Snapshot

• Q1’19 records 11% y/y decline in revenue on reduction in selling prices 

• Sharp normalization in other operating gains drives EBIT 26% lower y/y 

• Bottom line underperforms Vetiva estimate amid finance expense miss 

• FY’19 earnings estimates revised lower, BUY rating maintained 

Lower prices drive weaker than expected revenue figure in Q1’19 

08 August 2018 ( Lagos ): In its recently released Q1’19 results, FLOURMILL reported an 11% y/y decline in topline to N133 billion, 7% below analyst's estimate. The revenue miss was driven by a reduction in selling prices in flour and sugar businesses, which offset the impact of volume increases across certain product categories. Whilst the aforementioned drove an 11% y/y decline in the Food segment, the Agro-Allied segment also recorded a 10% y/y revenue moderation as underperformance in the Edible Oils and Animal Feeds businesses offset a good showing in the Fertilizer division. On a positive note however, Q1’19 gross margin (13.0%) came in stronger, 140bps higher y/y and above analyst's 12.7% estimate. As such, Gross profit was flat y/y at N17.3 billion, albeit 5% lower than analyst's estimate. 

Higher OPEX, lower other operating gains drive 19% decline in PAT 

Though Operating expense was largely in line with analyst's estimate, the expense line was 26% higher y/y, following a spike in General Admin expenses. Earnings for the period were further undercut by a 79% y/y moderation in other operating gains, a normalization of the line item which was bloated by fair value gains on derivatives in the previous year. As such, Q1’19 EBIT came in at N11.2 billion, 26% lower y/y and 7% below Vetiva estimate. Furthermore, net finance expenses came in 33% lower y/y, amidst a lower borrowing balance. Hence the line item came in at N6.0 billion, above analyst's N5.0 billion estimate. Overall, Q1’19 PAT was down 19% y/y at N3.6 billion – 26% below their N4.9 billion estimate. 

FY’18/19 outlook tempered, forecasts revised marginally lower 

Reflecting both the Q1 run rate and a more bearish outlook for revenue, analysts revise their FY’19 revenue growth estimate to -3% (Previous: +5%). Particularly, analysts expect the challenging market dynamics in the Animal Feeds and Edible Oil businesses to keep Agro-Allied topline depressed. Furthermore, analysts do not expect volume performance to compensate for the reduction in selling prices even as the Sugar business (c.20% of Foods segment) continues to struggle with the influx of smuggled refined sugar. 

Although the impact of uptrending global wheat prices was less visible on FLOURMILL’s margins in Q1’19, given that imported wheat makes up a major part of the company’s production cost, analysts forecast tighter margins in outer quarters. As such, despite the modest margin outperformance, analysts maintain their FY’19 gross margin estimate at 12.7%. Analysts note that FLOURMILL continues to make moves to rebalance and optimize its debt mix (expected to register Bond issue in the coming weeks). Hence, analysts revise their net finance expense estimate from N19.8 billion to N21.8 billion following the Q1 miss. 

Overall, analysts revise their FY’19 PAT estimate lower to N16.1 billion (Previous: N19.8 billion) – 3% PAT Margin. With this, their 12-Month Target Price (TP) is reduced to N36.32 (Previous: N40.99), supported by a downward revision in their risk-free rate. Analysts retain a BUY rating on FLOURMILL given the 48% upside to their TP, the stock also trades at a discount to their Consumer Goods Coverage with P/E of 6.4x vs 19.6x for the latter. 

Business Description 

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

Reporting for EasyKobo on Wednesday ,08 August 2018 in Lagos, Nigeria

Source: Ifedayo Olowoporoku from Vetiva Capital Management Limited