Flour Mills of Nigeria Reports Q2'17 Results; Sales Grows by 43% YoY


Monday, October 31, 2016 6:33 PM / FBNQuest Research

Event: Flour Mills of Nigeria (FMN) reports Q2 2017 (end-Sep) results

Implications: Marked upward revisions to consensus 2017 underlying PBT forecast likely 

Positives: Sales grew by 43% y/y. FMN reported PBT of N2.9bn vs underlying pretax loss of –N810m in Q2 2016

Negatives: FMN’s reported other operating expense of -N8.1bn (vs +N1.8bn Q2 2016) while opex increased by 28% y/y

Late last week Friday, the NSE published Flour Mills of Nigeria’s (FMN) Q2 2017 results which showed that the underlying trends (excluding N23.7bn gain on disposal of UNICEM) grew markedly across all key headline items. Sales expanded by 43% y/y to N136bn.

Although PBT and PAT declined by -87% y/y and  93% y/y respectively, excluding the impact of the divestment in UNICEM in Q2 2016,  underlying PBT accelerated to N2.9bn compared with a pre-tax loss of –N810m in Q2 2016.

The marked growth in underlying PBT was mainly driven by a 677bps expansion in gross margin to 15.5%, which completely offset a significant spike in other operating expense to –N8.1bn (vs. +N1.8bn Q2 2016) and a 28% y/y spike in opex.

The spike in other operating expense was due to a -N9.3bn exchange rate loss related to the 10% depreciation of naira over the June-September period. Moving down the P&L, PAT also expanded to N1.7bn versus an after-tax loss of –N958m in Q2 2016. Sequentially, sales grew by 14% q/q.

However, PBT and PAT declined by 50% q/q and 60% q/q respectively, mainly due to a combination of factors including the significant spike in other operating expense to –N8.1bn, a 30% q/q spike in opex and to a lesser extent a 5% q/q rise in interest expense. Compared with our estimates, sales beat by 28%. However, PBT  and PAT missed by 12% and 24% respectively due to negative surprises in other operating expense, opex and interest expense.

Similar to Q1 2017, the stellar growth in FMN’s topline was driven by the strong performance in the foods and agro allied businesses which grew by 59% y/y and 16% y/y respectively. Pending management’s comments we believe that the y/y growth in sales was driven by strong growth in the sugar business which is still ramping up.

Apart from sugar, we believe that FMN’s backward integration strategy via investments in palm oil, rice and sorghum amongst others is starting to become earnings accretive. While we do not have granular details on the contributions from new products, our channel checks reveal that FMN’s new product such as its Daily Delight Instant Cereal, Golden Penny Margarine and Golden Penny vegetable oil are more visible on the shelves of major retailer stores.

However, we await management’s confirmation on these. Given the historical lackluster results by FMN in recent times, we would be watching closely to see the sustainability of the solid growth posted in H1 going forward. We also expect the other operating expense line to be scrutinised closely by investors.

In terms of outlook, Bloomberg consensus wheat forecasts indicate that wheat prices are expected to rise by around 5% between 2016 and Q1 2017 (end-March). Although the share of wheat flour is reducing in FMN’s overall product mix, the company still faces downside risks arising from an uptick in wheat prices and volatility of the naira exchange rate on the interbank market.               

Given the results, we expect to see marked upward revisions to consensus 2017E (end-Mar) PBT forecast of N10.3bn and a positive reaction from the market over the next few days. Year to date, FMN shares have underperformed the index. The shares have shed -6.2%, compared with the -4.7% return delivered by the ASI.

We rate FMN shares Outperform. Our estimates are under review.

Flour Mills of Nigeria Q2 2017 (end-Sep) results: actual vs. FBNQuest Research estimates (N millions)

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