Monday, February 05, 2018 /9:35 AM /FBNQuest
4% avg. increase to our EPS forecasts and price target
In contrast to Q2 2018 (end-Sep) when strong y/y growth in earnings was driven by base effects, the positive surprise in Flour Mills of Nigeria’s (FMN) Q3 2018 (end-Dec) results was mainly driven by a marked y/y expansion in gross margin. The expansion was underpinned by lower input costs due to improved fx liquidity, higher operational efficiencies and improved route to market.
Management disclosed that gross margin also benefited from a y/y reduction in power costs due to increased gas availability. Similar to Q2 2018, the foods division was the key driver of earnings during the quarter. Although the division’s sales grew by high single-digits y/y (+9%), its PBT grew much faster at 75% y/y to N10.4bn. The strong double-digit y/y growth completely offset the pre-tax loss of –N5.2bn delivered by the agro-allied division.
However, the packaging business, with PBT growth of 12% y/y to N589m, and the ports operations division which delivered a PBT of N341m (from a pretax loss of –N1.8bn in Q3 2017) also contributed to earnings. While flour, semovita and pasta account for the largest chunk of the foods business revenue, management stated that the sugar business, which now operates at c.50% capacity utilisation, contributes c.17% of group sales and is now profitable.
Following FMN’s results, we have increased our EPS forecasts by 4% on average over the 2018-20E period and our (pre-rights issue) price target by a similar margin to N48.2. On a relative basis, the shares are trading on a 2018E (end-Mar) P/E multiple of 7.2x for 26% EPS growth in 2019E.
These compare with the 17.1x multiple for 22% EPS growth that our universe of consumer stocks is trading on. Ytd, FMN shares have broadly tracked the index with a 17% gain. The shares offer a potential (pre-rights issue) upside of 43% from current levels. Consequently, we retain our Outperform rating on the stock.
PBT up 303% y/y, driven by 322bp y/y expansion in gross margin
FMN’s Q3 2018 results showed that PBT grew by a stellar 303% y/y. The marked y/y growth in PBT was mainly driven by a gross margin expansion of 322bps y/y to 15.9%.
To a lesser extent a positive result of N431m in other operating income compared with a loss of –N3.7bn in the corresponding period of 2017 also contributed. These positives completely offset a -4%y/y decline in sales, a 26% y/y spike in interest expense and a 17% y/y rise in opex.
Further down the P&L, PAT accelerated by 418% y/y. sequentially, sales, PBT and PAT fell by between 13% q/q and 17% q/q. Compared with our forecasts, although sales missed by 13%, PBT and PAT beat by 41% and 31% respectively, thanks mainly to the positive surprise in gross margin.
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