July 4, 2017/Cordros Research
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FLOURMILL released fourth quarter and 2016/17FY result late yesterday. Compared to the loss we expected, Q4 PBT of N179 million (vs. N1.5 billion in Q3) was reported. A net operating gain of N10.3 billion (vs. N11.8 billion loss as at end-December, owing to FX gain of N7.54 billion) and a finance charge of N14.8 billion (vs. Cordros’ N4.7 billion) were the major surprises in the final quarter result. Overall, FLOURMILL reported net profit of N8.8 billion for the 2016/17FY, against a loss of N15.4 billion reported the previous year (excluding the gain on disposal of investment) and ahead of our estimate of N5.7 billion. The board has proposed a final dividend of N1.00, same as in the previous year.
Revenue in Q4 grew by 70.5% y/y, the highest in all quarters of the year, but compared to the Oct-Dec period, revenue was almost flat. The Food division remained resilient, growing by 50% y/y and 41% q/q. The introduction of new products, strong price increases, and the relatively less-cyclical demand for food-based products accounted for the impressive performance of this division. Also supporting the y/y topline growth in Q4 was the Packaging division, in continuation from the recovery in Q3. Management attributed the recent performance of this division to the slightly improved activities in the macro environment, but more importantly, to the performance of other divisions (accounting for up to 60% of total demand) within the Group. Asides from Food and Packaging (although revenue contracted q/q), all other business divisions performed poorly in revenue terms during the review period.
The first negative surprise from the Q4 result was the 287 bps y/y and 279 bps q/q declines in gross margin (GM) to 9.8%, the lowest during the year. While noting possible pricing pressure particularly in the Agro-Allied division (e.g the fertilizer market where the FGN was supplying at highly subsidized prices), we think the decline in GM may also be related to higher production cost. Raw materials and packaging costs increased by 68% y/y (although down 46% q/q), and notably, the 352% y/y and 48% q/q increases in fuel, gas, and oil costs are not unrelated to the increase (2.92% in Lagos) in diesel prices over the period. Gas supply to FLOURMILL’s Apapa factory area is yet to improve.
Also a negative surprise in Q4 was the 119% q/q increase in finance charge to a quarterly record of N14.8 billion, contrary to our expectation of a slight reduction following the relatively high charge (N6.8 billion) incurred in Q3. We consider this worthy of note, considering that (1) FLOURMILL’s total debt only increased by N8 billion during the quarter, (2) there was no material change in the interest rate environment, and (3) the NGN strengthened during the period (see significant FX gain above), making the case for huge FX loss on the company’s cumulative USD42 million loan unlikely. Net debt as at end-2016/17 was N196.6 billion (vs. N132 billion in 2015/16FY).
Operating expenses increased 74% q/q to the year’s peak of N9.3 billion. While this conforms with FLOURMILL’s usually bloated opex in the final quarter, we note that the amount reported was below the N10.2 billion we had expected. The N836 million reported as other income was also above our estimated N551 million.
Overall, while acknowledging FLOURMILL’s impressive 2016/17FY performance, we note, also, the effect of low 2015/16 comparables. The consistent weakness of quarterly earnings is a concern noteworthy. Given our single-digit forecast of normalized revenue growth, FLOURMILL’s management must at least, attain 2016/17FY margin, and most importantly, rein in finance charges, to achieve another impressive performance in the 2017/18F.
FLOURMILL’s stock has rallied (45.95%) alongside the broad buzz on the local bourse. We expect reaction to the result will be neutral.
