Friday, November 03, 2017 2:18PM /FBNQuest Research
10%+ increase to our 2018-20E EPS forecasts and price target
Flour Mills of Nigeria’s (FMN) Q2 2018 (end-Sep) results surprised positively, making it the fourth consecutive quarter of positive earnings surprises. In terms of topline growth, management disclosed that sales growth of 10% y/y was purely driven by volume growth. Similar to Q1 2018 (end-Jun), the strong y/y growth in earnings was underscored by the stellar performance of the foods division.
While Q2 sales for the division grew by 10% y/y to N117.3bn, its PBT grew by 507% y/y to N10.5bn on the back of a significant PBT margin expansion of 730bps y/y to 8.9%. The packaging business, which contributed only around 3% of group sales, grew its PBT by 126% y/y to N1.2bn, making it the second highest contributor to earnings. Although agro-allied business sales came in flattish, the division delivered a pre-tax loss of –N4.5bn in Q2 due to significantly higher input costs for the edible oil business and the expensing of costs which were previously capitalised for Sunti Farms.
Following FMN’s stellar Q2 results, we have increased our 2018-20E EPS forecasts by around 12% on average and our price target by 11% to N38.8. On a relative basis, FMN shares are trading on a 2018E (end-Mar) P/E multiple of 7.6x for EPS growth of 28.8% in 2019E. These compare with the 19.0x multiple for 25% EPS growth that our universe of consumer stocks are trading on.
Although FMN shares have rallied strongly this year, gaining 82.2% ytd (vs. 37.2% for the NSE ASI), the share still offer a potential upside of 15% from current levels. As such, we retain our Outperform rating on the shares.
Triple-digit y/y earnings growth driven by base effects
FMN’s Q3 2017 PBT of N7.3bn grew by a stellar 149% y/y, while PAT grew faster, by 156% y/y. The strong y/y growth in earnings was mainly driven by base effects, underscored by an fx loss of -N9.3bn a year ago. Further up the P&L the sales growth was more modest at around 10% y/y.
Sequentially, sales were flat q/q. However, PBT grew by 17.6% q/q, primarily due to a - 20% q/q decline in net interest expense and a 65bp q/q expansion in gross margin. In contrast, PAT growth decelerated to 5% q/q mainly because of a higher effective tax rate of 33.8% compared with 26.8% in Q1 2018.
Relative to our forecasts, although sales were
broadly in line (-1.9%), PBT and PAT beat by 47% and 31% respectively,
primarily driven by a combination of positive surprises in gross margin, other
operating income and interest expense.
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