FSDH Initial Reaction: Flour Mills 1QFY23 results
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August 3, 2022/FSDH Research

Key Performance Highlights:

• Flour Mills recorded an impressive 45.3% YoY increase in revenue to N339.6 billion in 1Q23, driven by robust growth across the segments via continuous product innovation and improved capacity utilization. The highest YoY revenue growth of 64.1% came from Agro-Allied (19% of 1Q23 revenue), driven by continuous penetration into new and rural markets and the implementation of innovative marketing strategies to serve the rural markets. This was followed by Food (63% of 1Q23 revenue) rising 45.1% YoY and Sugar Value Chain (16% of 1Q23 revenue) growing 37.7%, driven by stabilized trading environments and strong demand for brown sugar. The Support Services (2% of 1Q23 revenue) registered a modest 3.6% YoY rise in revenue. The company reported steady revenue growth of 0.2% on a sequential basis, while the net profit fell 49.9% QoQ to N5.5 billion in 1Q23.
   
• As the cost of sales grew more than proportionately at 47.3% YoY, it led to the shrinking of gross margin by 121 bps YoY to 9.8% in 1Q23. The material costs that form 90.3% of the cost of sales spiralled upward by 48.8% to N276.8 billion in 1Q23, thereby significantly impacting the gross margin. Flour Mills’ operating expenses soared as its administrative expenses rose by a 52.7% YoY to N10.1 billion in 1Q23, coupled with a 50.5% YoY jump in selling & distribution expenses to N4.6 billion, due to rising inflationary pressures in the economy. The company’s net operating losses reduced 16.1% YoY to N2.6 billion from N3.1 billion in 1Q22. In turn, the company’s operating profit increased 32.7% YoY to N15.3 billion in 1Q23. However, the company’s operating margin declined 43 bps YoY as a significant jump in costs offset the robust revenue growth.
   
• The decline in finance income (-35.1% YoY) and increase in finance costs of 79.1% YoY resulted in a substantial increase in net finance costs by 87.1% to N8.0 billion in 1Q23. The company recorded a net profit of N5.5 billion in 1Q23 versus N5.4 billion a year back, resulting in a modest 0.9% YoY growth. The growth in profit after tax can be attributed to continued bottom-line expansion in the Food segment by 17.4% YoY to profit before tax of N4.6 billion in 1Q23. The Agro-allied and Sugar Value Chain segments reported a steady 3.3% and 3.6% increase in profit before tax to N2.3 billion and N1.7 billion, respectively. However, the Support Service segment reported a significant decline of 174.8% YoY, resulting in a loss before tax of N1.2 billion. Net margin declined 71 bps YoY in 1Q23 to 1.6%. The company reported earnings per share of N1.37/share versus N1.17/share in 1QFY22.
   
• Flour Mills recorded a steady 0.2% QoQ revenue growth in 1Q23 to N339.6 billion. The cost of sales declined 1.5% QoQ, resulting in a Gross Profit expansion of 19.3% QoQ. The company reported a massive 220.1% QoQ jump in selling and distribution expenses, partially offset by a 13.6% QoQ decrease in net finance income, which resulted in profit after tax falling 49.9% QoQ to N5.5 billion versus N10.8 billion in 4Q22. The Agro Allied segment’s operating profit fell 57.5% QoQ to N2.3 billion in 1Q23, while the food segment reported a 78.2% QoQ jump in operating profit to N4.6 billion in 1Q23.
   
• On July 28, Flour Mills of Nigeria Plc announced that Flour Mills obtained the approval of the Securities & Exchange Commission to launch a Mandatory Takeover Bid to the shareholders of Honeywell Flour Mills Plc; for 1% of the issued shares of Honeywell Flour Mills. The Mandatory Takeover Bid is being offered by Ecowise Horizon Investment Limited and Greywise Investment Solutions Limited on behalf of Flour Mills. Ecowise and Greywise hold 76.75% of Honeywell Flour Mills Plc.

Market Reaction: The investor reaction to 1Q23 performance was muted as the stock remained unchanged at N30.50 versus a 0.83% loss for the All-Share Index (1/8). Moreover, the stock remained unchanged on Tuesday (2/8) versus a 1.35% gain for the All-Share Index (2/8).

Flour Mills Earnings Highlight 1QFY23

Source: Company Financials, FSDH