Flour Mills revised to OVERWEIGHT from Neutral, Adjustments boost fair value estimate


Wednesday, August 07, 2013 1:24 PM / ARM Research


Flour Mills of Nigeria Plc (FMNL) reported audited results for 12 months to March 2013 in which revenues rose 17% YoY to N301.9 billion. However, FY 13 PBT and PAT declined 5% and 0.5% YoY to N11.2 billion and N7.7 billion respectively.

Revenues higher on FY group consolidations

FQ4 revenues jumped 72% YoY (42% QoQ) to N96.4 billion (vs. our N78.6 billion forecast) and accounted for 36% of FY revenues - 10pps higher than in FY 12, but 2pps shy of the 38% average in the preceding four years. We believe the strong growth in the FQ4 in contrast to tepid revenue growth pattern in FY 13 (2% YoY as at 9M 13 revenue) is consistent with historical patterns in FMNL’s FY reporting as sales from FMNL’s various subsidiaries unreported in interim results are consolidated in FQ4 figures. We however also believe the results reflect the incorporation of its sugar business which commenced production in February 2013. Nonetheless, FY 13 revenues does show some top line resilience given the closure of its cement business, which had accounted for 20% of revenues over the last five years, in 2012.


Elevated wheat prices continue to impact gross margins     

An 85% YoY rise in FQ4 13 COGS to N84.5billion led to a 6pps contraction in gross margins to 12%. Nonetheless, FQ4 13 gross profits are 16% higher YoY at N11.9billion reflecting the faster rise in revenues during the quarter. Overall, FY 13 gross profits were 4% lower YoY at N48billion with the corresponding margins 2pps lower YoY at 13% largely reflecting the elevated wheat price levels that prevailed in much of financial year. Although, wheat prices have since receded from their July 2012 highs, they remain to well ahead of FY 12 levels.

Operating efficiency breaks down in FQ4

FQ4 13 operating expenses surged 45% YoY to N14.9 billion driven by strong QoQ increases in S&D (953%) and administrative expenses (209%) to N7.51 billion and N7.48 billion respectively in contrast to the relatively declining QoQ patterns for much of FY 13. As in 2012 when a similar trend occurred, we believe this reflects consolidation of costs previously unreported and possible costs from new acquisitions (ROM Oil Mills and Thai Farms) during the financial year.  FQ4 13 opex-to-sales ratio was 11pps higher than the preceding three quarter average at 16%. For context,   FQ4 12 opex-to-sales ratio also jumped 13pps ahead of the 9M 12 average.  Although, other operating income rose 217% to N4.1billion in FQ4 13, the surge in opex sent operating profits tumbling 18% YoY to N995million with corresponding margins halving YoY to 1%.


Nonetheless, the impact of the poor FQ4 performance was muted by much lower opex in previous quarters. FY 13 opex to sales ratio held flat YoY at 8% while FY 13 operating profits declined 13% YoY to N18.1billion putting FY 13 margins a more moderate 2pps lower YoY at 6%.

UNICEM loss moderates further

FQ4 13 finance expenses surged 127% YoY to N2.5billion tracking 32% and 37% increases in ST and LT borrowings to N53.8billion and N39.9billion respectively. FY 13 net finance costs shrank 2% YoY to N5.9 billion driven by 130% increment in interest income to N5.5billion which limited the effect of a 34% YoY rise in interest expense to N11.4billion. 


In line with management guidance about improvements at UNICEM, FMNL’s share of loss continued to moderate with a 90% YoY decline to N200million in FQ4 13 with the FY 13 figure 64% lower at N1.03billion.


FMNL booked a pre-tax loss of N367million (vs. PBT of N438million in FQ4 12) and a net loss of N441million in FQ4 13, 27% higher YoY. Correspondingly, FY 13 PBT and PAT shrank 5% and 0.5% YoY to N11.2 billion and N7.7 billion respectively with PBT margins declining 1ppt to 4% while PAT margin was flat YoY at 3% reflecting a 3pps contraction in effective tax rates to 31%.


