Culled—Proshare
November 9, 2020
by FBNQuest Research
33% increase to average EPS forecast
Flour Mills of Nigeria’s (FMN) sales surged 47% y/y to an all-time high of N201bn in Q2 2021 (end-Sep). In terms of profitability, the company is on track to deliver its best fiscal-year performance. Topline for the quarter was driven by high double-digit volume growth across all the businesses.
New product launches, a stronger sales push within the retail segment, enhanced route to market and a favourable price-volume mix were cited by management as chief performance drivers. PBT for the group, up 2.6x y/y to N8.2bn, was fueled by significant growth in earnings from the Agro Allied (37x y/y) and Sugar (2x y/y) businesses. Beyond earnings, FMN’s balance sheet improved on the back of a boost to its cash balance. Net debt-to-equity ratio halved y/y to 0.34x, largely driven by a 67% y/y increase in operating cash flow.
Following these results, our forecasts have improved considerably. That said, we remain cautious about the following: i) FMN’s flour (c.40% of sales) and sugar (c.16% of sales) segments are heavily import dependent. A limited price pass-through ability (given subdued purchasing power and FMN being a price taker in the sugar market) therefore leaves the firm most exposed to fx pressure; and ii) although management’s recent comments did not emphasise this, robust earnings are expected to be supported by stronger demand induced by the border closure, which may be lifted in forecast years.
Nevertheless, we have raised our 2021-23E EPS forecasts by an average of 33%. We also anticipate a more robust dividend policy given the stronger cash position. As such, we model a 26% increase in our 2021E dividend forecast to N4.4. Given the EPS changes combined with a rollover of our forecasts to 2022E, our new price target of N49.2 is higher by 46%.
Year-to-date, FMN shares have gained 38%, outperforming the broad market index by 23%. The shares are currently trading on a 2021E P/E of 5.6x for an average EPS growth of 21% in 2021-23E. Our new price target implies a potential upside of 81% from current levels. We retain our Outperform rating on the stock.
Strong PBT mainly driven by sales growth
Opex and net interest expense increased by 27% y/y and 21% y/y respectively, while other operating loss increased by 19x. That said, these were not strong enough to fully offset the surge in sales. Sequentially, sales were up 30% q/q whereas gross margin contracted by -419bps q/q. Opex also increased by 52% q/q.
Nevertheless, PBT increased by 26% q/q, underpinned by the q/q sales growth. PBT beat our forecast by 69%, thanks to positive surprises of 39% and -12% from sales and net interest expense respectively.
