Tuesday, November 08, 2016 5:03 PM / Cordros Capital
We met with the management of FLOURMILL earlier today ahead of our update following the release of second quarter result (July to September 2016).
Summary of the feedback is that while Q3-17 performance is expected to be affected by the impact of seasonality, there is strong conviction that the company would close 2017F on an impressive note. Specific guidance for revenue and earnings growth was not provided, but both are expected to grow in line with H1-17.
Revenue growth in the Food (51% in H1) and Agro-Allied (34% in H1) divisions is expected to remain strong, while recovery in Packaging (-32% in H1) is dependent upon recovery in external demand (accounting for 50% of total sales). Volumes, thus far, have grown in low single-digit on average across product categories, confirming that revenue growth has largely being as a result of price increases (PIs).
We understand that margins are now reviewed weekly and extra costs (where they arise) are passed to consumers monthly. No significant change is expected in this trend. Management’s comment on sales is somewhat consistent with the feedback from our routine checks, where distributors confirmed stable demand across products such as Semovita, Noodles, Pasta and Sugar.
Management said that exports (of food and packaging products to South and North Africa, and commodities to Asia) contributed to revenue in Q2, although details were not disclosed in the latest filing. Short term plan is to generate about 10% of total forex requirement from exports and the proportion should increase to 50% in the medium to long term.
The significant increase in SD&A expenses in Q2 was as a result of increasing focus on sales as well as the impact of naira depreciation on USD denominated salaries.
Forex loss of N9.3 billion was reported in Q2 following revaluation of (1) account payables and (2) US$20 million foreign loans. Each contributed equally to the forex loss. FLOURMILL benefits from the CBN’s frequent intervention in the FX market, wherein the apex bank sells USD (in excess of US$300 million) preferentially to manufacturers at subsidized rates. However, allocation is usually far insufficient (less than 5% of total demand). We estimate FLOURMILL’s average USD purchase rate to be around N388/USD.
In addition to PIs, FX linked costs are controlled by increasing domestic sourcing of inputs that are available locally. Items like maize and soybean are now 100% sourced locally, but concerns is that more than 80% is from third party growers, most of whom prices often reflect international market prices. Wheat and Sugar are still wholly imported.
On debt, the slight q/q increase in Q2 was as a result of fresh long term loans taken during the period to fund the ongoing backward integration programme (BIP) in sugar. The management recently issued a commercial paper (CP) at a rate that mirrors the yield on short term government treasuries. In addition, there is plan to raise up to N100 billion through CPs (to refinance maturing short term loans) in tranches over the next two years.
We are overweight FLOURMILL. Forecasts are under review.
1. Flour Mills of Nigeria Plc - ₦9 billion FX Losses Debase Strong Topline growth
2. Flour Mills of Nigeria Reports Q2'17 Results; Sales Grows by 43% YoY
3. Flour Mills of Nigeria Plc Grows PBT by 394% YoY to N5.9bn in Q1'17 Results
4. Flour Mills of Nigeria Plc UNICEM Sale Masks Earnings Challenge
5. Flour Mill Plc Rated Neutral as Shares Underperform the ASI; Sheds -28.5% YTD
6. Benefits from Investment Sales in UNICEM Help to Improve Flour Mills Bottom-line
7. FLOURMILL Declares N14.42 billion PAT Proposes N1 Final Dividend in 2016 Audited Result SP N21.50
8. Flour Mills Plc to File Audited Financial Statements On or Before 14th July, 2016
9. FLOURMILL Revenue picks up amidst declining consumer spending and challenging business environment
10. Flour Mills of Nig Plc Q3 2016 Result - Words from Management
11. Flour Mills of Nig records negative PBT PAT in Q3-15 16 Downside risks remain
12. FLOURMILL Declares N19 billion PAT in Q3 16 Result SP N18.05k
13. FLOURMILL Appoints Joseph Odion Umolu as Company Secretary Effective Jan 1 2016
14. FLOURMILL Sales Grows by 17 YoY in Q2 16 Results Shares Rated NEUTRAL
15. FLOURMILL Declares N24.02 billion PAT in Q2 16 Result SP N21.16k
16. FLOURMILL Stock is heading towards south side with descending triangle formation
17. FLOURMILL falls back to 2010 price-range on fresh sell pressure