Culled—Proshare

November 8, 2016/Vetiva Research

• Strong revenue performance persists, up 44% y/y
• Gross margin improves 400bps y/y to 14%
• FX loss undercuts earnings, Q2’17 PAT down 60% q/q
• TP revised upwards on improved earnings trajectory

Improved revenue profile on better volume performance, price
Buoyed by the strongest quarterly revenue performance on record, FLOURMILL reported a 44% y/y topline growth in its H1’17 period ended 30 September 2016. Amidst a challenging operating landscape, the company’s outperformance can be tied to gradual increases in selling prices (ranging between 10% and 25% as at Q1) as well as strong volume growth.

We believe additional product offerings (such as edible oils and cereal snacks) effected in FY’16 and a ramp up in sugar production have played a major role in this volume performance.

According to Mr. John Coumantaros, Chairman of FLOURMILL, export volumes for the agro-allied business (particularly soy beans) have seen an uptick since the currency de-pegging in June which has made Nigeria’s products more competitive in the international market.

He also stated that the company is increasingly substituting imports for locally produced raw materials even as it accrues gains from years of local production capacity expansions.

This, coupled with the strong revenue growth, explain how the company bucked a sector wide trend to record Gross margin expansion in H1’17 – up 400bps y/y to 14% -despite its high exposure to foreign inputs (78% as at FY’16). More so, we believe costs would surely have benefitted from persistent decline in global wheat prices (key raw material) since the start of the year – down 26% ytd.

FX headwind perturbs Q2’17 earnings, PAT down 60% q/q
Despite the gross margin improvement, EBIT margin declined to 6% in Q2’17 compared to 9% in Q1’17 following a ₦9.3 billion FX loss recorded in its “other operating expense” line. This FX loss represents exchange rate differential between the time of acquiring materials and the actual payment date.

Like other Consumer goods companies, FLOURMILL recorded notable increase in its trade payables amidst persistent illiquidity in the FX interbank market. Given this exposure, further depreciation in the currency could lead to a rise in FX losses before the end of the financial year (31 March 2017).

Whilst finance charges remained lower y/y (following repayment of some related party loans), there was a marginal 4% uptick q/q following a slight increase in total borrowings in the quarter.

Given the foregoing, PBT declined 50% q/q to ₦2.9 billion. Overall, PBT for H1’17 however came in at ₦8.8 billion, compared to ₦377 million in H1’16 (excluding exceptional income from UNICEM sale).

TP revised upwards, BUY rating maintained
On the back of this result, we have revised our FY’17 revenue to ₦494 billion (Prev: ₦410 billion), representing a 44% y/y turnover growth. However, our EPS estimate is cut slightly to ₦3.88 (Previous: ₦3.96) as we expect currency weakness will continue to pressure bottom line.

Nonetheless, following extensive capacity expansion in the past years, we are more optimistic about FLOURMILL’s earnings trajectory amidst better volume performance in its sugar (commenced production at Sunti Golden Sugar Estate in Q1) and agroallied businesses.

Thus, we have revised our revenue and earnings growth estimates for the coming years upwards. Our 12 month target price (TP) is raised to ₦35.86 (Prev: ₦32.58, BUY).