November 8, 2016/Cordros Research
We met with the management of FLOURMILL earlier today ahead of our update following the release of second quarter result (July to September 2016). Summary of the feedback is that while Q3-17 performance is expected to be affected by the impact of seasonality, there is strong conviction that the company would close 2017F on an impressive note. Specific guidance for revenue and earnings growth was not provided, but both are expected to grow in line with H1-17.
- Revenue growth in the Food (51% in H1) and Agro-Allied (34% in H1) divisions is expected to remain strong, while recovery in Packaging (-32% in H1) is dependent upon recovery in external demand (accounting for 50% of total sales).
- Management said that exports (of food and packaging products to South and North Africa, and commodities to Asia) contributed to revenue in Q2, although details were not disclosed in the latest filing.
- The significant increase in SD&A expenses in Q2 was as a result of increasing focus on sales as well as the impact of naira depreciation on USD denominated salaries.
- Forex loss of N9.3 billion was reported in Q2 following revaluation of (1) account payables and (2) US$20 million foreign loans. Each contributed equally to the forex loss.
- In addition to PIs, FX linked costs are controlled by increasing domestic sourcing of inputs that are available locally.
- On debt, the slight q/q increase in Q2 was as a result of fresh long term loans taken during the period to fund the ongoing backward integration programme (BIP) in sugar.
We are overweight FLOURMILL. Forecasts are under review.
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