August 6, 2020/United Capital Report

Recently, Flour Mills of Nigeria (FLOURMIL) released its numbers for the year ended 31st March 2020. The audited reports showed that Revenue grew 8.8% y/y to N573.8bn in FY-2019/20, supported by strong growth in Q4, up 18.6% y/y to N150.3bn. Also, relatively slow growth in cost, as well as a sharp decline in net finance cost further supported the bottom-line numbers. Accordingly, Profit Before Tax (PBT) and Profit After Tax (PAT) jumped 72.0% and 184.4%y/y to N17.5bn and N11.4bn, respectively. The firm declared a dividend of N1.4 per share, representing a 16.7% y/y spike. Below we give our take on the result, the company’s strategic moves as well as our expectations for FY-2020/21.

Revenue and cost optimization spurs bottom-line growth: FY-2019/20 Group Revenue was up 8.8% y/y to N527.4bn, which according to the management was largely driven by the upswing in volumes (+8.0% y/y). This was driven by the introduction of six new products with improved packaging to cater for the price-sensitive consumers as well as the improvement in route to market. Also, land border closure in the latter part of the financial year supported revenue growth. Further analysis of the revenue sources by business segment, showed that Agro-Allied (+19.7% y/y to N105.5bn) and Sugar (+18.1% y/y to N97.6bn) segment recorded the strongest growth during the year, followed by the Food segment comprising of Flour, Pasta, Snacks and Noodles (+6.8% y/y to N358.4bn). However, the non-core Support Services (-41.3% y/y to N12.3bn) segment poorly performed relative to the prior year, dragged by the weakness in the transport and bagging business.

Elsewhere, less than proportionate growth in Cost of Sales (+7.2% y/y to N508.0bn) relative to Revenue (+8.8%) and Volume (+8.0%) growth, boosted Gross Income by 23.3% to N65.9bn. Thus, Gross margins improved from 10.1% in FY-2018/19 to 11.5% in FY-2019/20. Increase in Cost of Sales was due to higher Material costs (+6.9% y/y to N435.5bn) and Production employee costs (+8.6% y/y to N17.5bn). However, we note that the slow growth in Cost of Sales relative to Revenue-growth, reflected the management’s success in achieving cost optimization during the review period.

Meanwhile, an 18.2% y/y jump in Operating Expenses (OPEX) to N32.6bn as well as 21.0% y/y decline in Net operating gains to N4.9bn, dampened the growth in Operating Income (+8.6% y/y to N35.1bn). Additionally, the recognition of N3.0bn Impairment charge in FY-2019/20 relative to a writeback of N0.3bn in FY-2018/19 added to the lethargic growth in Operating Income. Notably, the jump in OPEX was spurred by a number of factors ranging from advertising cost on new products, further spend to deepen route to market, costs associated with business continuity plans following the pandemic as well as COVID-19 donations and relief items expenses. 

Overall, a sharp drop in Net Finance Costs (-20.5% y/y to N17.6bn) spurred a jump in Profit before tax by 72.0% y/y to N17.5bn. This was as Finance Costs was down 12.7% to N20.0bn while Finance Income spiked by 2.1x to N2.4bn. Notably, the decline in Finance Cost was fueled by the company’s effort to restructure its debt mix with cheaper mid-to-long-term debt. Also, the jump in Finance Income was spurred by the uptrend in Bank balances and fixed deposits (+54.8% y/y) during the period. Despite the surge in Pre-tax profit, tax expenses declined by 0.9%y/y to N6.1bn. This was as the effective tax rate moderated from 60.7% in FY-2018/19 to 35.0% in FY-2019/20. Consequently, Post-tax profit rose by 184.4% y/y to N11.4bn.

Debt restructuring exercise continues to bear fruit: In the financial year ended 31st March 2020, the company further tapped into its approved N70.0bn shelf bond programme to raise cheaper long-term finance to pay-off more expensive short-term bank loans. Specifically, FLOURMIL successfully raised N20.0bn at a weighted average rate of 10.4% (vs. 15.7% when it raised N20.1bn in FY-2018/19). Accordingly, the debt mix is now skewed towards mid-to long term debt (up from 36.4% to 73.6% of total debt). Also, these sustained efforts at deleveraging its balance sheet were evident as Net debt to equity ratio sharply moderated from 72.7% to 53.5%. This was total debt fell 13.7% y/y to N109.6bn while Cash and Cash Equivalents rose 52.3% y/y to N26.2bn as the company cut CAPEX by 38.0%y/y.

Positive outlook amid short- and long-term gains: Looking ahead, we hold an optimistic view on the performance of FLOURMIL in FY-2020/21E. This is as we expect the company to stay immune to the negative impact of the COVID-19 pandemic or restrictions, largely because its major product portfolios (Food, Sugar and Agro-Allied) are concentrated on essential items. Accordingly, this should lessen any incidence of COVID-19 related disruptions on the company’s performance. Although weakness in consumers earnings amid loss of jobs during the COVID-19 induced lockdown might spur consumers downtrading over FY-2020/21E, FLOURMIL’s strong product offerings at the value segment provides a strong justification for Revenue to remain resilient during the period.

Also, we expect that the recent reversal of the 5.0% increase in duties on raw Sugar by the FGN in July-2020 would further spur growth in the Sugar segment even as the benefits from border closure remain apparent across the segments. Notably, our market survey showed that the company have been gradually increasing prices across all its product portfolios to support margins amid recent naira devaluations. Notably, our discussions with FLOURMIL’s wholesalers showed that due to the high quality of the company’s products, the market is conveniently adjusting to these price increases as volumes have not been negatively impacted, save for the Ball foods segment (Semovita) which is considered highly price competitive with no superior quality on offer by FLOURMIL. Overall, we expect Revenue growth to be price-led in FY-2020/21E.

Although the company is exposed to currency risks, especially as we expect export sales to remain weak amid border closure, we believe prior and recent investments in backward integration in the Agro-Allied products segment as well as the recent purchase of non-deliverable forward contracts (up 17.7x to N3.7bn in FY-2019/20) would help lessen overall surge in FX loss as a result of naira devaluations over FY-2020/21E. We expect the overall pressures from Finance cost to further weaken over FY-2020/21E and support bottom-line performance, on the back of the company’s access to CBN’s COVID-19 support palliative measures (lower interest rate and extended moratorium on c. 48.5% of FLOURMIL’s loan book). Overall, with the management’s guidance to only spend on maintenance CAPEX, we believe dividend seeking investors will continue to see value in the counter (current dividend yield – 7.3%; estimated dividend yield for next year using our new TP – 5.2%). FLOURMIL trades at a forward EV/EBITDA of 4.0x and P/E of 10.5x, well below EM peers average of 10.4x and 26.7x respectively. Accordingly, we revise our TP upwards from N21.5/share to N25.5/share and place a BUY rating on the ticker.

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