November 13, 2023/Cordros Report
In this report, we update our views on FLOURMILL for 2024E. As reflected in the company’s recently released H1-24 numbers, the food producer’s performance was quite underwhelming, as profitability was significantly impeded by higher operating expenses (+73.5% y/y) and net exchange losses (+159.5% y/y), even as topline growth (+33.9% y/y) remained substantial. While we expect FLOURMILL’s revenue to sustain its stellar momentum, we believe the company’s performance will be inhibited by a higher costs outlook in H2-24, and the sustained impact of higher FX losses on its net operating income. As such, we reduce our TP by 17.3% to NGN47.64 (previously: NGN57.61), factoring in the expected pressures on operating performance. Nonetheless, we retain our “BUY” recommendation. We estimate a DPS of NGN0.53 in 2024E, which would translate to a dividend yield of 0.8%. On our estimates, FLOURMILL is trading on a 2024E P/E of 40.5x and EV/EBITDA of 4.4x.
Net FX losses to mask topline gains: For 2024E, we expect revenue to grow by 31.2% y/y, driven majorly by the food business. As already witnessed in H1-24, we believe this will still be driven by the higher B2C volumes, SKU expansions and operational synergies from the Honeywell merger amid modest intermittent price increases. Over the medium term (2025 – 2028E), we expect revenue to grow at a CAGR of 15.5%. While we expect costs to remain elevated in H2-24, we believe the biggest pressure on profitability will emanate from the impact of the currency devaluation on the net operating loss line – our model suggests a 262.5% y/y increase. Thus, we expect EBITDA margin to decline to 5.1% (2023FY: 8.0%) in 2024E. With a 14.7% y/y increase in net finance costs, we forecast 2024E EPS at NGN0.80 (2023FY: NGN7.25). Further out, we forecast an EPS CAGR of 27.6% in 2024-2028E.
Low margins indicate sub-optimal sourcing & pricing strategy: Taking a cursory look at FLOURMILL’s numbers we highlight the still low margins of wheat and pasta producers. Our model suggests an average gross margin of 11.1% for 2024 – 2028E, marginally lower than the 11.2% average for the prior 5-year period. Even compared to MEA peers, FLOURMILL underperforms the implied global peer average gross margin of 20.1% in the period. The aforementioned low margin basically indicates that the company’s strategy around its raw material sourcing and eventual product sourcing may not be optimal, even as pricing in the industry is homogenous and passthrough impact of FX volatility are key considerations on cost computation.
Valuation: Our target price is NGN47.64/s, derived from a 60/40 blend of DCF and sector relative valuation (P/E & EV/EBITDA) estimates. Our DCF FV is derived from an equal blend of FCFF (NGN32.27) and FCFE (NGN72.00) estimates, assuming a 21.0% WACC and 4.0% terminal growth rate. On P/E, we utilised the Middle East & African (MEA) peer average 2024E multiple of 10.9x as gotten from Bloomberg. Applying this to our 2024E EPS estimate of NGN0.80/s gives a FV of NGN8.74/s. Similarly, for EV/EBITDA, we also utilised the 2024E MEA peer average (6.2x) gotten from Bloomberg and derived a fair value estimate of NGN73.03/s.
