August 3, 2022/CSL Research

The Russia-Ukraine induced strain in the global supply chain has continued to cause an increase in the cost of raw materials for Flour Mills, particularly as both countries rank among the top ten producers of wheat. Flour Mills of Nigeria Plc has been accommodating the escalating prices of wheat and other raw materials especially as Nigeria remains heavily reliant on imports. In its Q1 2023 numbers, published on August 1, 2022, we note that the Cost of Sales grew faster than Revenue by 200bps. The Flour milling giant sustained its upbeat Revenue growth, up 45.3% y/y to N339.60bn (Q1 2023) from N233.70bn (Q1 2022). Q/q, Revenue inched by 0.2% to N339.60bn in Q1 2023 from N338.82bn recorded in Q4 2022. Total Revenue growth was driven by growths across all business segments. Flour, Rice, Noodles, and other Golden Penny brands in the company’s Foods category retained a dominant position, contributing 62.8% to total Revenue and up 45.1% y/y to N213.17bn (Q1 2023) from N146.93bn (Q1 2022). Also, the Fertilizers, Animal Feeds, and other offerings in the Agro-Allied products segment contributed 19.3% to total Revenue while growing 37.7% y/y to N65.65bn (Q1 2023) from N47.69bn (Q1 2022). We believe the Revenue growth was driven by a combination of volume growth and upward price reviews, though we are yet to confirm price increases.

The Cost of Sales (adjusted for depreciation) driven by the prevailing global price hike and local FX pressures grew faster than Revenue, up 48.2% y/y to N300.85bn in Q1 2023 from N203.00bn in Q1 2022. Consequently, Gross Margin shrank to 11.4% in Q1 2023 from 13.1% in Q1 2022. However, Gross Profit was up 26.2% y/y to N38.75bn in Q1 2023 from N30.71bn in Q1 2022.

Likewise, growth Operating Expenses (adjusted for depreciation) outpaced Revenue growth as Administrative Expenses (adjusted for depreciation) jumped by 59.3% to N9.10bn in Q1 2023 from N5.71bn in Q1 2022 while Selling & Distribution Expenses leaped by 50.5% to N4.61bn in Q1 2023 from N3.06bn in Q1 2022. Specifically, Advertisement cost jumped by 58.96% to N812m in Q1 2023 from N511mn in Q1 2022. Consequently, EBITDA increased by 18.7% y/y to N24.38bn in Q1 2023 from N20.53bn in Q1 2022. However, EBITDA Margin shrank, down 1.7ppts to 7.2% in Q1 2023 from 8.8% in Q1 2022. The decline in EBITDA Margin was largely driven by the increase in Cost of Sales and Operating Expenses. 

Depreciation & Amortisation increased by 9.8% y/y to N6.47bn in Q1 2023 from N5.89bn in Q1 2022. In the absence of Other Income, Earnings Before Interest and Tax (EBIT) grew higher by 22.3% y/y to N17.91bn in Q1 2023 from N14.64bn in Q1 2022.  

The company’s Finance Income dropped by 35.1% to N193m in Q1 2023 from N298m in Q1 2022 despite a 59.92% increase in Bank Balance and Fixed Deposits to N48.81bn in Q1 2023 from N30.52bn in Q1 2022. On the flip side, Interest Expense jumped by 79.1% to N8.15bn in Q1 2023 from N4.55bn in Q1 2022 as Loans & Borrowings almost doubled, up 98% to N294.69bn in Q1 2023 from N148.83bn in Q1 2022. We also note that the company recorded 17.1% increase in FX losses to N5.08bn in Q1 2023 from N4.34bn in Q1 2022. Overall, Net Finance Loss increased by 87.1% to N7.96bn in Q1 2023 from N4.25bn in Q1 2022. 

Consequently, Net Profit grew by 6.7% y/y to N5.81bn in Q1 2023 from N5.45bn in Q1 2022.  

Our estimates are under review. Current Price: N30.50 

Flour Mills Nigeria, Q1 2023 (Nm)

Source: Company, CSL Research