Flour Mills of Nigeria Q4 2020 and Q1 2021 Results Review: Upgrading to Outperform


Monday, August 24, 2020 / 12:45 PM /by  FBNQuest Research / Header Image Credit: Nairametrics


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2021-23E average EPS and PT up 83% and 23% respectively

Flour Mills Nigeria's (FMN) Q4 2020 (end-Mar) and Q1 2021 (end-Jun) results imply that the earnings boost received from last year's border closure was more significant than we had anticipated. PBT beat our Q4 and Q1 forecasts by 3.3x and  88% respectively. The results also suggest that FMN fared better than peers amid the pandemic environment, as Q1 gross margin expanded by 430bps y/y to 16.5%, its highest since Q4 2015. The expansion compares with contractions of -562bps y/y and -342bps y/y from Dangote Sugar Refinery and UAC of Nigeria respectively.


Based on management comments during the Q1 call, sales - up 15% y/y - were mostly demand driven as price increases were marginal despite strong fx headwinds. Specifically, the pasta, sugar, and edible oil businesses delivered double-digit volume growth, fueled by the border closure. Given recent results, our earnings outlook for FMN has improved considerably. Our 2021-23E EPS forecasts have been raised significantly by an average of 83%. We however recognize the following points as key risks to our outlook: i) FMN's flour (c.44% of sales) and sugar (c.17% of sales) segments are heavily import dependent.


A limited price pass-through ability (given subdued purchasing power and FMN being a price taker in the sugar market) therefore leaves the firm most exposed to fx depreciatory pressure; and ii) robust earnings are expected to be largely supported by stronger demand induced by the border closure, which may not be perpetual. Given that we modelled higher fx rates for capex and key components of working capital, the impact of the earnings forecast changes were limited.


Consequently, our new price target of N33.6 is higher by 23% - a fraction of the average EPS increase. Year-to-date, FMN shares have shed -6%, on par with the broad market index. The shares are currently trading on a 2021 P/E of 4.8x for an average EPS growth of 21% in 2021-23E. Our new price target implies a potential upside of 82% from current levels. Despite the risks highlighted above, we view the upside and earnings potential to be compelling. We therefore upgrade our rating on the stock to Outperform.


Strong PBT driven by sales growth

FMN grew Q1 sales by 15% y/y. Opex and interest expense increased 3% and 7% respectively but these negatives were more than offset by the sales growth. As such, PBT grew 17% to N6.5bn. Sequentially, PBT grew 24% q/q,  largely driven by a gross margin expansion of 458bps q/q and -23% and -29% q/q declines in opex and interest expense respectively. PBT beat our forecast by 88%, thanks to positive surprises of 16% and -9% from sales and opex respectively.


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