Monday, August 13, 2018 03:10 PM / FBNQuest Capital
Material cuts to our 2019-21E EPS forecasts and price target
Similar to the preceding quarter, Flour Mills of Nigeria’s (FMN) Q1 2019 (end- Jun) PBT came in well behind our forecast. Although the y/y reduction in sales for the foods divisions and a spike in opex contributed to the negative earnings surprise, a -N3.6bn loss delivered by the agro-allied division was the key driver of the variance relative to our estimate. PBT for the foods business grew by 34% y/y. However, the pre-tax loss delivered by the agro-allied business proved significant and completely offset the earnings growth in foods.
According to management, increased competition in the animal feed market and slow growth of the edible oil business continue to weigh on the division’s top and bottom line performance. Beyond Q1, we expect earnings growth to decline y/y due to competitive headwinds in the agro-allied segment. As such, we have made material cuts to our 2019-21E EPS forecasts. Our new price target of N31.0 is around 22% lower than our previous price target. In order to optimise its funding structure - substitute long term debt for short term funding – management disclosed plans to issue a bond of an undisclosed size in the coming weeks.
On a relative basis, FMN shares are trading on a 2019E (end-Mar) P/E multiple of 12.9x for 10% EPS growth in 2020E. These compare with the average multiple of 19.9x for 30% EPS growth that our universe of consumer goods stocks is trading on. Having shed 21% in the last month, our new price target implies a potential upside of around 26% from current levels, hence our decision to keep our Outperform rating.
PBT down -16% y/y, driven by y/y decline in sales & spike in opex
FMN’s Q1 2019 (end-Jun) results showed that the PBT fell by -16% y/y to N5.2bn. A combination of factors including an -11% y/y reduction in sales, a 26% y/y rise in opex and a -79% y/y decrease in other operating income was responsible for the y/y decline in earnings. Further down the P&L, PAT declined by -10% y/y. Sequentially, sales grew by 16% q/q. In addition, PBT and PAT of N5.2bn and N3.7bn improved markedly compared with the pre-tax loss of – N3.0bn and PAT of N142m which the company reported in Q4 2018 (end- Mar). Relative to our forecasts, sales missed by 16%. PBT and PAT also missed by 29% and 21% respectively.