July 16, 2019/InvestmentOne Report

•    Mixed top line:  down 3.16% q/q, up 10.07% y/y.

•    Weak gross profit margin: down 573bps q/q; 573bps y/y.

•    Lower Opex to sales ratio: up 5bps q/q; down 247bps y/y.

•    Weaker Profit Before Tax: down 342.40% q/q; 143.71% y/y 

Recently, Flour Mills of Nigeria (FMN) Plc published its Q4 2019 results (Year-end March), which were reflective of a higher turnover despite the weak price level in Q4 2019. 

Topline Remains Strong due to Higher Volume  

The company’s turnover rose by 10.07% y/y to N126billion in Q4 2019. This was basically driven by higher volume sales (+2%y/y according to the management) as the company’s brand building focus further ensured its growth in market share. We highlight that the boom in sales was driven by higher volume sold in the Agro Allied segment of the business which improved by 33.61% in the quarter.  

We opine that the gradual improvement in consumer spending could have supported the company sales despite the prevalence of smuggled products in the market. The improvement in volume could also be as a result of the price cut the company took in the second quarter (Q2 2019). 

Higher Input Cost and Lower Prices Pressure Margin  

However, FMN’s gross profit margin was under pressure as a result of the price cut and higher wheat prices in the global commodities market despite the stability in FX market. As a result, gross profit margin declined by 573bps y/y to 5.33% in Q4 2019.  

We highlight that key players in the agro allied space have experienced fall in their margins due to the impact of Apapa gridlock, smuggling in the North and rising wheat prices (+7.77%y/y on the average during the quarter).

Lower Margin Weighs on PBT  

Moving down to the P& L line, the weak gross margin outweighs the effects of the 247bps y/y decline in OPEX/sales and the 15.02% decline in net finance cost. As a result, the company recorded a negative PBT margin of 5.69% and a loss before tax of N7.21billion in Q4 2019. 

We believe the balance sheet restructuring by the company in terms of refinancing expensive short dated instruments with long dated bond drove the its net finance cost down. 

High Base Effect Slows Quarter On Quarter Performance 

On a sequential basis, turnover was down by 3.16% q/q to N126billion due to the high base effect of Q3 2019 volume. Similarly, the gross profit margin declined by 573bps q/q due to input cost pressure. 

That said, a 20.39%q/q increase in net finance cost and the decline in gross profit margin offset the impact of the jump in Other Income to N464billion in Q4 2019 from N468million in Q3 2019. As such, PBT margin declined by 796bpsq/q to a negative value of 5.69% in the quarter.   

Weak Margin Drags FY Earnings Down 

For FY 2019, turnover declined by 2.81% y/y to N527billion due to lower prices despite higher volume sales during the year. In the same vein, the gross profit margin declined by 256bps y/y to 10.12% due to the cut in price and increase in wheat prices during the year.  

That said, a combination of a 4.51% y/y increase in other income and the fall in gross profit margin more than offset the impact of the 29.99%y/y decline in net finance cost and drove the PBT margin down by 112bps y/y to 1.93%. In the same vein, the company recorded a 38.50%y/y decline in PBT to N10.17billion in FY 2019. 

Summary And Outlook 

Overall, the results were headlined by weaker gross profit margin which offset the effect of the fall in net finance cost. 

Going forward, we expect the new product innovation to drive top line performance in the near term as the company’s market share in the Food segment increases. In the same vein, the company’s switch to commercial paper which is cheaper than bank loan could continue to reduce its finance cost as highlighted by the management. Similarly, we believe the successful completion of the first tranche of the N70billion bond programme, with about N20billion raised for 3 and 5 years, should support the company’s drive to restructure its loan book. 

Furthermore, we believe full optimization 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 the increase in minimum wage. In the same vein, we expect stable FX environment to continue to support input cost and margin performance in the near term. 

Our pricing model is under review.

Source: Company financials, Investment One Research