Flour Mills of Nigeria Plc Q1’18 Earnings Update – Growth in PAT Remains Marginal


Thursday, August 3, 2017 9:20AM/CBPResearch

Investment Summary (Growth in Profits subdued by rising finance cost)

In what seemed like a decent Q1’17/18 outing for flour mills of Nigeria Plc in which revenue and operating profit impressed for the period, the company’s profits continue to suffer from increase in finance cost due to its debt obligations.

Though a few weeks of gridlock affect the company’s operations in the Apapa area of Lagos state, revenue for the period grew by ₦149.97 billion (vs. ₦119.20 billion in Q1’16/17) representing an increase of 24.97%.

The company reported strong revenue growth from volume and product mix which was achieved across all main product segments. Its biggest growth by segment came from its packaging segment which grew by 73.9% to ₦5.39 billion (vs. ₦3.10 billion in Q1’16/17), followed by the food segment which grew by 27.8% to ₦115.81 billion (vs ₦90.59 billion in Q1’16/17), port operations and logistics grew by 20.8% to ₦0.26 billion (vs. ₦0.21 billion in Q1’16/17), agro-allied grew by 8.8% to ₦27.47 billion (vs. ₦25.24 billion in Q1’16/17) while others dropped for the period by 41.9% to ₦0.02 billion (vs. ₦0.03 billion in Q1’16/17).

Profit before tax by segment however showed that the company’s operating cost is on the rise as profit before tax for its agro-allied segment stood at a loss of ₦1.70 billion against a profit of ₦1.24 billion in Q1’16/17.

This loss reported in the agro-allied segments was however attributed to the high cost of integrating its new Sunti operation and oil and fats business for the period as management expects the segment to return to profit in the short term.

Long term rating for the company shares suggests a BUY position with a revised target price of ₦49.28 having taken a 15% haircut on our current valuation output.

Rising cost remains a burning to earnings growth

Though the company’s cost of sale continues to rise faster than revenue having increased by 26.8% to ₦131.73 billion (vs. ₦103.92 billion in Q1’16/17) and total expenses for the period also grew from ₦3.98 billion in Q1’16/17 to ₦5.30 billion in Q1’17/18, the company still reported an operating profit of ₦15.08 billion (vs. ₦10.97 billion in Q1’16/17) representing a rise of 37.45%.

However, the 67.20% rise in finance cost was adequate enough to subdue profits having increased to ₦8.92 billion (vs. ₦5.33 billion in Q1’16/17). Though debt to equity ratio dropped for the period, the company remains highly geared at a debt to equity ratio of 1.80x in Q1’17/18 against 2.36x reported in FY’16/17.

The company debt profile has also impressively continued to ease own as its total debt dropped by 21.35% to ₦190.01 billion (vs. ₦241.60 in FY’16/17). The increase in finance cost was therefore mostly due to higher interest rate for the period as the company continues to source for alternative funding sources which may lead the company to eventually raise funds via a rights issue as earlier indicated by the company’s management targeted mainly at refinancing its debt obligations.

Growth in profit after tax remains marginal;

PBT grew by 5.47% to ₦6.19 billion (vs. ₦5.87 billion in Q1’16/17), PBT margin for the period dropped to 4.16% (vs. 4.93% in Q1’16/17).

PAT grew in similar manner having increased by 2.66% to ₦4.53 billion (vs. ₦4.41 billion in Q1’16/17) taking its PAT margin to 3.04% (vs. 3.70% in Q1’16/17).

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