Revenue growth outlook still robust

The strong growth in FY 13 revenues despite the closure of its cement division supports our view of the robust prospects of FMNL’s various business, particularly in its food and agro-allied divisions, which have made up for the losses in its cement business. Net of its cement division, FY 13 revenues are 32% higher YoY. In this vein, the stronger than expected FY 13 revenue growth leads us to revise our revenue outlook upwards.


In view of capacity additions to its flour business (FMNL completed its 2750 MT/day West Mills plant in FQ 2 13 raising name-plate capacity to 12kmt/day) and expansion in its snacks business, we forecast a CAGR of 8% its food business (which has, on average, contributed ~65% since 2008) over FY14-18.


We are also still bullish on its animal feeds division which has grown at an average pace of 25% since inception in 2010, with FMNL doubling capacity at its Premier Feeds factory to 300ktpa in 2012 on account of increasing volumes.  USDA[1] data indicates that Nigeria is the Africa’s top hen producer (19th globally)  with the agency projecting that poultry meat production  will rise from 268kmt in 2011 to 400kmt by 2021 which should boosts earnings outlook for this segment where we forecast a 16% CAGR over the FY 14-18 period.


We expect FMNL’s fertilizer division (~6% average contribution to revenues 2008-2013) to benefit from the Agriculture Ministry’s Growth Enhancement Support Scheme (GESS) which seeks to increase access to agricultural inputs to farmers under a now reformed distribution system. Our horizon forecast CAGR for its fertilizer division stands at 12%. There are no planned factory expansions at its now consolidated packaging subsidiary BAGCO, which hitherto accounted ~6.7% of revenues. We expect this division to match trend CAGR of 9.6%.


Although, we do not have much clarity on its newly launched Sugar division, FMNL’s management intends to leverage on its relationship with its existing flour customers in the bakery and confectionery industry to push volumes.


The sum of these assumptions is a 10% CAGR growth in revenues over FY 2014-18 with FY 14E revenues forecast 13% higher YoY at N341 billion. We expect FQ1 14 revenues at N80.3billion, based on mean contribution to FY revenues over the last five years.


Margin pressures to ease on moderating wheat prices


Wheat prices have declined ~17% YTD on account of improved weather conditions and higher production from major global producers but FMNL’s forward buying arrangements ensured that FQ1 13 COGS reflected prices prior to the 25% increment in wheat prices in FQ1 12. This higher base results in forecast FQ1 14 gross profits 8% lower YoY at N11.2billion with margins 3pps lower at 14% (+2pps QoQ). However, bearish outlook for wheat prices should see FY 14E gross margins 1ppt higher YoY at 14% with FY 14E gross profits 29% higher YoY at N48.9billion.


Adopting trend mean opex-to-sales ratio of  8% (which is also consistent with the last two years)  flat YoY trend in FY 12 opex despite of management avowed attempts to rationalize costs implies FQ1 14E operating expenses that are 9% higher YoY at N5.8billion. At N5.92billion, FQ1 14E operating profits are 13% lower YoY with margins 3pps lower YoY at 7% largely reflecting contraction at the gross margin level.


FQ1 14E PBT and PAT are 26% and 32% lower YoY at N3.8billion and N2.69billion with corresponding margins 2pps and 3pps lower YoY at 5% and 3% respectively. FY 13 PBT and PAT are however 54% and 58% higher YoY at N17.2billion and N12.2billion respectively with corresponding margins 1ppt higher at 5% and 4% largely reflecting expansion in gross margins as wheat prices trend lower over FY 14.

Adjustments boost fair value estimate
These revisions raise our fair value estimate for FMNL 16% from our previous update to N101.87 which is a 15% premium to the last trading price with the stock having declined 21% from its mid- June peak of N109.24. FMNL trades at current and forward P/E of 26.1x and 17.2x respectively vs. 17.1x and 14.9x peer average[2]. We revise our rating on the stock from the previous NEUTRAL to OVERWEIGHT.

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