January 26, 2018 /10:05 AM /ARM Research
· We issue a BUY
recommendation on Flourmill based on a FVE of N38.33, representing 24% and 42%
upside from market and Rights Issue price of N30.80 and N27.00 respectively.
Our positive sentiment is supported by the recovery in earnings (FH1 18: +44.6%
YoY) with FY 18 PAT estimated at N16.3 billion (+84.7% YoY). Considering the
impact of capital raising on Flourmills’ finance expense, we remain optimistic
on the stock going into FY 19 with a projected PAT of N23.9 billion. However,
owing to the dilution from the Rights Issue, FY 19 EPS of N5.83 represents a 6%
decline when compared to FY 18 estimate of N6.22.
· Flourmill is seeking to
raise N39 billion ($127 million) by way of Rights Issue. The company is
offering 1.47 billion ordinary shares of 50 kobo each at a rights price of
N27.00/share to existing shareholders based on 9 new ordinary shares for every
16 ordinary shares held as at 8th December 2017. The Rights issue opened on the
15th of January 2018 and closes on the 21st of February 2018.
· Proceeds from the Rights
Issue will be used to pay down some of its overdrafts and short-term borrowings
with the intent of deleveraging the balance sheet and strengthening the capital
base of the company. Precisely, 45% of the proceeds will be used for the
repayment of short term loans (N17.5 billion), 30% will be used for the
repayment of overdraft facilities (N11.9 billion) while the balance (25%) will
be applied towards working capital for strengthening and achieving efficiency
in the company’s operations.
Earnings expansion underpinned by
estimating the impact of the rights issue on earnings, Flourmill’s debt
position remains the reoccurring recital. As at FQ2 18, Flourmill’s borrowings
totaled N188.2 billion, split into overdrafts (N41 billion), short-term (N93.5
billion) and long-term borrowing (N53.9 billion) - short-term borrowings and
overdrafts constitute ~50% and 22% of total debts respectively. Consequently,
following the repayment of N29.4 billion1, we expect its debt position to dip
by 15.4% YoY to N143 billion over FY 19.
view is supported by a sustained recovery in operating cash flow from improving
EBIT margin (FY 19E: +95bps YoY; FQ2 18: +33bps QoQ) and lesser need to prefund
Letters of Credits, reflecting improved dollar liquidity. Pertinently, our
discussions with management revealed that Flourmills moved to unconfirmed from
confirmed LCs which eliminated the need to prefund payments for its imported
we estimate a decline in debt-equity4 ratio to 0.94x (FH1 18: 1.74x; 3-year
average of 2.01x). In terms of interest rate, we use an average rate of 16%
over FY 19 in line with our view of a downtrend in yields over the year which
would have a direct impact on its borrowing costs particularly its commercial
the lower debt position with our interest rate expectations, we estimate a 26%
YoY decline in interest expense to N23 billion (FY 18E: N30.9 billion; FY 17:
N32.5 billion). In addition, we view funds allocated to working capital (N9.7
billion) as positive for finance costs as the liquidity would reduce the burden
on the company to borrow expensive short-term borrowings in a bid to finance
the above-mentioned with our expectation of a recovery in gross margin to 13%
(FH1 18: 11.9%; FY’17: 12.7%), we estimate earnings to print at N23 billion in
FY 19 which translates to an EPS of N5.83 post dilution (FY’18E: N6.22).
