July 30, 2019/Cordros Research
Q1-20 Update: From a finance cost-induced negative EPS in Q4-19 (end-Mar 19), FLOURMILL reported an impressive EPS growth of 16.5% y/y in Q1-20 (end-Jun 19). The upsurge in earnings largely stemmed from the blend of lower effective taxes (-700 bps) and material decline in finance charges (26.6% y/y) as the company used the proceeds from the rights issue earlier in the year to pay off its expensive borrowing. For evidence, the company’s total debt dipped by 22.0% y/y to NGN133.9 billion, split into overdraft (12% of total), short term (32% of total), and long term (48% of total), respectively.
Further Debt Reduction on the Cards: Earlier this year, FLOURMILL raised NGN39.0 billion via a rights issue and utilized the proceeds to pay off its expensive short-term debt. Consequently, the company recorded a 22% decline in finance charges. Looking ahead, we see scope for further debt reduction given the group’s less aggressive CapEx programme and better revenue outlook. Management has guided to CapEx intensity remaining low in the medium-term. We, therefore, believe that the group’s FCF generation is looking set to be boosted and net debt reduced.
Estimates and Valuations – From our previous estimate of NGN2.27/share, we now forecast FLOURMILL will deliver a +137.3% y/y expansion in EPS (NGN2.31/share) in 2020E, driven by the combination of (1) low base from the prior year, (2) sizeable decline in finance charges, and (3) managements cost-cutting tactics. While we are concerned about the weak food margin, on account of consumer downtrading, we like that the sugar segment is now at break-even point, and despite the strength of competition, we believe margin growth prospect is high. On our estimates, the stock is trading at 2020E P/E and EV/EBITDA of 6.41x and 3.38x, relative to 17.5x and 13.5x for Bloomberg Middle East & Africa peers. Our revised TP of NGN26.59/share (previously: NGN25.23) implies a total return of 76.0% as at the closing price yesterday. We retain our BUY rating on the stock.
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