Culled—-Proshare

July 25, 2016/Vetiva Research

• FY’16 revenue ahead of Vetiva estimate
• N23.7 billion exceptional income boosts EPS 70% y/y
• Board proposes dividend of N1.00 per share (FY’2015: N2.10)
• Downward revision to FY’17 EPS
• TP revised lower to N23.41 (Prev: N43.93) on challenging outlook

Revenue growth ahead of Vetiva estimate
Despite a second consecutive quarterly decline in topline growth (Q4: -8%, Q3: -10%), FLOURMILL reported an 11% y/y revenue growth in its FY’16 period ended 31 March, above Vetiva’s 9% growth estimate. This growth was supported by the strong performance recorded in the first half of the year wherein Q2’16 delivered the strongest quarterly topline performance since Q3’13.

On a segmental basis, the resilient Food segment (contributed 82% to topline) continued to support growth, recording an 18% y/y rise in revenue. According to press release by management, this topline improvement was driven by volume growth and gradual price increases through the year. With this, gross margin came in relatively flat y/y as price increases tapered the impact of higher input costs incurred from currency weakness (given the miller’s c.80% exposure to imported raw materials).

Whilst operating expenses moderated 15% y/y, a N7.7 billion “other operating loss” (on the back of N6.3 billion FX loss) pulled EBIT margin 54bps lower to 2.6%. Elevated net finance charges of N22 billion (FY’15: N19 billion) also weighed on earnings, putting operational loss before tax at N12.2 billion (FY’15 loss of N6.6 billion).

Nonetheless, following exceptional income of N23.7 billion from the final payment on the sale of FLOURMILL’s stake in UNICEM to Lafarge in Q2’16, net earnings for the year rose 70% y/y to N14 billion. The Board of Directors have proposed a dividend per share of N1.00 (FY’2015: N2.10).

Downward revision to FY’17 EPS on tough outlook
Whilst we are impressed with the revenue growth recorded in FY’16, we are wary as to how sustainable this run rate (on both the volume and price front) will be in the first half of 2017 amidst macroeconomic headwinds that have stifled consumer spending and increased sensitivity to changes in price.

Furthermore, following the FX market liberalization in June which has seen the naira depreciate 55% (currently NGN307/USD), we believe FLOURMILL will struggle due to its exposure to imported inputs. We expect management will hedge against this currency risk; this may include participating in the new naira futures market.

Though we expect payoffs from further backward integration in the Agro- Allied segment and previous product expansions, we exhibit caution in our expectation given the challenging operating environment and FLOURMILL’s peculiar exposure to foreign exchange.

We revise our FY’17 EPS estimate from a profit of N0.98 to a N1.15 loss. Consequently, our 12 month target price (TP) is cut to N23.41 (Previous: N43.93) to reflect the tough earnings outlook.