Culled—Proshare
August 1, 2016/FBNQuest Research
Event: Flour Mills of Nigeria (FMN) reports Q1 2017 (end-Jun) results
Implications: Marked upward revisions to consensus 2017 PBT forecast likely
Positives: PBT grew markedly by 394% y/y to N5.9bn mainly driven by a 45% y/y growth in sales.
Negatives: No obvious negatives
Late last week Friday, the NSE published Flour Mills of Nigeria’s Q1 2017 (end-June) results which showed marked growth on all key headline items. While sales grew by 45% y/y to N119.2bn, PBT grew by a remarkable 394% y/y to N5.9bn.
The marked growth in PBT was driven by a combination of factors including; slower growth (+6% y/y) in opex relative to the double-digit (+45% y/y) growth on the topline, a 14% y/y decline in interest expense, and to a lesser extent a gross margin expansion of 81bps to 12.8%. Moving down the P&L, PAT grew by 403% y/y to N4.2bn. Sequentially, the growth trends were even more pronounced.
Sales increased by 51% q/q. The PBT and PAT of N5.9bn and N4.2bn were well ahead of the pretax and after tax losses of –N8.3bn and –N4.3bn that the company reported in Q4 2016 (end-Mar). The results also came in well ahead of our (unrevised) forecasts. While sales beat by 36%, the PBT was ahead of our pretax loss forecast of –N2.7bn, mainly due to positive surprises on the topline, gross margin and opex.
The stellar growth in FMN’s topline was mainly due to a strong performance in the foods and agro-allied business, both of which grew by 43% y/y and 61% y/y respectively to N90.6bn and N25.2bn respectively.
Doing a read-across from the results of Dangote Sugar Refinery whose Q2 results came in better than expected, we believe that FMN’s sugar business contributed strongly to the significant y/y growth in the foods business. According to DSR’s management, sugar sales have been driven by strong growth in Lagos and a rebound in the north-east market following the restoration of relative peace in the region.
For the agro-allied business, we believe that topline growth was most likely driven by the edible oils business. Consequently, it appears that the company’s backward integration strategy via investments in sugar, palm oil, rice, sorghum amongst others, which is expected to address its import dependence is starting to pay-off. However, we await management confirmation on these. Given the historical lackluster results by FMN in recent times, we would be watching closely to see the sustainability of the solid growth posted in Q1 going forward.
In terms of outlook Bloomberg consensus wheat forecasts indicate that wheat prices are expected to rise by around 12% between 2016 and Q1 2017 (end-March). As such, the company still faces downside risks arising from an uptick in wheat prices and volatility of the naira exchange rate on the interbank market.
Given the stellar results, we expect to see marked upward revisions to consensus 2017E (end-Mar) PBT forecast and a positive reaction from the market over the next few days. Year to date, FMN shares have broadly tracked the index. The shares have shed -2.8%, compared with the -2.2% return delivered by the ASI.
We rate FMN shares Neutral. Our estimates are under review.
Flour Mills of Nigeria Q1 2017 (end-Jun) results: actual vs. FBNQuest Research estimates (N millions)
