Flour Mills of Nigeria Plc - Abnormally Weak Q4 Slows Strong FY Earnings


Thursday, July 06, 2017 1:15 PM  /Vetiva Research

·         Impressive revenue run-rate persists, up 53% y/y

EBIT surges from 9 billion to 41 billion in FY’16/17

Board of Directors recommend dividend of 1.00/share

Earnings estimates cut, TP revised lower, BUY rating maintained

Strong y/y improvement in FY’16/17 earnings despite dismal Q4

FLOURMILL released its FY’16/17 financial results with revenue coming in 53% higher y/y and 2% above Vetiva estimate at
524 billion – finishing the year with yet another revenue outperformance in its final quarter.

The impressive performance was driven by strong topline growth across the Group’s major business segments – Agro-Allied (+72% y/y) and Food (+51% y/y) – following both price increases and volume ramp-up in the period.

Earnings were further supported by improvement in costs which saw operating profit rise from
9 billion to 41 billion. Despite reporting impressive y/y growth in operating profit, PAT was down 39% y/y to 8.8 billion (prior year: 14.4 billion).

It is important to note that the y/y decline in PAT is not a fair comparison given that bottom line in the prior year was bloated by a
23 billion exceptional item (UNICEM sale proceeds).

Save for the exceptional item, we highlight that prior year’s bottom line would have come in at a
12.2 billion loss before tax. Nonetheless, the Board of Directors proposed a 1.00/share dividend (FY’15/16: 1.00/share) – representing a current dividend yield of 4%.

Looking at the q/q performance however, FLOURMILL reported a quite dismal Q4’16/17 result with most line items printing below estimates.

Whilst revenue remained flat q/q and 8% above Vetiva estimate, earnings were knocked by a moderation in gross margin (287bps q/q) and an uptick in OPEX to sales ratio (294bps q/q) amidst high conversion and administrative costs respectively.

Though these pressure points were offset by a 57% reduction in the FX losses accumulated (FX losses moderated from
13.3 billion in 9M’16/17 to 5.7 billion) a rather unexpected 119% q/q surge in financing costs brought profit before tax to a modest 0.2 billion – 88% q/q decline.

Nonetheless, profit after tax for the quarter came to
1.4 billion, supported by a 1.3 billion tax credit.

FY’17/18 earnings estimates cut as internal risks weigh on outlook

Whilst the y/y performance for FLOURMILL remains impressive, the Q4 numbers look quite disturbing and we are wary as to how well the company will leverage the improvement in the operating environment amidst prevalent internal risks which could quickly derail earnings prospects.

We are specifically most concerned about FLOURMILL’s debt levels. Following a 29% y/y rise in total borrowings in FY’16/17, the company has an elevated debt to equity ratio of 187% and interest expenses take up almost 80% of operating profit realized.

We believe the company needs to look at deleveraging its balance sheet and given the recovering equity market, Management may speed up equity capital raising plans given that the company obtained Shareholders’ approval to raise
40 billion through a 3- year shelf program in Q1’16/17.

Further supported by an improving macroeconomic environment, we remain optimistic about revenue growth, particularly in the Food and Agro-Allied segments, and forecast a 9% rise in topline in FY’17/18.

We however revise our EPS for the period lower given our more cautious stance on cost efficiency and an upward revision to interest expense estimate.

Our FY’17/18 EPS is revised to
4.16 (Previous: 5.40) and 12-month Target Price is cut to 31.71 (Previous: 34.63).

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