Mr Lanre Jaiyeola, MD, Honeywell Flour Mills.
  • Receives analysts nod for dividend seeking investors

By JULIUS ALAGBE

Flour Mills of Nigeria (FMN) Plc scorecard came stronger than expected as the company bolstered turnover and increased its market share amidst rising competition for consumers’ wallets in virus damaged economy. The company’s earnings size has increased significantly due to border closure as substitute products and producers have been locked out from competing in the local space.

The stock is recommended to investors on the back of positive earnings outlook in the year as United Capital upgrade price target to ₦25.5. Traded at ₦18.50 on the Nigerian Stock Exchange on Friday, investors valued the company at ₦75.857 billion on 4,100, 379,605 shares outstanding. According to stock market data, Flour Mill’s 52-week record shows the stock had peaked at ₦24, and hit bottom at ₦13 within the period.

Flour Mill submitted first quarter 2020/21 result on the local bourse Tuesday barely two weeks after the release of 2019/2020 full year audited report. Revenue leaped to ₦154.578 billion in the first quarter of the 2020/21 financial year, from ₦134.745 billion in the comparable period. This represent a 15% year on year growth in the top line as the company deepened market share amidst competing brands.

The increase in top line led to 55% uptick in gross profit from ₦16.472 billion to ₦25.549 billion at the end of first quarter following a moderate growth in cost of sales. Cost of sales rose by 9% in the first quarter from ₦118.272 billion to ₦129.029 billion amidst rising inflation rate. Profit for the period settled at ₦4.97 billion, having increased by 17.3% from ₦4.233 billion in the comparable period.

In its equity note, United Capital’s research analyst Ademuwagun Yinka upgrade FMN price target to ₦25.5 from ₦21.5 with expected return estimate 32.9%. In the audited report for the year end 30 March 2020, the company’s earnings came strong surprisingly despite disruption in the economy and specifically its distributions channels.

The company’s revenue grew 8.8% year on year to ₦573.8 billion in financial year 2019/20, supported by strong growth in Q4, up 18.6% year on year to ₦150.3 billion. United Capital said relatively slow growth in cost, as well as a sharp decline in net finance cost further supported the bottom-line numbers.

Accordingly, profit before tax (PBT) and profit after tax (PAT) jumped 72.0% and 184.4% year to ₦17.5 billion and ₦11.4 billion, respectively. On the back of the strong earnings performance, FMN Plc. declared a dividend of ₦1.4 per share, representing a 16.7% uptick from previous position. Explaining the feat, United Capital analyst observed that revenue and cost optimization spurs bottom-line growth.

Analysis of the company’s performance showed that Group revenue grew 8.8% to ₦527.4 billion, which according to the management was largely driven by the upswing in volumes.

Specifically, there was a +8.0% year on year demand for the group products lines as different from price adjustment. This was driven by the introduction of six new products with improved packaging to cater for the price-sensitive consumers as well as the improvement in route to market, the management explained.

United Capital stated that land border closure in the latter part of the financial year supported revenue growth. Further analysis of the revenue sources by business segment, showed that Agro-Allied jerked up 19.7% year on year to ₦105.5 billion and revenue from Sugar increased 18.1% to ₦97.6 billion. These segments recorded the strongest growth during the year, followed by the Food segment comprising of Flour, Pasta, Snacks and Noodles that surged +6.8% year-on-year to ₦358.4 billion.

However, United Capital stated that the non-core support services dropped 41.3% to ₦12.3 billion. According to analyst, this segment poorly performed relative to the prior year, basically dragged by the weakness in the transport and bagging business. Elsewhere, less than proportionate growth in cost of sales which grew 7.2% year on year to ₦508.0 billion relative to revenue which grew 8.8% and Volume increase of 8.0% boosted gross income by 23.3% to ₦65.9 billion.

Thus, gross margins improved from 10.1% in 2018/19 to 11.5% 2019/20. The reported increase in cost of sales was due to higher material costs that jerked 6.9% year on year to ₦435.5 billion and production employee costs that rose 8.6% to ₦17.5 billion.

“We note that the slow growth in cost of sales relative to revenue-growth, reflected the management’s success in achieving cost optimization during the review period”, United Capital stated.

