- The financial performance of Flour Mills of Nigeria Plc (FMN) suffered from the temporary tough operating environment in HY1 2018
- The gridlock in the Apapa area of Lagos, where the company has its main business operations, increased the cost of running the business and increased delivery time. FSDH Research expects the traffic to ease when the current road construction in the area is completed
- The weak purchasing power and the weak economic performance in the country also had negative impacts on the operations of the company
- FMN invested in high-profit-margin businesses in the last few years. FSDH Research expects these businesses to contribute to the financial performance of the company in the next five years
- The company reduced the selling price on some of its products in response to the drop in some major input costs and to enable it to gain more market share
- The restructuring of debts through the proceeds from the Rights Issue has reduced the finance costs. The company will have the full benefits of this going forward.
- FMN has been able to align itself with the agriculture agenda of the Federal Government of Nigeria, which enables it to consolidate its position in the food product and ancillary businesses
- The company has also entered into a strategic partnership with Corteva Agriscience, agriculture division of DowDuPont in order to improve farm yields
- We estimate a dividend per share of N1.04 for the FY 2019
- Our fair value of the shares of FMN is N49.90
- Our target price is N32.00
1.0 Results Analysis
1.1 HY1 2018 Performance Analysis:
The financial performance of Flour Mills of Nigeria Plc (FMN) suffered from the temporary tough operating environment in HY1 2018. The gridlock in the Apapa area of Lagos, where the company has its main business operations has increased the cost of running the business and increased delivery time. The weak purchasing power and the weak economic performance in Nigeria have had negative impacts on the operations of the company. The company reduced the selling price on some of its products in response to the drop in some major input costs and to enable it to gain more market share. The restructuring of debts through the proceeds from the Rights Issue reduced the finance costs.
The unaudited HY1 2018 result for the period ended September 2018, shows that Turnover (T/O) decreased by 9.62% to N269.74bn, compared with N298.44bn in HY1 2017. The drop in revenue was as a result of the company’s strategy to focus on market leadership. This means an increase in the volume of sales in some product categories at lower selling prices in response to lower input cost. Thus, customers received more value for their money. Our analysis of the company’s revenue by business segment shows that food accounted for 64% of the company’s total revenue as shown in table 4 below. The company’s cost of sales (COS) decreased by 9.63% to N237.62bn from N262.93bn in HY1 2017. Despite the decline in COS, gross profit decreased by 9.56% to N32.12bn in HY1 2018 from N35.51bn in HY1 2017. Its COS as a percentage of T/O remained flat at 88.09% in HY1 2018 from 88.10% in HY1 2017. Flour Mill’s administrative, selling and distribution expenses increased by 25.71% to N13.98bn. The company said it was mostly as a result of increased marketing activities geared to boost the top line. FSDH Research believes the difficulties in moving goods around the country especially in Apapa because of the bad transportation system contributed to this. However, reconstruction work is going on to ease traffic in the area. These expenses as a percentage of T/O increased to 5.18% in HY1 2018 from 3.73% in HY1 2017. The company’s Earnings Before Interest and Tax (EBIT) decreased by 34.71% to N19.24bn from N29.47bn in HY1 2017.
The company recorded a net finance charge of N10.94bn in HY1 2018, a decrease of 31.60% from N15.99bn in HY1 2017. This was a reflection of debt refinancing through the Rights Issue as well as a drop in interest rate in the market. The Profit Before Tax (PBT) fell by 38.40% to N8.30bn in HY1 2018 from N13.48bn recorded in HY1 2017. The company’s tax provision also decreased by 21.57% to N3.23bn in HY1 2018 from N4.12bn in HY1 2017. The Profit After Tax (PAT) was N5.07bn in HY1 2018, from N9.36bn in HY1 2017, representing a decrease of 45.81%.
The GP margin increased marginally to 11.91% in HY1 2018 from 11.90% in HY1 2017, while the EBIT margin decreased to 7.11% from 9.88%. Similarly, the PBT margin decreased to 3.08% from 4.52% while the PAT margin decreased to 1.88% in HY1 2018, down from 3.13%.
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