Monday, November 02, 2015 12:34PM / FBNQuest Research
Event: Flour Mills of Nigeria (FMN) reports Q2 2016 (end-Sep) results
Implications: Downward revisions to consensus underlying PBT forecasts likely
Positives: Sales grew 17% y/y to N95.3bn
Negatives: Underlying PBT came in at a loss of =N810m
Over the weekend, the NSE published Flour Mills of Nigeria’s Q2 2016 (end-Sep) results which showed that PBT and PAT grew by 928% y/y and 1,521% y/y to N22.9bn and N22.7bn respectively.
The marked expansion in earnings was driven by a one-off gain of N23.7bn related to the divestment of the balance of the company’s shares in UNICEM. Excluding the one-off gain, FMN reported pre-tax and after tax losses of -N810m and –N958m respectively.
Further up the P&L, although sales grew 17% y/y to N95.3bn, gross profit declined by 52% y/y to N8.4bn due to a gross margin contraction of 1,266bps y/y to 8.8%. Excluding the one-off gain, the combination of the gross margin contraction and a 3.4% y/y and 32% y/y rise in opex and interest charges respectively would have resulted in a pre-tax loss of -N810m.
Sequentially, sales expanded by 16% q/q. Again thanks to the one-off gains, PBT and PAT grew markedly by 1,829% q/q and 2,638% q/q respectively. Compared with our forecasts, Q2 sales beat by 16%.
However, our PBT and PAT forecasts of N2.4bn and N1.6bn were ahead of the underlying results of –N810m and –N958m respectively mainly because of negative surprises on the gross margin and interest expense lines.
Flour Mills of Nigeria Q2 2016 (end-Sep) results vs FBN Capital estimates
Pending comments from management, we believe that the 32% y/y rise in FMN’s interest expense was driven by a spike in its borrowing costs.
When annualised, FMN’s interest expense implies an average cost of debt of 15.5%, or around 471bps higher than the average cost of debt as at the end of FY 2015 (end-Mar). We note that FMN’s total debt has declined by 15.6% since FY 2015 (end-Mar).
Bloomberg data indicates that wheat prices (FMN’s key raw material) have declined by 21% y/y over the June to September period. However, we believe that most of the gains from the y/y price decline were wiped out by the 22% depreciation of the naira since November 2014.
Bloomberg consensus forecasts indicate that wheat prices are expected to rise only marginally through 2016. Although the monetary authorities have ruled out further devaluation of the naira, a potentially weaker naira presents a significant downside risk.
On an annualised basis and adjusting for seasonality, FMN’s underlying H1 2016 PBT tracks well behind consensus full year PBT forecast N7.3bn. Given that the underlying Q2 2016 results were weak, we expect to see downward revisions to consensus 2016 PBT forecast.
Although we expect the market’s initial reaction to be positive (given the one-off gains), we believe the positive sentiments will taper off once the market starts to focus on the underlying results. Year to date, FMN shares have shed -45.1%, underperforming the ASI (-29.3%).
We rate FMN shares Neutral. Our estimates are under review.