Flour Mills of Nigeria Plc Q1 2019/2020 Results- Stronger Volume and Lower Finance Cost Support Earnings

August 6, 2019/InvestmentOne Report

§  Improving top line:  up 6.30% q/q, 1.29% y/y.

§  Mixed gross profit margin: up 690bps q/q; down 75bps y/y.

§  Stable Opex to sales ratio: down 33bps q/q; 7bps y/y.

§  Rising Profit Before Tax: up 176.27% q/q; 5.53% y/y. 

Recently, Flour Mills of Nigeria (FMN) Plc published its Q1 2019/2020 results (Year-end March), which were reflective of a higher turnover despite the weak price level in the quarter. 

Topline Remains Strong due to Higher Volume 

The company’s turnover rose marginally by 1.29% y/y to N134billion in Q1 2019/20. This was basically driven by higher volume sales (+7%y/y) as the company’s brand building focus further ensured its growth in market share, while price cut the company took in the second quarter of the previous year could have slowed revenue growth. We highlight that the boom in sales was driven by higher volume sold in the Sugar and Agro Allied segments while revenue from the Food segment continued to be plagued by low sales volume.  

We opine that CBN’s ban on importers of fertilizers from accessing FX from the official FX market could have boosted local fertilizer sales, which supported Agro allied segment of the business while the company’s investment in Sugar could have started to yield results. 

Higher Input Cost and Lower Prices Pressure Margin  

On the other hand, FMN’s gross profit margin remained under pressure as a result of the price cut despite the stability in FX market. As a result, gross profit margin declined by 75bps y/y to 12.23% in Q1 2019/ 20.  We highlight that key players in the agro allied space have experienced a fall in their margins due to the impact of Apapa gridlock, smuggling in the North despite the fall in average wheat prices (-4.29%y/y) during the quarter. 

Lower Finance Cost Drives Earnings 

Moving down to the P& L line, a combination of the 26.7%y/y fall in net finance cost and stable OPEX/Sales ratio offset the effect of the weaker gross margin. We believe the balance sheet restructuring by the company in terms of refinancing expensive short dated instruments with long dated bond drove the its net finance cost down. This has been supported by lower interest rate environment in 2019/20 compared to 2018/2019.

As a result, the company recorded a 16bpsy/y increase in PBT margin to 4.08% and a 5.53% y/y growth in PBT to N5.50billion in Q1 2019/20. 

Weak Q4 flatters Quarter On Quarter Performance 

On a sequential basis, turnover was up by 6.30% q/q to N134billion due to weak output in previous quarter. Similarly, the gross profit margin rose by 690bps q/q due to better cost management in the quarter.

Similarly, a combination of the stronger gross margin, stable OPEX/Sales and a 28.09%q/q decline in net finance cost offset the effect of the 97.28%q/q decline in other income. As a result, PBT margin rose from a negative value of 5.69% in Q4 2018/19 to a positive value of 4.08% in Q1 2019/20. Similarly, the company recorded a PBT of N5.50billion in Q1 2019/20 from a loss N7.21billion in Q4 2018/19. 

Summary and Outlook 

Overall, the results were headlined by increase in volume and lower net finance cost which offset the impact of the weak gross profit margin. 

Going forward, we expect the company’s drives to boost Business to Consumer (B2C) channel through its product innovation to continue to support volume sales. In the same vein, cost of sales may moderate in near term as we expect cyclical lower wheat price to support earnings in the near term. Wheat prices are usually low during bumper season which usually starts in July. 

Furthermore, the company’s Sunti sugar Cane plantation and refinery plant could improve output from its sugar segment as it is expected to produce about 1million tons of sugarcane which should generate about 100,000 tons sugar per annum. This may reduce company’s importation of raw material thus supporting gross profit margin. This, combined with plans to acquire more land for further development, geared towards achieving the 6,500 metric tons per day (mtpd) capacity of the mill. This may enhance the company’s gross profit margin performance over the medium to longer term given that c.70% of the company’s cost of goods are dependent on FX. 

In the same vein, we see support to FMN’s performance from expected improvement in consumer demand due to the increase in minimum wage.

YE: March

Q1 2020 (N’ Million)

Q/Q

Y/Y

Sales

134,745

6.30%

1.29%

Cost of Sales

-118,272

-1.45%

2.16%

Gross Profit

16,473

143.93%

-4.57%

Gross margin

12.23%

690bps

-75bps

Other operating income/loss

126

-97.28%

-80.71%

OPEX

-6,704

-0.24%

-0.05%

Opex/sales

4.98%

-33bps

-07bps

Net Finance cost

-4,393

-28.09%

-26.71%

PBT

5,502

-176.27%

5.53%

PBT margin

4.08%

977bps

16bps

Tax

-1,265

-50.67%

-19.09%

PAT

4,234

-142.34%

16.07%

PAT margin

3.14%

1103bps

40bps

Sources: Company financials, Investment One Research

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