FMN Group: Softer selling prices drive Q1’19 revenue lower y/y

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  • Q1’19 records 11% y/y decline in revenue on reduction in selling prices
  • Sharp normalization in other operating gains drives EBIT 26% lower y/y
  • Bottom line underperforms Vetiva estimate amid finance expense miss
  • FY’19 earnings estimates revised lower, BUY rating maintained

Lower prices drive weaker than expected revenue figure in Q1’19

In its recently released Q1’19 results, FLOUR MILL reported an 11% y/y decline in topline to ₦133 billion, 7% below our estimate. The revenue miss was driven by a reduction in selling prices in flour and sugar businesses, which offset the impact of volume increases across certain product categories. Whilst the aforementioned drove an 11% y/y decline in the Food segment, the Agro-Allied segment also recorded a 10% y/y revenue moderation as underperformance in the Edible Oils and Animal Feeds businesses offset a good showing in the Fertilizer division. On a positive note, however, Q1’19 gross margin (13.0%) came in stronger, 140bps higher y/y and above our 12.7% estimate. As such, Gross profit was flat y/y at ₦17.3 billion, albeit 5% lower than our estimate.

Higher OPEX, lower other operating gains drive 19% decline in PAT

Though Operating expense was largely in line with our estimate, the expense line was 26% higher y/y, following a spike in General Admin expenses. Earnings for the period were further undercut by a 79% y/y moderation in other operating gains, a normalization of the line item which was bloated by fair value gains on derivatives in the previous year. As such, Q1’19 EBIT came in at ₦11.2 billion, 26% lower y/y and 7% below Vetiva estimate. Furthermore, net finance expenses came in 33% lower y/y, amidst a lower borrowing balance. Hence the line item came in at ₦6.0 billion, above our ₦5.0 billion estimates. Overall, Q1’19 PAT was down 19% y/y at ₦3.6 billion – 26% below our ₦4.9 billion estimates.

FY’18/19 outlook tempered, forecasts revised marginally lower 

Reflecting both the Q1 run rate and a more bearish outlook for revenue, we revise our FY’19 revenue growth estimate to -3% (Previous: +5%). Particularly, we expect the challenging market dynamics in the Animal Feeds and Edible Oil businesses to keep Agro-Allied topline depressed. Furthermore, we do not expect volume performance to compensate for the reduction in selling prices even as the Sugar business (c.20% of Foods segment) continues to struggle with the influx of smuggled refined sugar. Although the impact of trending global wheat prices was less visible on FLOURMILL’s margins in Q1’19, given that imported wheat makes up a major part of the company’s production cost, we forecast tighter margins in outer quarters. As such, despite the modest margin outperformance, we maintain our FY’19 gross margin estimate at 12.7%. We note that FLOURMILL continues to make moves to rebalance and optimize its debt mix (expected to register Bond issue in the coming weeks). Hence, we revise our net finance expense estimate from ₦19.8 billion to ₦21.8 billion following the Q1 miss. Overall, we revise our FY’19 PAT estimate lower to ₦16.1 billion (Previous: ₦19.8 billion) – 3% PAT Margin. With this, our 12-Month Target Price (TP) is reduced to ₦36.32 (Previous: ₦40.99), supported by a downward revision in our risk-free rate. We retain a BUY rating on FLOURMILL given the 48% upside to our TP, the stock also trades at a discount to our Consumer Goods Coverage with P/E of 6.4x vs 19.6x for the latter.

VETIVA RESEARCH