February 10, 2020
By FBNQuest Research
Target price now 15% higher
We have adjusted upwards our earning forecasts for Flour Mills of Nigeria (FMN), following stronger-than-anticipated recoveries in the flour and agro-allied businesses in Q3 2020 (end-Dec). PBT for food – which mostly includes flour and had declined by -94% y/y in Q2 – was up 19% y/y to N1.8bn, while that of the agro-allied segment climbed out of negative territory to deliver a PBT of N192m.
As such, group PBT for the quarter grew by 23% to N3.7bn and overshot our estimate by 87%. The results were however suggestive of strong headwinds in the sugar business as its PBT fell by -19% y/y despite a 9% y/y volume growth. Essentially, we struggle to see the gains made in Q3 as progressive and sustainable over the medium term. Indeed, we continue to see strengthening headwinds in the flour business, largely driven by a ramp-up in food giant Olam International’s presence and elevated wheat prices. We also expect tailwinds from the border closure – which has boosted agro-allied, pasta and sugar sales – to ease off over the coming quarters.
Our 2020-22E average EPS forecast increase of 16% is therefore well below the Q3 positive surprise. Nevertheless, given the forecast changes, our target price of N27.4 is around 15% higher than previous. FMN shares are currently trading at a 2020 P/E of 11.5x for a 2020-22E average EPS growth of 26%. The shares have gained 16% year-to-date, outperforming the broad market index by 11%. Our new price target implies a potential upside of 20%. Despite the upside, we are retaining our Neutral recommendation on the stock given the persisting headwinds.
Earnings supported by improved topline
FMN’s Q3 PBT growth of 23% was driven by a 17% y/y increase in sales to N152.7bn. The other positive was a -20% y/y decline in finance charge. Opex was up 26% y/y but this was offset by the strong topline. On a sequential basis, PBT grew by 17% q/q on the back of a 12% q/q increase in sales. Relative to our forecasts, Q3 sales beat by 16%, contributing to the PBT positive surprise of 87%.