06 July 2018 ( Lagos )

Upside potential still meaningful despite marked cuts to analyst's EPS ests.: 

Flour Mills of Nigeria’s (FMN) Q4 2018 (end-Mar) results disappointed across all key headline items due to the weak performance of its foods and agro-allied businesses relative to the three preceding quarters. Sales for both businesses - foods and agro-allied - declined by -14% and -41% respectively compared with their average quarterly run-rates over the 9M 2018 (end-Dec) period. 

On its conference call, management disclosed that earnings were weighed down by losses in its new sugar factory, Sunti Sugar Mills, and ROM Oil, its edible oil business. Although management did not provide specific guidance, it alluded to a stronger start to the year compared with the previous quarter. Despite management’s optimism, analysts would like to see evidence of this going forward. 

As such, analysts have cut their EPS forecasts significantly over the 2019E-2020E period and their price target by –18% to N39.6. Although the shares have shed -15.8% over the last three months (vs. -7.7% NSE ASI), their new price target still implies a potential upside of 28%. On a relative basis, the shares are trading on a 2019E (end-Mar) P/E multiple of 9.4x for 36% EPS growth in 2020E. As such, analysts retain their Outperform rating on the shares.

FBNQuest Capital Equity Research recommendation definitions

Outperform               

The analyst expects the stock to outperform the Nigerian Stock Exchange (NSE) All Share Index over the next 12 months or the specified investment horizon.

Neutral

The analyst expects the stock to perform in line with the NSE All Share Index over the next 12 months or the specified investment horizon.

Underperform

The analyst expects the stock to underperform the NSE All Share Index over the next 12 months or the specified investment horizon.

Not Rated

The rating and price target are currently suspended to comply with regulations or firm policies such as when FBN Capital is acting as an adviser in a merger or transaction which involves the company whose rating has been suspended or due to reasons that limit the ability of the analysts to provide forecasts for the company in question.

Benchmark

The Nigerian Stock Exchange All Share Index

Price targets

Price targets reflect in part the analyst's estimates for the company's earnings. The achievement of any price target may be impeded by general market and macroeconomic trends, and by other risks related to the company or the market, and may not occur if the company's earnings fall short of estimates.

Asset allocation

The recommended weighting for equities, cash and fixed income instrument is based on a number of metrics and does not relate to a particular size change in one variable.

Source : Tunde Abidoye from FBNQuest Capital Limited

Reporting for EasyKobo on Friday, 6 July 2018 in Lagos, Nigeria