February 9, 2023/Cordros Report
In 9M-23, FLOURMILL sustained the sturdy topline growth recorded since the start of the financial period and hit the trillion-naira revenue mark in 9M, reflecting the impact of (1) the food producer’s retail expansion and proactive pricing of its food products, (2) its new fertilizer blending plant, and (3) higher volumes across the oils and fat, and sugar product lines. Notwithstanding, FLOURMILL’s profitability was dampened by the significant expansion in net finance costs, which was largely influenced by the Honeywell Flour Mills Plc acquisition and integration. For 2023FY, while we believe the company remains well positioned to outperform 2022FY’s revenue print, earnings expansion will remain subdued given the effects of the new debt on the company’s books, amid margin pressures from higher costs. Accordingly, we revise our estimates on the stock, and reduce our target price to NGN50.64/s (previously: NGN63.12/s) but maintain our “BUY” rating.
Higher net finance costs weaken earnings: FLOURMILL’s revenue grew by 35.0% y/y, driven by a broad-based growth across the Food (+35.5% y/y), Agro-Allied (+38.9% y/y), Sugar (+34.2% y/y), and Support Services (+5.0% y/y) business segments. In the press release which accompanied the financial result, management cited (1) its retail expansion and proactive pricing of food products, (2) the commissioning of a new fertilizer blending plant, and (3) increased volumes across the oils and fat, and sugar product lines, as the key drivers of the stellar revenue expansion. However, gross (-46bps y/y to 9.3%) and operating (-29bps y/y to 6.8%) margins recorded declines, reflecting the overwhelming cost pressures in the year, most predominantly in Q3-23. We highlight that most of the pressure on profitability emanated from the significant expansion of net finance costs in the year, attributable to the increased loan facilities on the company’s books. As of 9M-23, total borrowings increased by 69.8% y/y to NGN303.72 billion (2022FY: NGN178.85 billion). Consequently, EPS declined by 28.3% y/y to NGN2.87 in the period.
Net finance costs to mask topline gains: For 2023FY, we raise our topline growth projections to 37.3% y/y (previous: 14.6% y/y), reflecting price adjustments made by the company across its products to higher levels and stronger than expected contribution from the food segment. Over the medium term (2024 – 2027E), we expect revenue to grow at a CAGR of 8.8%. We expect cost pressures to remain elevated in Q4-23, due to the high inflationary environment and the pass-through impact of currency devaluation on input costs. Thus, we expect gross and EBITDA margins to decline to 9.0% (2022FY: 9.3%) and 6.3% (2022FY: 7.6%), respectively, in 2023FY. Further down, we believe the significant increase in net finance costs witnessed in 9M-23, will significantly influence the EPS outturn for 2023FY. Thus, we forecast that EPS will decrease by 15.3% y/y to NGN5.30 in 2023FY. Further out, we forecast an EPS CAGR of 19.1% in 2024-2027E.
Valuation: Following the revisions to our forecast, we have reduced our target price to NGN50.64 (previously: NGN63.12/s), implying a potential upside of 69.1% based on the price of NGN29.95 (7 February). Thus, we maintain our ‘BUY’ recommendation on the stock. Based on our estimates, FLOURMILL is trading on a forward P/E and EV/EBITDA of 5.7x and 2.8x compared to the EM peer average of 18.5x and 9.5x, respectively.
