31/10/2018/Cordros report

Event: FLOURMILL published H1-19 result late yesterday, with EBITDA and EPS down by 31% y/y and 78% y/y respectively in Q2. The group’s performance in the period was impacted by (1) lower revenue and gross margin, (2) higher OPEX, and (3) significantly lower other income. The aforementioned offset the high-double digit decline in net finance costs. Compared to our estimate, the Q2-19 EPS is slower by a significant margin.

Over H1-19, both FLOURMILL’s EBITDA and EPS are lower by 24% and 61% respectively relative to H1-18, and are below market expectation for 2019E by 2% and 26% when annualized.

• Q2-19 revenue was down by c.9% y/y and below our expectation by 1%. Trend of y/y revenue decline has now extended to the fourth quarter in row. Food (-7% y/y) and Agro-Allied (-19% y/y) revenues declined the most, while Support Services (Packaging, Ports operation, and Real Estate/others) grew by 15% y/y. In the Food category, revenue from Sugar was down 16% in H1-19 while Flour/processed food revenue declined by 7% relative to last year.

• The Q2-19 gross margin of c.11% is below our 12% estimate for the period, and is the lowest achieved since the quarter ended March 2017. This suggests that the rising price of wheat, pricing pressure faced across select product lines (notably sugar and bulk flour), and efficiency losses from low capacity utilization (for flour and sugar also) are having more impact on margin than expected.

• Elsewhere, Q2-19 OPEX increased by 25% vs. Q2-18, with the related ratio-to-revenue at 5%, vs. 4% in Q2-18. In addition, other income was down 77% y/y, driven by significantly lower sundry income (NGN34 million vs. NGN1.2 billion respectively) and net FX loss of NGN293 million (vs. NGN1.7 billion FX gain recorded in Q2-18). EBITDA and EBIT were consequently down 31% y/y and 44% respectively in the review period.

• Further down the income statement, net finance cost was down 30% y/y, marking the third quarter of y/y decline. Noteworthy, finance cost, at NGN5 billion, (1) was down 32% y/y and 19% q/q and (2) is FLOURMILL’s lowest in a quarter since the period ended March 2016. Compared to Q1-19, total borrowings are currently lower by N29.9 billion, and by NGN48 billion compared to H1-18. Expensive overdraft facilities now account for far lesser proportion of gross debt at 1% (from 12% as at Q1-19, and vs. 19% average in 2018FY).

• A higher effective tax rate of 54%, vs. 34% in Q2-18, added to the steep decline in Q2-19 EPS.

Comment: FLOURMILL’s Q2 EPS is unimpressive in our view. The result adds to the disappointing July-September results that have been published thus far by the consumer goods companies in our universe (excluding NESTLE and UNILEVER). We expect negative reaction to follow. Our estimates are under review.