FSDH Initial Reaction: Flour Mills 2QFY23 results
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November 2, 2022/FSDH Research

Key Performance Highlights:

• Flour Mills recorded an impressive 31.8% YoY increase in revenue to N381.0 billion in 2Q23, driven by robust growth across the segments via continuous product innovation and improved capacity utilization. It is worth noting that the 2022 numbers also include the acquisition of Honeywell Flour Mills. The highest YoY revenue growth of 65.3% came from Agro-Allied (23% of 2Q23 revenue), followed by Sugar Value Chain (13% of 2Q23 revenue) rising 38.0% YoY and Food (61% of 2Q23 revenue) growing 22.0%. The Sugar segment performed well due to increased volume and various customer engagement efforts to drive customer loyalty. The Support Services (3% of 2Q23 revenue) registered a 14.4%YoY rise in revenue. The company reported double-digit revenue growth of 12.2% on a sequential basis, while the net profit fell 96.3% QoQ to N204 million in 2Q23.
   
• As the cost of sales grew more than proportionately at 32.7% YoY, it led to the shrinking of gross margin by 60 bps YoY to 9.3% in 2Q23. The material costs that form 88.7% of the cost of sales spiralled upward by 29.5% YoY to N306.6 billion in 2Q23, thereby significantly impacting the gross margin. The power cost that jumped 160.1% YoY to N15.5 billion in 2Q23 also contributed to the rise in the Cost of Sales. Flour Mills managed to keep operating expenses in check as its administrative expenses were down 9.6% YoY to N8.0 billion in 2Q23, coupled with a 22.9% YoY drop in selling & distribution expenses to N3.3 billion. The company’s net operating losses climbed 94.7% YoY to N9.4 billion from N4.8 billion in 2Q22, primarily due to a 2.85x jump in foreign exchange loss to N14.7 billion in 2Q23. In turn, the company’s operating profit increased 19.9% YoY to N15.0 billion in 2Q23. However, the company’s operating margin declined 39 bps YoY as a significant jump in costs offset the robust revenue growth.
   
• The decline in finance income (-59.6% YoY) and increase in finance costs by 196.7% YoY resulted in a substantial increase in net finance costs by 223.8% YoY to N14.0 billion in 2Q23. Consequently, the company’s profit before tax came in at N1.0 billion versus N8.2 billion in 2Q22. The Agro Allied segment recorded a profit before tax of N5.2 billion, while Sugar Value Chain and Support Services reported profit before tax of N239 million and N22 million in 2Q23, respectively. In contrast, the Food segment reported a loss before tax of N4.5 billion in 2Q23 versus a profit before tax of N2.6 billion in 2Q22. The company recorded a net profit of N204 million in 2Q23 versus N5.0 billion a year back, as the net margin declined 170 bps YoY in 2Q23 to 0.1%. The company reported earnings per share of N0.60/share versus N1.27/share in 2Q22.
   
• Flour Mills recorded a steady 12.2% QoQ revenue growth in 2Q23 to N381.0 billion. The cost of sales rose 12.8% QoQ, resulting in a gross profit contraction of 46 bps QoQ. The company reported a massive 256.9% QoQ jump in net operating gains and losses, partially offset by a 20.4% QoQ decrease in administrative expenses, which resulted in operating profit falling 1.6% QoQ. Furthermore, the significant jump in the finance cost resulted in profit after tax falling 96.3% QoQ to N204 million versus N5.5 billion in 1Q23.
   
• In its AGM held on 9 September 2022, the board approved a final dividend payment of N2.15 kobo, payable to all shareholders whose names were registered in the Company’s Register of Members at the close of business on the 12th of August 2022.

Market Reaction: The investor reaction to 2Q23 performance was muted as the stock remained unchanged at N30.30 versus a 1.60% loss for the All-Share Index (28/10). Moreover, the stock remained unchanged on Monday (31/10) versus a 0.17% fall for the All-Share Index (31/10).

Flour Mills Earnings Highlight 2QFY23

Source: Company Financials, FSDH