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Flour Mills of Nigeria Plc H1’17’18 Result - Pleasing H1 Performance, Outlook Remains Upbeat

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Wednesday, November 08, 2017 / 3:20 PM /Vetiva Research 


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Volume growth supports 17% y/y revenue growth

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Gains from FX hedge support 22% y/y rise in core operating profit

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Moderating finance cost drives earnings beat

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Earnings estimates revised, BUY rating maintained 

Strong sales growth supported by volumes
FLOURMILL sustained the positive top line growth momentum in its H1’17/18 result, reporting a 17% y/y rise in revenue to 298 billion – in line with Vetiva estimates. The top line growth was driven by a recovery in volumes in the Food segment (up 18%) and improved performance of the Packaging segment (up 78%) – both contributing 78% and 3% respectively to revenue. 

We highlight that despite a price cut implemented within the quarter (according to management), revenue came in flat q/q – supported by the strong volume growth. Particularly, revenue growth in the Agro-Allied segment came in at a modest 5% y/y. The segment has in recent times been exposed to high input costs which the company has been unable to transfer to consumers – constraining margins.
 

Down-trending interest expense drives PAT beat
Gross margin came in marginally higher than we had estimated at 12.2% (Vetiva: 12.1%, Q1: 11.6%). However, on a y/y basis, H1’17/18 gross margin was down 237bps to 11.9%, largely depressed by higher input costs from the Agro-Allied segment as earlier highlighted. Given this, Core operating profit came in 11% lower y/y despite the top line boost. 

Buoyed by gains from FX hedges however, FLOURMILL reported a
5 billion Net Operating gain – a significant improvement from the 8 billion loss recorded in the corresponding period last year and 22% better than we had estimated. With this, H1’17/18 EBIT rose 54% y/y to 29 billion – 4% above Vetiva estimate. 

Though interest expense remains elevated y/y (up 54%), notable moderations have been recorded on the expense line in the past two quarters. As such, net finance costs came in 20% lower q/q in Q2’17/18 and 16% below our estimate. Overall, H1’17/18 PAT came in at
9 billion - 18% above Vetiva estimate and 45% over prior year’s performance. 

Earnings estimates revised higher, strong FY’17/18 outlook
We raise our FY’17/18 revenue estimate 3% higher to 600 billion, reflecting the overall improvement in the demand landscape, particularly for the Food business, and an anticipated improvement in the Agro-Allied segment as the Company reviews its route-to-market for the segment. 

Following a 20% upward revision of our net operating gains estimate and a lower net interest expense estimate (from
33 billion to 30 billion for FY’17/18), we revise our FY’17 PAT estimate to 18 billion (Previous: 13 billion, FY’16/17: 9 billion) and 12-Month Target Price to 40.82. 

We note that FLOURMILL is still in the process of raising equity capital to deleverage its balance sheet, with the Management stating that it is concluding details around timing and size of the issue.
 

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