Underlying our view of a recovery in earnings is a successful rights issue
where the intended amount is fully raised. Given our expectation of earnings
recovery going forward, we recommend that qualified investors take up their
impact of these assumptions results in a FVE of N38.33. Our FVE factors in the
additional shares from the rights. Against this backdrop, we place a BUY rating
on the stock. Flour Mills trades at a current P/E of 8.3x versus 13.7x for
Bloomberg Middle-East & African peers.
terms of other plans to reduce its interest expense burden, FMN is looking to
debt restructuring as it intends to raise N70 billion in Medium Term Notes to
refinance its expensive debts at a lower interest rate. Also, the company plans
to generate N35 billion through the sale of some of its real estate properties
for the repayment of its short-term debts.
guides to the commencement of the bond programme when interest rates are
favorable and hopes to complete the sale of non-core assets this year. Our FVE
does not consider the impact of these strategies thus; we view the adoption of
these plans as a positive catalyst to earnings and FVE.
growth underpinned by non-core operations, Flourmills most recent FH1 18 results
revealed a 45% YoY increase in earnings to N9.4 billion, 1.1x ahead of FY’17
earnings (N8.8 billion).
the sizable jump in earnings reflected gains from non-core operations
particularly “other operating income” which printed at N5.1 billion from a loss
of N8.1 billion in FH1 17. Specifically, the company reported gains on its
non-deliverable forwards amounting to N2.1 billion which reflected the Naira
appreciation (+3.7% QoQ) at the IEW during the quarter. Added to this, FMN
reported gains of N733 million from the revaluation of its sugar plantations.
terms of core performance, despite a 16.9% YoY increase in revenue, gross
margin contracted by 237bps YoY owing to a faster increase in cost of sales
(+20% YoY) amidst the hike in the price of Maize (+33% YoY) and negative
product mix. According to management, despite higher input cost on its edible
oil business, the company was unable to raise prices due to lower domestic
prices for edible oil on which flourmills’ pricing is anchored.
operating expenses rose by 21.6% YoY to N11 billion, largely driven by a 36.7%
YoY increase in administrative expenses. Management stated that, the sharp
increase in administrative expenses was due to the employment of workers for
its newly commissioned sugar crushing plant in Sunti, Niger State.
Consequently, EBIT declined by 10.6% YoY to N24.4 billion.
expense remained elevated as it surged 48.9% YoY to N16.3 billion on account of
the twin impact of high interest rates (FH1 18 effective interest rate at 20%
vs 15% in FH1 17) and expanded borrowings (+11.5% YoY to N147 billion). The
expansion in borrowings followed the depreciation in the currency which drove
an increase in the cost of imported inputs and, by extension, liquidity to meet
working capital requirements.
ahead to FH2 18, we envisage a faster rise in earnings (+194.3% YoY) mainly due
to the low base of FH2 17. However, in line with seasonality, we expect a
slowdown in wheat flour demand as consumption switches to yam from bread
following the just concluded harvest season.
guides to a slowdown in the pace of revenue growth over FH2 18 (+8.1% YoY).
However, we expect cost of sales to rise at a slower pace (+6.6% YoY) than
revenue, owing to global oversupply of its key inputs including wheat and raw
sugar coupled with an improvement in the domestic supply of Maize which
suggests bearish prices for these commodities and softer pressures on COGS.
expect finance costs to remain elevated in FH2’18 (N14.7 billion) which,
however, translates to a 32.1% YoY decline from FH1’17 due to the high base of
1. Flour Mills of Nigeria Plc Proposed 1.48bn Rights Issue
2. Flour Mills of Nigeria PLC Set to Undertake N39.9B Rights Issue
3. Flour Mills of Nigeria Plc - Proposed Rights Issue
4. Flour Mills of Nigeria Plc H1’17’18 Result - Pleasing H1 Performance,
Outlook Remains Upbeat
5. Flour Mill of Nigeria Plc to Raise Additional Equity Funds
6. Flour Mills of Nigeria Plc - Earnings Beat Despite Lingering Cost
7. Flour Mills of Nigeria Plc Q1’18 Earnings Update – Growth in PAT
8. Flour Mills of Nigeria Plc Increases Its Shareholding in Rom Oil
9. Flour Mills of Nigeria Plc - Abnormally Weak Q4 Slows Strong FY
Appoints Mrs. Salamatu Hussaini Suleiman as an Independent Non–Executive