Culled—Proshare

February 6, 2017/FBNQuest Research

Maintaining OP rating despite modest increase to PT
Flour Mills of Nigeria’s (FMN) Q3 2017 (end-Dec) PBT came in well ahead (+104%) of our forecast. The key drivers behind the strong results were positive surprises in sales and gross margin, which beat our forecasts by 13% and 67bps respectively. Topline growth was underpinned by a 50% y/y expansion in food sales and, to a lesser extent, a 53% y/y growth in the agro-allied business.

In terms of earnings, the foods business which delivered a PBT of N5.9bn in Q3 (vs. –N3.0bn in Q3 2016) was again the largest contributor to PBT. The gains by the foods business were almost completely offset by pre-tax and after-tax losses of –N3.2bn and –N1.8bn for the real estate and port divisions respectively.

Despite the strong results, we have increased our EPS forecasts by only 5% on average over the 2017-19E period and our price target by 2% to N30.2. The modest increase to our EPS forecasts is driven by our conservative view on interest expense which we expect to weigh on earnings following a considerable (+47% q/q) spike in financial leverage (debt-equity-ratio 2.9x vs. 1.9x Q2 2017).

Going forward, Bloomberg consensus wheat forecasts indicate that wheat prices are expected to rise by 2% in the first quarter of 2017. Nevertheless, given the high proportion of wheat products in the firm’s sales mix, it still faces downside risks from an uptick in wheat prices and a potential devaluation of the naira.

Beyond 2017E, we forecast sales and EPS growth of 6% y/y and 42% y/y in 2018E, driven largely by base effects. FMN shares are trading on a 2017E (end-Mar) P/E multiple of 10.7x for 42% EPS growth in 2018E.

This is more compelling than the average P/E multiple 43.8x for 29% EPS growth that our universe of consumer names is trading on. Our price target implies a potential upside of 68% from current levels. As such, we retain our Outperform rating on the shares.

Result showed strong growth trends y/y
FMN’s Q3 sales grew by 56% y/y to N134.6bn. Furthermore, PBT and PAT grew to N1.5bn and N706m compared with pre-tax and after-tax losses of –N4.3bn and –N5.3bn respectively in Q3 2016.

The marked growth in PBT was mainly driven by a 170bp y/y expansion in gross margin to 12.7% and, to a lesser extent, a 25% y/y reduction in other operating expense. These two factors completely offset a 61% y/y spike in interest expense. Sequentially, sales were flattish q/q.

However, PBT and PAT declined by 49% q/q and 58% q/q respectively. The marked declines in PBT were driven by a 286bp q/q contraction in gross margin and a 21% q/q surge in interest expense to –N6.8bn.