August 21, 2020/United Capital Report
Recently, Flour Mills of Nigeria (FLOURMIL) released its unaudited Q1-2020/21 financial result. According to the report, Revenue grew 14.7% y/y to N154.8bn in FY-2019/20 while Profit After Tax (PAT) rose faster by 17.3% y/y to N5.0bn. Below we give our take on the result as well as our expectations for the rest of the financial year-ending March-2021.
Sharp topline growth lifts bottom-line: In Q1-2020/21, FLOURMIL Group Revenue jumped 14.7% y/y to N154.8bn, despite the coronavirus pandemic and the resultant lockdown during the period. Noticeably, significant improvement in Revenue from Agro-Allied (+29.1% y/y to N33.1bn), Sugar (+12.3% y/y to N27.0bn) and Food (+11.6% y/y to N91.0bn) business segments which outweighed the mild contraction from the Support Services (-1.8% y/y to N3.4bn) segment, buoyed growth. Notably, the introduction of new value stock-keeping unit (SKUs) of some brands, the continued focus on driving B2C sales and border closure which had helped to significantly reduce smuggling and spur demand for locally produced Food and Agro-Allied items, were some of the key factors highlighted by the management as the fundamental drivers of Revenue growth across the business segment in Q1. Also, we note that the concentration of the company’s product portfolio in essential items (which were exempted from government lockdown measures implemented through Q2-2020) helped to lessen disruptions to production activities during the period.
Elsewhere, less than proportionate growth in Cost of Sales (+9.1% y/y to N129.0bn) relative to Revenue (+14.7%), spurred Gross Profit by 55.1% to N25.5bn. Thus, Gross margins improved from 12.2% in Q1-2019/20 to 16.5% in Q1-2020/21. Notably, the increase in Cost of Sales was due to higher Material costs (+8.8% y/y to N110.3bn) and Production employee costs (+10.1% y/y to N4.6bn). Also, we link the increase in material costs to the negative impact of naira devaluation on imported costs of Grain and Sugar, especially amid the 5.0% increase in import duty on Sugar in the early part of H2-2019. However, we note that the slow growth in the Cost of Sales relative to Revenue growth reflected the management’s success in achieving cost optimization during the review period.
Meanwhile, recognition of N7.6bn Net Operating Loss (vs. Net Operating Gain of N126.2mn in Q1-2019/20) erased the impact of the management’s effort to keep Operating Expenses (+3.7% to N70.0bn) under control during the period and dampened the growth in Operating Income (+11.1% y/y to N11.0bn) – far behind Gross Profit growth of 55.1%. Notably, the Net Operating Loss was driven by upfront FX losses of N9.4bn booked by the company on revaluation of foreign currency (FCY) denominated payables to reflect recent naira adjustment to around N400.0/$. Overall, a mild increase in Net Finance Cost (+3.3% y/y to N4.5bn) and a relatively flat effective tax rate of 23.0%, spurred Pre-and Post-tax profits higher by 17.3% y/y to N6.5bn and N5.0bn, respectively.
Leverage Deteriorates in Q1: Relative to FY-2019/20, FLOURMIL’s debt position rose significantly, up 22.9% ytd to N134.7bn in Q1-2020/21, as management continue to leverage the low-interest-rate environment to raise cheap capital. Consequently, Debt/Equity ratio settled at 0.8x (vs. 0.7x in FY-2019/20). Also, cash and cash equivalents grew by 124.4% ytd to N58.8bn thanks to N30.0bn inflow from commercial paper issuance in April-2020 as well as the improvement in the cashflow from operating activities (+193.0% y/y).
FLOURMIL rated a BUY at current market price: Herein, we reiterate our outlook for the company as discussed in our recently published report for the FY-2019/20 result. In all, we retain our bullish sentiment on the performance of FLOURMIL in FY-2020/21E on the expectation that Revenue will grow by 11.6% during the period. This is underpinned by our expectation for steady demand across the Food (mostly Pasta & Semolina), Agro-Allied (Animal Feeds & Edible Oil) and Sugar (supported by the reversal of the 5.0% increase in import duties on raw Sugar in July-2020) segments.
Furthermore, we expect the overall pressures from Finance cost to remain weak and support profitability over FY-2020/21E. This on the back of the company’s access to CBN’s COVID-19 support palliative measures (lower interest rate and the extended moratorium on c. 44.0% of FLOURMIL’s loan book). We do not expect the recently recognized FX loss on the revaluation of FCY payables in Q1-2020/21 due to naira adjustments during the period, to significantly impact on performance in subsequent quarters, except there is a further devaluation beyond N400/$ till March-ended 2021.
Elsewhere, we expect debt/equity ratio to further increase in the short-term as the management disclosed to analysts that it plans to revisit the domestic bond market in the next 2-months to refinance some of its existing debts at lower interest rates – under the approved N70.0bn shelf bond programme, out of which it had already raised N40.0bn. Also, contrary to our prior expectation for CAPEX to be limited to only maintenance CAPEX, we now expect the company to incur some expansion CAPEX amid plans to increase the cultivated area for sugarcane production from the current 2,800 hectares to 3,500 hectares, before the end of the current financial year-end. Accordingly, we do not expect any interim dividend announcement in the current financial year. However, given our expectation for an improvement in EPS to N3.7/share in FY-2020/21E, we have forecasted a final dividend of N1.83/share (resulting in an estimated dividend yield of 10.0% at the current market price or 7.1% using our TP).
Overall, FLOURMIL trades at a forward EV/EBITDA of 3.4x and P/E of 6.2x, well below the Emerging Market peer average of 7.2x and 14.9x respectively. Accordingly, we maintain our TP at N25.5/share and our BUY rating on the ticker.
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