November 7, 2019/InvestmentOne Report

·         Stable top line:  up 0.94% q/q, down 0.51% y/y.

·         Mixed gross profit margin: down 97bps q/q; up 38bps y/y.

·         Higher Opex to sales ratio: up 112bps q/q; 78bps y/y.

·         Unstable Profit Before Tax: down 43.07% q/q; up 1.43% y/y.

Recently, Flour Mills of Nigeria (FMN) Plc published its Q2 2019/2020 results (Year-end March), which were reflective of a stable turnover despite the rise in volume during the quarter.

Topline Remains Stable due to Higher Volume  

The company’s turnover declined marginally by 0.51% y/y to N136billion in Q2 2019/20 as higher volume sales offset the impact of the fall in price. We highlight that double digit growth in Pasta and Noodles sales as well as strong improvement in Animal feed and fertilizer supported volume growth. We opine that CBN’s ban on importers of fertilizers from accessing FX from the official FX market could have boosted local fertilizer sales. Similarly, recent border closure could have supported volume in the quarter.

Margin Remains Steady 

However, FMN’s gross profit margin remained relatively stable as a result of the price cut which offset the impact of 2.47% year to date reduction in wheat prices in the global commodities market. As a result, gross profit margin inched up by 38bps y/y to 11.25% in Q2 2019/ 20. 

Lower Finance Cost Drives Earnings 

Moving down to the P& L line, a combination of the 23.31%y/y fall in net finance cost and a stable OPEX/Sales ratio supported PBT margin to remain stable. We believe the balance sheet restructuring by the company in terms of refinancing expensive short dated instruments with long dated bond drove its net finance cost down. This has been supported by lower interest rate environment in 2019/20 compared to 2018/2019.

As a result, the company PBT margin was flat at 2.30% while PBT rose by 1.43%y/y to N3.13billion in Q2 2019/20. 

Weak Quarter On Quarter Performance 

On a sequential basis, turnover rose marginally by 0.94% to N136billion. Similarly, the gross profit margin declined by 97bpsq/q. This combined with a 112bpsq/q rise in OPEX/Sales to offset the impact of the 13.63%q/q fall in net finance cost. As such PBT margin shed 178bpsq/q and PBT fall by 42.07%q/q. 

Better H1 Performance 

Overall, H1 2019/20 performance has been relatively stable as turnover rose marginally by 0.38% to N270billion while gross profit margin fell by a meager 17bps to 11.74%. In the P&L, OPEX/Sales rose by 36bps but net finance cost declined by 25.17% on the back of the debt restructuring. As a result, PBT margin improved by 11bpsy/y and PBT rose by 3.99% to N8.63billion in H1 2019/20. 

Summary And Outlook 

Overall, the results were headlined by increase in volume and lower net finance cost which offset the impact of the weak gross profit margin. 

Going forward, we expect the company’s drive to boost Business to Consumer (B2C) channel through its product innovation to continue to support volume sales. In the same vein, cost of sales may moderate in near term as we expect cyclical lower wheat price to support earnings in the near term. Wheat prices are usually low during bumper season which usually starts in July. 

In the same vein, we believe the recent border closure should continue to support sales, especially sugar, in the near term. Furthermore, we expect CBN’s ban on FX supply to fertilizers importers to support agro allied business. 

Similarly, we see support to FMN’s performance from expected improvement in consumer demand due to the implementation of the new minimum wage.

  Sources: Company financials, Investment One Research