Meanwhile, FMN recorded 18.2% jump in operating expenses (OPEX) to ₦32.6 billion as well as 21.0% decline in net operating gains to ₦4.9 billion, which thus dampened the growth in operating income. Operating income for the period rose 8.6% year on year to ₦35.1 billion. Additionally, United Capital analyst said the recognition of ₦3.0 billion impairment charge in 2019/20 relative to a write-back of ₦0.3 billion in 2018/19 added to the lethargic growth in operating income.

United Capital explained that the jump in OPEX was spurred by a number of factors ranging from advertising cost on new products. There was further spend to deepen route to market, costs associated with business continuity plans following the pandemic as well as COVID-19 donations and relief items expenses.

Overall, a sharp drop of 20.5% in net finance costs year on year to ₦17.6 billion, thus spurred a jump in profit before tax by 72.0% to ₦17.5 billion. This was as Finance costs was down 12.7% to ₦20.0 billion while Finance Income spiked by 2.1times to ₦2.4 billion. Notably, the decline in finance cost was fuelled by the company’s effort to restructure its debt mix with cheaper mid-to-long-term debt, United Capital analyst stated.

Also, the jump in finance income was spurred by 54.8% uptrend in bank balances and fixed deposits during the period. Despite the surge in pre-tax profit, tax expenses declined by 0.9% to ₦6.1 billion in the period. This was as the effective tax rate moderated from 60.7% in 2018/19 to 35.0% in 2019/20. Consequently, Post-tax profit rose by 184.4% to ₦11.4 billion

Meanwhile, United Capital stated that FMN’s debt restructuring exercise continues to bear fruit as reflected in the scorecard. The investment firm explained that in the financial year ended 31st March 2020, the company further tapped into its approved ₦70.0 billion shelf bond programme to raise cheaper long-term finance to pay-off more expensive short-term bank loans.

Specifically, United Capital said FMN successfully raised ₦20 billion at a weighted average rate of 10.4% as against 15.7% when it raised ₦20.1 billion in 2018/19. Accordingly, the debt mix is now skewed towards mid-to long term debt, jerked up from 36.4% to 73.6% of total debt.

Also, these sustained efforts at deleveraging its balance sheet were evident as net debt to equity ratio sharply moderated from 72.7% to 53.5%. Total debt fell 13.7% year on year to ₦109.6 billion while cash and cash equivalents rose 52.3% to ₦26.2 billion as FMN Plc. cut capital expenditure by 38%.

Positive outlook

Looking ahead, United Capital said the firm holds an optimistic view on the performance of Flour Mills of Nigeria in 2020/21.

“This is as we expect the company to stay immune to the negative impact of the COVID-19 pandemic or restrictions, largely because its major product portfolios (Food, Sugar and Agro-Allied) are concentrated on essential items”, United Capital analyst said. Accordingly, the investment firm said this should lessen any incidence of COVID-19 related disruptions on the company’s performance.

Although weakness in consumers’ earnings amid loss of jobs during the COVID-19 induced lockdown might spur consumers down trading over 2020/21, United Capital said FMN’s strong product offerings at the value segment provides a strong justification for revenue to remain resilient during the period.

 “Also, we expect that the recent reversal of the 5.0% increase in duties on raw sugar by the Federal Government of Nigeria in July-2020 would further spur growth in the sugar segment even as the benefits from border closure remain apparent across the segments.

“Our market survey showed that the company have been gradually increasing prices across all its product portfolios to support margins amid recent naira devaluations”, United Capital analyst stated.

United Capital said FMN’s wholesalers showed that due to the high quality of the company’s products, the market is conveniently adjusting to these price increases as volumes have not been negatively impacted. Analyst said this exclude the Ball foods segment (Semovita) which is considered highly price competitive with no superior quality on offer by FMN.

Overall, United Capital stated that the firm expects FMN’s revenue growth to be price-led in 2020/21.

“Although the company is exposed to currency risks, especially as we expect export sales to remain weak amid border closure, we believe prior and recent investments in backward integration in the Agro-Allied products segment as well as the recent purchase of non-deliverable forward contracts -surged 17.7x to ₦3.7 billion in 2019/20 – would help lessen overall surge in FX loss as a result of naira devaluations over FY-2020/21”, the firm stated.

United Capital explained that it expects overall pressures from finance cost to further weaken over 2020/21 and support bottom-line performance, on the back of the company’s access to CBN’s COVID-19 support palliative measures. This includes lower interest rate and extended moratorium on about 48.5% of FMN’s loan book.

Overall, with the management’s guidance to only spend on maintenance, United Capital express view that dividend seeking investors will continue to see value in the counter.