Wednesday, December 17, 2014 11:46 AM / Chapel Hill Denham Research
Flour Mills of Nigeria Plc (FMN) recently published its H1-15 results and held a conference call on the results. We cut our 12-month target price (TP) to N60.84 from N82.74, but maintain our BUY recommendation on the stock, following the review of our earnings forecasts.
FY-15E bread flour volume cut on weak performance in H1-15.
We now expect the sales volumes of FMN’s bread flour to rise at a slower rate of 6.1% yoy in FY-15E compared to our previous forecast of 10.3% yoy. This is due to the 3.1% yoy sales decline reported by FMN for its food business in H1-15. Management attributed the decline to the loss of a few weeks of production due to power supply challenges experienced by its Lagos factory in June and July 2014. We remain broadly optimistic about FMN’s food business and see the multipurpose flour, which was introduced to the market in November 2014, supporting growth over the medium to long term.
According to management, Golden Penny Multipurpose flour contains 10% cassava flour. Our FY-15E sugar revenue growth forecast has also been cut to 86.1% yoy from 113.5% yoy as we now expect 40% capacity utilisation rate vs. 45% previously. Our revised expectation is consistent with the performance of the sugar factory over the past two quarters.
We retain our 9.8% yoy revenue growth forecast for the agro-allied business segment on the satisfactory revenue growth of 6.3% yoy reported in H1-15. The livestock feed factory in Calabar, which was commissioned in November 2014, is an upside risk to our forecast. The factory has installed production capacity of 370K tonnes p.a.
Management confirms that proceeds from the UNICEM deal will be channelled to debt repayment.
Further to our initial comment on the deal entitled Divestment from UNICEM is value accretive published on 18 November 2014, we estimate that the sale of UNICEM will fetch FMN N51.0bn, the midpoint of the N47bn-N55bn range provided by management. Going by management guidance, FMN will receive 50% of the estimate by Q4-15E and the remaining 50% by FY-16E.
As a result, we expect FMN’s net debt-to-equity ratio to compress to 105.0% in FY-15E and further to 65.2% in FY-16E, post the repayment of part of its debt. We see PBT margins rising to 3.3% and 4.9% in FY-15E and FY-16E respectively from 2.5% in FY-14 on reduced interest expense. It should be noted that our revised PBT margins reflect the recent devaluation of the NGN against the US$.
FY-15E capital expenditure (capex) forecast trimmed by 11%.
We now expect FY-15E capex at N31.6bn, slightly ahead of management guidance of N30.0bn. FMN appears to have spent c.54% of our revised FY-15E capex in H1-15, based on the reported cash flow from investing activities during the period. Management disclosed that most of FMN’s capex in H1-15 was directed to its backward integration projects, the Sunti sugarcane plantation project in particular. Capex will likely lean towards this project in H2-15E given the N25.0bn target set by management.
We maintain our BUY recommendation on FMN with a revised 12-month target price of N60.84.
FMN is currently trading on CY-15E P/E and EV/EBITDA of 8.1x and 4.8x vs. our consumer sector average of 16.0x and 10.1x respectively.