Culled—–Proshare

July 26, 2016 / FBNQuest Research

Event: Flour Mills of Nigerian (FMN) reports Q4 2016 (end-Mar) results

Implications: Likely downward revisions to consensus 2017 PBT forecast

Positives: No obvious positives

Negatives: FMN reported a pre-tax loss of –N8.3bn, driven mainly by a 48% y/y and 58% y/y rise in interest expense and other (non-operating) losses

Late yesterday, the NSE published Flour Mills of Nigeria’s Q4 2016 (end-Mar) results which showed pre-tax and after tax losses of –N8.3bn and –N4.3bn respectively, compared with PBT and PAT of N4.0bn and N6.8bn in Q4 2015. The pre-tax loss was mainly driven by a combination of  factors including a 58% y/y spike in other (non-operating) losses, a 49% y/y rise in interest expense to –N5.0bn and to a lesser extent a 359bp contraction in gross margin to 12.6%.

These negatives completely offset a 22% y/y growth in sales to N78.9bn and a 25% y/y reduction in opex. Sequentially, sales declined by 8% q/q. Although the pre-tax loss of -N8.3bn is significant relative to the –N4.3bn that the company reported in Q3 2016 (end-Dec), the after tax loss of -N4.3bn compares with the –N5.2bn in Q3 2016. Compared with our forecasts, although sales beat by 34%, the losses reported compare with our PBT (profit) forecast of N4.9bn, mainly because of negative surprises in interest expense and the other (non-operating) losses lines.

On a full year basis, sales were up by 11% y/y to N342.6bn. However, thanks to a N23.7bn gain on disposal of FMN’s 15% equity stake in UNICEM, PBT and PAT both grew by 49% y/y to N11.5bn and N14.1bn respectively. The 2016 PBT came in slightly behind consensus forecast of N13.6bn.

Management has proposed  a dividend per share of N1.0, 52% lower than the N2.10 dividend declared by the company in 2015. The DPS implies a dividend yield of 4.7% and a payout ratio of 17.9%. The proposed dividend is also below ours and consensus DPS forecasts of N1.92 and N1.58 respectively.

Since the bulk of FMN’s raw materials (particularly wheat) is imported, the adoption of a more flexible exchange rate regime by the CBN and the consequent downward shift in the naira exchange rate to around N295 per US dollar from N197.50 previously severely impacted its cost of sales and was the primary driver behind the gross margin contraction. This is in line with the trends seen with other consumer goods firms that have reported earnings so far.

We also believe that a large chunk of the other (non-operating) losses is most likely related to fx. Although the company’s backward integration strategy via investments in sugar, palm oil, rice, sorghum amongst others is expected to address its import dependence, we do not expect these to have a material impact on profits in the near-term. As such,  given FMN’s import dependence, we see downside risks arising from the increased volatility of the naira exchange rate on the interbank market.

Furthermore, Bloomberg consensus wheat forecasts indicate that wheat prices are expected to rise by around 12% between 2016 and Q1 2017 (end-March).

Given the poor results and outlook on input costs, we expect to see downward revisions to consensus 2017E PBT forecast and a mild sell-off in the shares. Year to date, FMN shares have shed -28.5%, underperforming  the ASI (-0.8%).

We rate FMN shares Neutral. Our estimates are under review.

Flour Mills of Nigeria Q4 2016 (end-Mar) results: actual vs. FBNQuest Research estimates (N millions)