Monday, February 06, 2017 10:32 AM / FBNQuest Research
Maintaining OP rating despite modest increase to PT
Flour Mills of Nigeria’s (FMN) Q3 2017 (end-Dec) PBT came in well ahead (+104%) of our forecast. The key drivers behind the strong results were positive surprises in sales and gross margin, which beat our forecasts by 13% and 67bps respectively. Topline growth was underpinned by a 50% y/y expansion in food sales and, to a lesser extent, a 53% y/y growth in the agro-allied business.
In terms of earnings, the foods business which delivered a PBT of N5.9bn in Q3 (vs. –N3.0bn in Q3 2016) was again the largest contributor to PBT. The gains by the foods business were almost completely offset by pre-tax and after-tax losses of –N3.2bn and –N1.8bn for the real estate and port divisions respectively.
Despite the strong results, we have increased our EPS forecasts by only 5% on average over the 2017-19E period and our price target by 2% to N30.2. The modest increase to our EPS forecasts is driven by our conservative view on interest expense which we expect to weigh on earnings following a considerable (+47% q/q) spike in financial leverage (debt-equity-ratio 2.9x vs. 1.9x Q2 2017).
Going forward, Bloomberg consensus wheat forecasts indicate that wheat prices are expected to rise by 2% in the first quarter of 2017. Nevertheless, given the high proportion of wheat products in the firm’s sales mix, it still faces downside risks from an uptick in wheat prices and a potential devaluation of the naira.
Beyond 2017E, we forecast sales and EPS growth of 6% y/y and 42% y/y in 2018E, driven largely by base effects. FMN shares are trading on a 2017E (end-Mar) P/E multiple of 10.7x for 42% EPS growth in 2018E.
This is more compelling than the average P/E multiple 43.8x for 29% EPS growth that our universe of consumer names is trading on. Our price target implies a potential upside of 68% from current levels. As such, we retain our Outperform rating on the shares.
Result showed strong growth trends y/y
FMN’s Q3 sales grew by 56% y/y to N134.6bn. Furthermore, PBT and PAT grew to N1.5bn and N706m compared with pre-tax and after-tax losses of –N4.3bn and –N5.3bn respectively in Q3 2016.
The marked growth in PBT was mainly driven by a 170bp y/y expansion in gross margin to 12.7% and, to a lesser extent, a 25% y/y reduction in other operating expense. These two factors completely offset a 61% y/y spike in interest expense. Sequentially, sales were flattish q/q.
However, PBT and PAT declined by 49% q/q and 58% q/q respectively. The marked declines in PBT were driven by a 286bp q/q contraction in gross margin and a 21% q/q surge in interest expense to –N6.8bn.
1. Flour Mills of Nigeria Plc - Minutes from Meeting with Management
2. Flour Mills of Nigeria Plc - ₦9 billion FX Losses Debase Strong Topline growth
3. Flour Mills of Nigeria Reports Q2'17 Results; Sales Grows by 43% YoY
4. Flour Mills of Nigeria Plc Grows PBT by 394% YoY to N5.9bn in Q1'17 Results
5. Flour Mills of Nigeria Plc UNICEM Sale Masks Earnings Challenge
6. Flour Mill Plc Rated Neutral as Shares Underperform the ASI; Sheds -28.5% YTD
7. Benefits from Investment Sales in UNICEM Help to Improve Flour Mills Bottom-line
8. FLOURMILL Declares N14.42 billion PAT Proposes N1 Final Dividend in 2016 Audited Result SP N21.50
9. Flour Mills Plc to File Audited Financial Statements On or Before 14th July, 2016
10. FLOURMILL Revenue picks up amidst declining consumer spending and challenging business environment
11. Flour Mills of Nig Plc Q3 2016 Result - Words from Management
12. Flour Mills of Nig records negative PBT PAT in Q3-15 16 Downside risks remain
13. FLOURMILL Declares N19 billion PAT in Q3 16 Result SP N18.05k
14. FLOURMILL Appoints Joseph Odion Umolu as Company Secretary Effective Jan 1 2016
15. FLOURMILL Sales Grows by 17 YoY in Q2 16 Results Shares Rated NEUTRAL
16. FLOURMILL Declares N24.02 billion PAT in Q2 16 Result SP N21.16k
17. FLOURMILL Stock is heading towards south side with descending triangle formation
18. FLOURMILL falls back to 2010 price-range on fresh sell pressure