July 7, 2021/Proshare
by FBNQuest Research
Increased focus on B2C channels and backward integration projects over FY ’22
In Q4 ’21 (end-Mar), FMN reported impressive results, delivering growth across divisions on the back of improved volumes and price increases over FY ’21. The company’s core operational changes, centred around (1) restructuring of its agro-allied business, (2) increased B2C focus and (3) backward integration projects, appear to be yielding desired outcomes. On its Q4 ’21 investor call held last week, management disclosed that the 34.5% y/y growth in sales (to NGN771.6bn in FY ’21) was led by an expansion in the agro-allied business, alongside investments in route-to-market. Looking ahead, we expect management to double down on volume expansion strategies, given that prices were recently raised on products (between 10% and 25%).
In Q4, management introduced new product offerings in the food division, which include Amazing Day Cereal, Auntie B Spaghetti Slim and a new packaging brand for Golden Penny Semovita. On financials, we project FY ’22E turnover at NGN816.9bn (+5.9% y/y), on the back of stable volume growth and unchanged average portfolio prices. We also estimate gross margin at 13.8% in FY ’22 (same as FY ’21), due to the impact of rising wheat prices on production costs. Management has noted that the CBN’s proposed restriction on wheat imports is yet to come into effect. However, the company has kick-started wheat backward integration developments.
Down the P&L, we project opex to be higher by 3% y/y to NGN42.5bn and interest costs of NGN20.0bn (+6.9% y/y) due to the increase in total debts in FY ’21. In terms of profitability, our estimates imply a PAT of NGN32.5bn. Assuming a pay-out ratio similar to FY ’21, we project DPS at NGN1.99 for this year. For our valuation, we apply a beta of 1.0, risk free rate of 12.5% (from 10%) and equity risk premium of 7.5%. The higher risk free rate and an assumed capex-to-depreciation ratio of -140% (from -120%) recalibrated our price target (PT) lower to NGN40.3 (-21.4% vs. prior PT). Nonetheless, our Outperform rating on FMN remains unchanged. FMN’s new price target implies a potential upside of 35.5%. The implied multiples of the new price target show that FMN is relatively cheap. Compared with peers, FMN’s EV/EBITDA and P/E multiples of 2.5x and 4.0x is behind EM averages of 13.1x and 18.9x respectively.
Strong Q4 ’21 results driven by topline growth and GM expansion
FMN Q4 ’21 and FY ’21 results were stellar as they exceeded our estimates and consensus forecasts. Topline grew by 43.9% y/y and 8.0% q/q respectively to NGN216.3bn in Q4 ’21 compared with our estimate of NGN160.1bn. Gross margin improved to 15.9% in Q4 ’21 (vs 11.9% in Q4 ’20), reflecting better production efficiency. Bottomline in Q4 ’21 also expanded by 215.1% y/y and 79.4% q/q respectively to NGN10.1bn (compared with our forecast of NGN6.0bn).
For FY ’21, management declared a PAT of NGN5.7bn and subsequently announced a DPS of NGN1.65 (from NGN1.40 in FY ’20). This implies a dividend yield of 5.6%. The company’s AGM is scheduled for 8 Sept 2021.