthermore, underpinned by lower operating expenses (-3.7% YoY to N8.9 billion), EBIT margin expanded marginally by 39bps to 3.3%.

Elsewhere, finance expense declined 49.2% YoY to N7.5 billion over FQ4 18 owing to lower leverage as Flourmill paid down ~23.6% of its total loans & borrowings which now currently stands at N153.2 billion (vs. N200 billion and N241 billion as at 9M 18 and FY 17 respectively). 

Accordingly, debt-to-equity ratio improved to 102% from 180% as at 9M 18. Also, over FQ4 18 the company refinanced some of its expensive short-term borrowings with cheaper commercial papers which, in their view, provided additional support to the moderation in finance expense.

Largely on account of weak operating profit (-3% YoY to N3.8 billion) and still high finance expense, the company reported a loss before tax of N2.96 billion (vs. profit of N178 million in FQ4 17). However, ( FLOURMILL ) enjoyed some tax holiday – effective pioneer status of N6.0 billion – which led the company to report a tax credit of N3.3 billion and after-tax profit of N368 million (vs. N1.4 billion in FQ4 17). Flourmill trades at a P/E of 7.0x compared to Bloomberg Middle East and Africa peers of 12.4x. 

Their last communicated FVE on the stock is N39.40 which translates to a STRONG BUY rating. Analysts will revisit their numbers after further analysis and discussion with management.

Source: Feyisike Ilemore at ARM Securities Limited.

Reporting for EasyKobo on Tuesday, 3 July 2018 in Lagos, Nigeria

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