Flour Mills of Nigeria Q3 2019 Results Review: Neutral Rating Maintained

Culled—Proshare

February 12, 2019/FBNQuest Research   

Slight cuts to our 2019-21E EPS forecasts and price target

Although Flour Mills of Nigeria’s (FMN) Q3 2019 (end-Dec) sales beat our forecast, PBT missed on account of negative surprises in gross margin and non-core operating line items. Looking at the line items on a year-on-year basis, sales were driven by a 9% y/y growth in overall volumes, thanks to price reductions across key segments. However, earnings remained under sustained cost pressure in Q3, with PBT for the quarter showing a sharp decline of 51% y/y. 

The results suggest that the strongest headwinds came from FMN’s sugar and agro allied businesses which posted sales declines of -14% y/y and -10%. y/y respectively for 9M 2019. Price competition, particularly in the animal feeds and sugar businesses, high input costs in the edible oil business and a slower turnaround time in light of traffic congestion around the Apapa Ports area where the company operates were cited by management as struggles being faced. 

To improve its performance, FMN last year introduced new variants of flour and pasta brands targeted at price-sensitive consumers in northern Nigeria. It is however clear that this move is not providing meaningful support to bottom line (yet). We have cut our EPS forecasts slightly by around -1% over the 2019-21E period, and our price target by the same percentage to N23.3. Year to date, FMN shares have shed -13.4%, underperforming the ASI by -13.7%. 

Our new price target implies a potential upside of 16% from current levels. We are however retaining our Neutral recommendation on the stock because we believe the weak earnings outlook in the near-to-medium term is likely to weigh on sentiment.

PBT dragged down by tight squeeze on gross margin

FMN’s Q3 2019 (end-Dec) results showed that PBT halved y/y to N3.0bn. The y/y decline in earnings was driven by a gross margin contraction of -484bps y/y to 11.1%, and an 11% y/y rise in opex. 

These negatives completely offset a -40% y/y decline in interest expense. Below the tax line, PAT fell by 27% y/y. Sequentially, both sales and PBT were down by -4% q/q, whereas gross margin widened by 19bps q/q. Relative to our forecasts, sales came in ahead by 5%, but PBT missed by 12%. 

However, PAT beat our forecast by 5% on the back of a 78% lower-than-forecast tax expense.

Proshare Nigeria Pvt. Ltd.

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