Culled—Proshare
December 2, 2016/FBNQuest Research
Rolling over to 2018E; price target up 19%
Although Flour Mills of Nigeria’s (FMN) Q2 2017 (end-Sep) PBT missed our forecast by 12%, the difference was mainly due to a negative surprise of N7.8bn in other operating expense which was driven by fx devaluation.
Beyond this, FMN’s sales and gross margins surprised positively, beating our forecasts by 28% and 369bps respectively. The underlying results (ex-UNICEM divestment) were also strong on a y/y basis.
While unit volume growth in the foods business and average price increases of around 10% -25% y/y were the key drivers behind the y/y growth in sales and gross margin, an exceptional income of N2.1bn in the ports and logistics business was the single largest contributor (67%) to y/y growth in underlying (ex-UNICEM) PBT.
The foods and the agro-allied businesses also contributed strongly to profitability. However, a pre-tax loss of –N2.4bn reported by the real estate business was a drag on earnings. Beyond Q2, although the naira has achieved some stability since August, given the prevailing issues with fx liquidity, the company still faces downside risks.
Consequently, we expect to see further fx and inflationary cost pass-through reflected in the P&L in 2017E (end-Mar). In view of this, we have cut our EPS forecasts by 17% on average over the 2017E-19E period.
However, our new price target of N29.6 is up by 19%, mainly because we have rolled forward our valuation to 2018E. Our new price target implies a potential upside of 52% from current levels. On a relative basis, the shares are trading on a 2017E P/E multiple of 14.5x for a 70% EPS growth in 2018E. We retain our Outperform rating on the shares.
Result showed strong underlying trends y/y
FMN’s Q2 results showed that the underlying trends (ex a N23.7bn gain on disposal of UNICEM in Q2 2016) grew markedly across all key headline items. Sales expanded by 43% y/y to N136bn.
Although PBT and PAT declined by -87% y/y and -93% y/y respectively, excluding the impact of the divestment, underlying PBT improved to N2.9bn compared with a pre-tax loss of –N810m in Q2 2016.
The marked growth in underlying PBT was mainly driven by a 677bp expansion in gross margin to 15.5%, which completely offset a significant spike in other operating expense to –N7.8bn (vs. +N1.8bn Q2 2016) and a 28% y/y rise in opex.
The spike in other operating expense was due to a -N9.3bn exchange rate loss related to the 10% depreciation of naira over the June-September period. Moving down the P&L, PAT also expanded to N1.7bn versus an after-tax loss of –N958m in Q2 2016.
