August 12, 2016/Cordros Research
FLOURMILL’s Q1-16/17 numbers outperformed consensus, with EBIT and PBT respectively growing by 56.9% y/y and 394.3% y/y. Key drivers were the significant growth in gross profit and decline in finance charges. Given the strong start to the year, albeit acknowledging underlying downside risks, we have revised 2016/17FY PAT to N2.4 billion (previously -N1.2 billion) and upgrade TP to N43.65 (previously N33.65). BUY maintained.
Having hesitated during most of the last financial year, FLOURMILL’s management finally responded to rising cost pressures by adjusting prices between 10-25% higher (between January and June). The move, which partially offset costs (gross margin expanded by 81bps in Q1), had no immediate impact on volumes, considering the buoyant growth seen across the principal Food and Agro Allied divisions. Depending on the magnitude of subsequent price increases, we note the prospect of volume growth in 2016/17FY from the (1) newly commissioned capacities in sugar, pasta, noodles and flour categories; (2) continued contribution from newly launched products (edible oil, breakfast cereals and snacks); and importantly (3) relative insulation of food-based and agro allied products from the pressure facing consumer demand.
That said, given FLOURMILL’s significant exposure to imports, upside risks to production costs through the foreign exchange channels remain elevated. Besides, energy costs increases will likely linger through the year on weak gas supply outlook. While these portend potential pressure on margins, management’s guidance to 12-13% sustainable gross margin offers comfort, as it speaks to cost-reflective selling prices in the near term. In the long term, margins stand to benefit from the growing substitution of local raw materials inputs – maize and soya beans are now sourced 100% locally.
Despite volume growth and fairly good margins, FLOURMIILL’s 2016/17FY earnings face risks on two fronts: (1) loss on forex differences and (2) finance charges. On forex loss, we estimate N11.7 billion in 2016/17FY (vs. N6.3 billion in 2015/16FY) assuming N350 USDNGN. On the other hand, huge outstanding debt (N155 billion in Q1) and rising domestic interest rates suggest finance charges will remain high (as reflected in the latest results).
The stock recovered from its YtD low in January to accumulate 40% gain at the end of June, supported primarily by the general speculation that drove local equities prices higher in May and June. FLOURMILL is currently trading on a consensus 12M FPE of 11.7x, which is at slight premium to those of EM Asia and SSA peers.
