November 08, 2017 / 3:20 PM /Vetiva Research
Volume growth supports 17% y/y revenue growth
Gains from FX hedge support 22% y/y rise in core operating
Moderating finance cost drives earnings beat
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 –
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
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.