EQUITY COVERAGE: FLOUR MILLS PLC (Q1 2017) – Revenue up by 25%, net income by 3%

Flour Mills (‘The Company or FMN’) Nig. Plc., a forefront player of wheat milling in Nigeria and one of the largest single site mills in the world released its unaudited financial statement for the three months ended June 30th 2017 on 31st July 2017. 

The Company reported a 25% growth in revenue generated from the sale of goods and services to N148.9bn ($40.2million) from N119.2bn ($32.7million) y/y. The rise in revenue was driven by strong growth in packaging (+74%y/y) and food (+28% y/y) as a result of both increases in volume sold and price. The 27% increase in cost of sales from N103.9bn ($28.5million) to N131.7bn ($36.1million) y/y was triggered by 28% rise in cost of raw materials (wheat, rice and cassava flour).

However, there is the need for raw materials to be sorted locally which will help cut input cost. Administrative expenses rose by 52% while marketing and distribution expenses used to promote sales dipped by 4% y/y. The drop in marketing cost translated to the 33% rise in operating profit from N10.9bn ($3.0million) to N15.1bn ($4.1million) y/y.
The current debt profile of Flour Mills constrained its performance ratios as could be seen here. Return on Equity (ROE) which measures returns on fund provided by shareholders returned 4%, same posted in Q1 2016 while Return on Asset (ROA) stood at 1%, same as in 2016. Current ratio improved to 1.31x compared to 1.2x posted in Q1 2016. Debt to equity ratio increased to 3.2x against 2.9x y/y. The Company needs to work round the clock to soften the existing debt profile.
Based on our analysis, the stock is currently trading at a 30.94% discount to our estimated fair value of N37.33, with a 12 month investment horizon. We focused on the historical financial performance of the stock and our expectation for FY 2018 to arrive at our fair value for the stock.
Our fair value for the shares of Flour Mill Nigeria Plc was calculated using the Dividend Discount Model comprising our expected dividend estimate for the company and GTI Securities customized tweak to adjust for the risk of investing in the Nigerian consumer goods sector. Our Required Rate of Return (RROR) factors in a risk premium of 11.15% and the yield for the most recently issued 20-Year FGN Bond was applied as the risk free rate of return.

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