August 2, 2018/InvestmentOne Report

Q1 2019 results highlight: Lower Sales Volume Weighs on PBT Performance  

·         Mixed top line:  up 15.52% q/q, down 10.70% y/y.

·         Improving gross profit margin: up 191bps q/q; up 140bps y/y.

·         Mixed Opex to sales ratio: down 273bps q/q; up 148bps y/y.

·         Volatile Profit Before Tax: up 276.09% q/q; down 15.82% y/y. 

Recently, Flour Mills of Nigeria (FMN) Plc published its Q1 2019 results, which were reflective of lower turnover in Q1 2019. The fall in revenue may be due to the less inspiring sales from food segment, which may not be unconnected to weak consumer spending in the economy as well as smuggling in the North East. 

Lower Sales Volume Drove Turnover Down 

The company’s turnover fell by 10.70% y/y to N133billion in Q1 2019. This was majorly reflected in the sales of food segment (78% of revenue in Q1 2019), which fell by 10.53%y/y to N104billion.  

On the other hand, management stated that turnover during the year was driven by volume given the stability in pricing. We opine that the issue of smuggling especially in the North East, a serious challenge to the players in Agro allied sector, could have affected sales in Q1 2019. 

Stability in FX Market Supports Improvement in Gross Profit Margin  

However, the company’s gross profit margin improved by 140bps y/y to 12.98% in Q1 2019 due to the 15.43 y/y and 52.01% y/y decline in cost of raw materials and factory rent and rates respectively. This may have been supported by stability in FX market thus slowing down cost of imported raw materials.  

We believe gross profit margin could have improved further if not for the 14.38%y/y rise in average global Wheat prices in Q2 2018 (equivalent period for FMN’s Q1 2019), which could have slowed down margin growth. Nonetheless, we point out that this is still below the gross profit margin of Dangote Flour and Dangote Sugar which were around 13% and 30% respectively as at Q2 2018. 

Rise In OPEX/Sales Offsets the Impact of Lower Finance Cost

Moving down to the P& L line, a 148bps y/y rise in OPEX/sales offset the impact of the  79.26% y/y decline in Other income and a 32.58% y/y fall in net finance cost. As a result, PBT margin was somewhat flat at 3.92% in Q1 2019.  We opine that PBT margin is very low as it remains uninspiring both before and after right issue. 

We highlight that the decline in finance cost was as a result of the conversion of part of the company’s debt to equity with the proceeds from the N40billion right issue completed in Q4 2018. This reflected in the company’s finance cost, which fell by 30.53% y/y in Q1 2019. However, the company’s leverage increased with its debt to equity ratio rising to 98% in Q1 2019 from 70% in Q4 2018. This could be as a result of additional loan of N17billion taken in Q1 2019. Elsewhere, the decline in other operating income was as a result of no gain on derivative in Q1 2019 compared to a gain of N2.12billion in Q1 2018. Overall, the company recorded a 15.82% y/y decline in PBT to N5.21billion in Q1 2019. 

Low Base Effect Flatters Quarter On Quarter Performance 

On a sequential basis, turnover was up by 15.52% q/q to N133billion due to higher volume in Q1 2019. Similarly, the gross profit margin improved by 191bps q/q to 12.98%. This came as a surprise despite the 9.59% q/q rise in average international wheat price. We believe the improvement in margin may be connected to significant fall in factory rent and rates, which fell by 67.13% in Q1 2019. 

That said, a combination of 50.00% q/q increase in Other income, a 273bpsq/q decline in OPEX/ sales,  and a 16.62% q/q fall in net finance cost drove the PBT margin to 3.92% ( -2.57% in Q4 2018). As result, the company recorded a PBT of N5.21 billion compared to a Loss before tax of N2.96billion in Q4 2018. 

Summary And Outlook

Overall, the results were headlined by decline in revenue and fall in gross profit margin weighing on the net finance income. 

Going forward, we expect the successful issuance of N40billion rights issue to reduce the company’s finance cost thus supporting the PBT margin in the near term. In the same vein, the company’s switch to commercial paper which is cheaper than bank loan could reduce its finance cost as highlighted by the management. Nonetheless, the recent rise in company’s leverage may slow the expected decline in finance cost. 

Furthermore, the company’s recent commissioning of the Sunti sugar Cane plantation and refinery plant could reduce company’s importation of raw material thus supporting gross profit margin. This combined with plans to acquire more land for further development, geared towards achieving the 6,500 metric tonnes per day (mtpd) 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. 

In the same vein, we see support to FMN’s performance from expected improvement in consumer demand due to potential for increased spending as electioneering intensifies in the later part of 2018. 

Our pricing models are currently under review. 

Source: Company financials, Investment One Research