Event:                       Flour Mills of Nigeria (FMN) reports Q1 2018 (end-June) results

Implications:        Likely upward revisions to consensus 2018 PBT forecast

Positives:                Sales and PBT grew by 25% y/y and 6% y/y respectively

Negatives:               Gross margin contracted by -124bp to 11.6%. FMN also reported a 74% y/y surge in net interest expense

This morning Flour Mill of Nigeria (FMN) published its Q1 2018 (end-June) results which showed that PBT grew by a modest 6% y/y to N6.2bn, much slower than that 25% y/y growth reported on the topline.

A combination of factors including a 124bps y/y contraction in gross margin to 11.6%, a 23% y/y rise in opex and a 74% y/y spike in net interest charges were the primary factors underpinning the subdued PBT growth relative to sales. Further down the P&L, PAT declined by 3% y/y to 4.1bn mainly because of a 2.1x increase in minority interest to N490m.

Sequentially, while sales grew by 11% q/q, PBT grew substantially by 3,361% q/q due to other operating income. However, growth on the PAT line slowed to 89% q/q mainly due to negative base effects – on the other comprehensive income line in the prior quarter.

Compared with our forecasts, sales beat by 19%. While PBT and PAT were ahead by 74% and 82% respectively. The PBT also tracks well ahead of consensus PBT forecast of N16.1bn for FY 2018(end-Mar).

In terms to contribution of the various segments. The foods and agro-allied businesses were the  major drivers of growth, accounting for around 78% and 18% of FMN’s group sales respectively.

While food sales grew by 28% y/y to N115.8bn, growth for the agro-allied business was much slower at 9% y/y. FMN’s packaging business which contributed around 3% of group sales also grew by 74% y/y.

Similar to the prior quarter, we believe that the topline growth benefited slightly more from price increases as opposed to volume growth. We also believe that unit volumes, particularly those in the foods division benefitted from consumers down-trading to cheaper domestic brands.

From FMN’s statements, we note that raw material costs spiked by around 28% y/y. Corroborating this, we note that wheat prices which form the bulk of FMN’s raw materials increased by around 14% between April and June 2017.

Bloomberg consensus wheat forecasts indicate that prices are expected to rise marginally by around 4% through Q4 2017 (end-Dec).

As such, the company still faces downside risks from an uptick in raw material costs. As reflected by the 74% y/y surge in net interest expense, FMN’s huge debt overhang continues to be a major drag on earnings.

We expect this to be a major focal point on the company’s conference call which holds tomorrow.

Given that FMN’s Q1 2018 (end-June) PBT tracks ahead of consensus FY 2018 PBT forecast of N16.1bn, we expect to see upward revisions to consensus PBT forecasts.

Year to date, FMN shares have outperformed the market. The shares have gained 57% compared with 37% delivered by the NSE ASI.

We rate FMN shares Outperform. Our estimates are under review.

Flour Mills of Nigeria Q1 2018 (end-June) results: actual vs. FBNQuest Research estimates (N millions)

Q1 2018 (end-Jun)

Source: NSE; FBNQuest Estimate