01 Aug 2018 ( Lagos ) : Yesterday, Flour Mills of Nigeria (Flourmill) released its first quarter results (FQ1 19) reporting weaker earnings of N3.6 billion (-19.5% YoY). On a per-share basis, EPS printed at N0.90, representing a 42% decline from Q2 17 (N1.54) due to the dilutive impact of additional shares (1.47 billion new shares) from the rights issue which was concluded in March 2018.
Broadly, despite a marginal increase in gross profit (+0.13% to N17.3 billion) the contraction in earnings ensued due to higher operating expenses (+26.3% YoY to N6.7 billion) and lower “other operating income” which neutered lower finance expense (-30.5% YoY to N6.2 billion). To buttress on the decline in “other operating income”, last year was a high base bloated by foreign exchange gains which wasn’t present in FQ1 19 result.
Slow recovery in topline: In the review quarter, revenue declined by 10.7% YoY to N133 billion, extending the YoY topline contraction that began in FQ3 18. According to provided breakdown, the decline in revenue stemmed from weakness in its food (-10.5% YoY to N103.6 billion) and agro-allied business (- 9.7% YoY to N24.8 billion). Based on management’s last communication, prices have remained stable hence, analysts attribute the decline in sales to weaker volumes.
It appears the slowdown in wheat flour as well as soft demand for its agro-allied products which management alluded to in its FY 18 conference call is still playing out to drive weaker volume and revenue. Also, concerning its sugar subsidiary, analysts believe the company might have lost volumes taking a cue from the current operating environment where the influx of smuggled sugar is threatening local manufacturers volumes.
Faster increase in OPEX erode gross margin expansion: On the other hand, cost of Sales declined faster (-12.1% YoY to N115.8 billion) than sales, indicating tamer cost pressures over the period. According to breakdown provided, material costs declined 15.4% YoY to N100.2 billion which analysts attribute to softer raw sugar prices (-21.3% YoY) which offset higher wheat prices (+14.7% YoY). Accordingly, gross margin expanded 140bps to 13% (vs. FQ4 18: 11.1%; FQ1 18: 11.6%).
However, the expansion in gross margin was eroded as an increase in OPEX to sales ratio (+148bps to 5%) – due to higher operating expenses (+26.3% YoY to N6.7 billion) – drove EBIT margin to contract 7bps to 7.9% in FQ1 19 (vs. 5-year average of 5.8%) while related profit expanded declined 11.5% to N10.6 billion.
Finance expense extends its moderation: In the review period, Flourmill total debt increased 12% QoQ to N171 billion owing to higher borrowings from commercial banks and Bank of Industry (BOI). However, due to higher cash (+68% QoQ to N37.3 billion), net-debt to equity ratio remained unchanged QoQ at 87% (vs. 140% as at FQ1 17). Irrespective of higher borrowings, finance expense extended its downward trend to print at N6.2 billion (YoY: -30.5%; QoQ: -17.7%). Analysts link the moderation in finance cost to the company’s strategy of refinancing its expensive short-term borrowings with cheaper commercial papers at currently low interest rates as well as lower borrowings (-9.7%).
Flourmill trades at P/E and EV/EBITDA multiples of 6.9x and 4.3x compared to Bloomberg Middle East and Africa peers of 13.5x and 10.8x respectively.
Flour Mills of Nigeria Plc will be hosting a teleconference call for analysts and investors on Friday 3rd August at 14.30 Lagos / 14:30 London / 09.30 New York / 15:30 Johannesburg to review the company’s group results for the quarter ended 30th June 2018 and to reply to questions.
Reporting for EasyKobo on Wednesday, 1 July 2018 in Lagos, Nigeria
Source: Feyisike Ilemore at ARM Securities Limited
NOTE - THIS ARTICLE PUBLICATION IS COPYRIGHT OF ARM SECURITIES LIMITED AND NOT TO BE REPRODUCED OR REPRINTED IN ANY FORM WITHOUT THE EXPRESS PERMISSION OF ARM SECURITIES LIMITED.