January 31, 2018/InvestmentOne Research
Decline top line: down -13.65% q/q, -4. 14% y/y
· Expansion in gross profit margin: up +367bps q/q; +322bps y/y
· Slight uptick in opex to sales ratio: up +94bps q/q; +87bps y/y
· Mixed PBT performance: down -17.3% q/q; up +303.5%
Yesterday, Flour Mills of Nigeria (FMN) Plc published its unaudited Q3 2018 results which were reflective of the improvements in the domestic FX market.
The company’s results showed a +303% y/y surge in PBT to N6.03billion driven by a N672million foreign currency gain, against a -N4billion loss in Q3 2017. This combined with the +322bps expansion in margin, despite the -4.14% y/y slide in revenues, more than offset the +87bps y/y rise in opex/sales ratio and the +32.35% y/y jump in net finance cost.
The decline in revenue may not be unconnected with the reduction revenue from Agro Allied segment of the company, which dropped by -32.59% y/y during Q3 2018.
Furthermore, we point out that the FX gain reported may not be unconnected to a lower blended average FX rate for the payment of its trade payables as highlighted by management, this may be supported by the expected stability in FX in the short term. During the conference call, the company also highlighted that the spike in finance cost, despite the c.-14% y/y slide in total interest bearing debt, was the result of the higher interest environment.
On a sequential basis, the -18.19% q/q decline in investment income, +22.44% q/q jump in net finance cost and the +87bps increase in opex to sales ratio more than outweighed the +367bps q/q rise in gross profit margin leading to the -17.28% q/q drop in PBT.
Similar to the company’s y/y performance, gross profit margin expanded despite a decline in revenues (-13.65% q/q). According to management the decrease in top line was due to the seasonally drop in sales volume.
However, we highlight that the expansion in gross profit margin y/y and q/q maybe reflective of improvements in cost management.
Overall, the results were headlined by decline in revenue, recovery in margin as well as increase in opex/sales ratio.
Going forward, we see the recently announced N40billion rights issue and the planned issuance of a N70billion Medium Term Note as a positive for the company’s performance in the near term. This could reduce its foreign loan exposure estimated at USD20million as well as potentially decreasing the proportion of short term to total debt on the company’s balance from c.63% currently. Consequently, we should see a decline in net finance cost which may improve the company’s PBT performance.
In the same vein, the company’s ongoing raising of N100bn through Commercial Papers may support the company’s working capital needs in the short term.
Over the medium term, we see support to FMN’s performance from expected improvement in consumer demand due as inflation continues to moderate as well as the potential for increased spending as electioneering intensifies in the later part of 2018.
Furthermore, the company is focusing on its backward integration such as the Sunti sugar Cane plantation and refinery plant that is scheduled for commissioning in 2018. This combined with plans to acquire more land for further development, geared towards achieving the 6,500mtpd capacity of the mill, may enhance the company’s gross profit margin performance over the medium to longer term given that c.70% of the company’s cost of goods are dependent on FX.
Our pricing models are currently under review.
Flour Mills of Nigeria Plc Q3 2018 figures ( N’ millions)
YE: March | Q3 2018 | Q/Q | Y/Y | 9M 2018 | Y/Y |
Sales | 129,066 | -13.65% | -4.14% | 427,509 | 9.63% |
Cost of Sales | (108,543) | -17.26% | -7.68% | (371,472) | 10.41% |
Gross Profit | 20,523 | 12.30% | 20.22% | 56,037 | 4.75% |
Gross margin | 15.9% | 367bps | 322bps | 13.11% | -61bps |
Other operating income/loss | 431 | -77.58% | -111.73% | 5,507 | -146.84% |
SD&A | (1,271) | -15.86% | -6.69% | (4,037) | -8.89% |
Admin expenses | (4,959) | 15.37% | 24.92% | (13,311) | 32.52% |
OPEX | (6,230) | 7.25% | 16.84% | (17,348) | 19.85% |
Opex/sales | 4.83% | 94bps | 87bps | 4.06% | 35bps |
Investment income | 192 | -18.19% | -3.02% | 465 | -35.98% |
Finance cost | (8,891) | 21.14% | 31.31% | (25,158) | 42.16% |
PBT | 6,025 | -17.28% | 303.46% | 19,503 | 89.46% |
PBT margin | 4.67% | -20bps | 356bps | 4.56% | 192bps |
Tax | (2,133) | -13.27% | 280.28% | (6,255) | 116.24% |
Tax rate | 35% | 4.84% | -5.75% | 32% | 397bps |
PAT | 3,892 | -19.32% | 317.41% | 13,248 | 79.00% |
PAT margin | 3.02% | -21bps | 232bps | 3.10% | 120bps |
Source: NSE, Investment One Research
