Flour Mills of Nigeria Plc 9M’20 – Favorable Economic Policy Provides Support as Earnings rise on the back of border closure

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Major Highlights

  • Volume grew by 8% in Q3’20
  • Solid growth in the agro-allied, food and sugar business segments
  • Deleveraging efforts continue to provide accretion to bottom-line

In  its  recently  released  9M’20 financial results, Flour Mills of Nigeria (‘FMN’ or ‘The Group’) reported a relatively strong top-line growth. Revenue grew by 6% year-on-year to N423.48bn in  9M’20  from  N400.64bn  in  9M’19.  Operating profit declined by 10%  year-on-year to N24.68bn in 9M’20 from N27.29bn in 9M’19. However,   profit before tax (PBT) rose by 9% to N12.29bn, while profit after tax grew by 3% year-on-year.

Border Closure Delivers for FMN

Following the border closure policy by the Federal Government in October 2019, just at the start of the third quarter of FMN’s financial year, smuggling activities and the influx of imported goods subsided significantly;  thus creating an  increased  market  share.  Resulting  from  the supply gap induced by the border closure, FMN was able to push more goods in the market. Consequently,  revenue  grew  by  17%  in  Q3’19,  as  volumes  grew  by  8%. The food business segment, which had hitherto reported  revenue decline in the last two quarters, Q1’20  (-3%) and  Q2’20  (-2%),  bounced back  to  growth  as  the  business  segment  grew  by  14%  in  Q3’20. The sugar and agro-allied business segments also grew by a  double-digit  of  20%  and  52% respectively. However, the upside recorded in the three business segments mentioned above was partially offset by the support services business  segment,  which  declined  by    27%  to N6.10bn  in  Q3’20  from  N8.30bn  in  Q3’19.  In summary,  for the food,  agro-allied and sugar business segments,  the revenue growth reported majorly resulted from improved sales during the period as the Group took advantage of the border closure in terms of increased market share.

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Quarterly Breakdown of Business Segments

Flour Mills of Nigeria Plc 9M'20 - Favorable Economic Policy Provides Support as Earnings rise on the back of border closure - Brand Spur

Cost of Sales Rise with Revenue Growth

The cost of sales rose by 17% in Q3’20 to N136.66bn from N116.43bn in Q3’19. The increase in the cost of sales in Q3’20 (+17%) was the highest compared to Q2’20 (-1%) and Q1’20 (+2%). The sharp increase in the cost of sales in Q3’20  is attributed to raw material cost (which increased by 19%)  and direct staff cost  (which grew by  11%).  Other line items that recorded major increases in the cost of sales were depreciation  (+11%) and maintenance cost (+17%). The 17% increase in the cost of sales in Q3’20 was the major driver of the 6% growth in the cost of sales in 9M’20. As of 6M’20, the cost of sales growth was flat. Nonetheless, gross profit grew by 3% in Q3’20 to N47.83bn from N46.59bn in Q3’19.

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Spike in Operating Expense Hits Profits

Operating profit declined by 10% year-on-year to N24.68bn in 9M’20 from N27.92bn in 9M’19. The factor that drove operating profit to a decline despite growth in gross profit was higher operating expenses during the period.  Operating expenses increased by  13%  in  9M’20.  The increase in majorly resulted from higher personnel expenses and general expenses.

Read Also:  September 2019 Annual Inflation Rate Rises to 11.24% as Food Inflation Jumps to 13.51% amid Border Closure…

Effective Balance Sheet Optimisation Delivers Value

FMN,  however,  returned to the path of profit growth in the period,  as  PBT  grew by  9%  to N12.29bn in 9M’20 from N11.28bn in 9M’19. The higher profit recorded during the period was owing to lower finance costs incurred during the period. Finance cost declined by 21% year-on-year, saving the Group as much as N3.00bn. The lower finance cost reported was a manifestation of the deleveraging efforts by the management of the  Group.  Specifically,  total borrowings declined by  21%  to  N112.56bn  in 9M’20  from  N141.86bn  in 9M’19.  In addition, the portion of short-term debt to total borrowings reduced significantly from 51% in 9M’19 to 37% in 9M’20.

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Profit after tax grew by 3% year-on-year. The slow growth in PAT (relative to the higher growth in PBT) was due to a higher effective tax rate during the period. According to the management, prudent steps were taken in estimating the tax bill due to uncertainties regarding the recently implemented Finance Bill. An effective tax rate of 34% was reported in 9M’20 (9M’19: 30%).

Summary of Income Statement

Flour Mills of Nigeria Plc 9M'20 - Favorable Economic Policy Provides Support as Earnings rise on the back of border closure - Brand Spur

Flour Mills of Nigeria Plc 9M'20 - Favorable Economic Policy Provides Support as Earnings rise on the back of border closure - Brand Spur

In our Q3’20 forecast, we underestimated the positive impact of the border closure on the revenues of the  Group due to our thought that increased competition in the industry, weak consumer demand, and an overall challenging business environment would limit the upsides associated with the border closure.  However,  it appeared that the  Group,  in the absence of cheaper smuggled products, was able to establish its leadership status in the market.

Outlook

We note the solid performance of the  Group in  Q3’19.  We also note that the solid performance resulted from the border closure policy by the  Federal  Government.  In the near term and till the end of the Group’s financial year, we expect the Group to continue benefitting from the favourable government policies.  However,  in the medium to long- term,  we believe that the border closure is not sustainable and that earnings growth might be under pressure again.

Generally, we revise our EPS estimate upwards to N2.50 (previous: N2.02). Our basis for an upward revision includes expected revenue growth across major business segments, operating efficiency (as the Group embarks on rightsizing), and lower finance costs. Using a  market-based valuation,  we have a  higher fair value estimate of  N22.88  (previous: N18.48).  Since the beginning of the  Group’s financial year,  our fair value estimates have oscillated between N18.48 to N24.66. We expect the Group to pay a dividend of N1.20 for the FY’20 financial year.

Between our last earnings report (November 13, 2019) and this report (February 5, 2020), the  Group’s share price had rallied from  N15.20  to  N22.00.  We believe that the stock is currently trading at its fair value. Hence, we recommend a HOLD.

 

WSTC Securities Limited (WSTC)

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Flour Mills of Nigeria Plc 9M'20 - Favorable Economic Policy Provides Support as Earnings rise on the back of border closure - Brand SpurFlour Mills of Nigeria Plc 9M'20 - Favorable Economic Policy Provides Support as Earnings rise on the back of border closure - Brand Spur

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Flour Mills of Nigeria Plc 9M'20 - Favorable Economic Policy Provides Support as Earnings rise on the back of border closure - Brand SpurFlour Mills of Nigeria Plc 9M'20 - Favorable Economic Policy Provides Support as Earnings rise on the back of border closure - Brand Spur

Latest News

Cityneon Raises S$235 Million; Well Positioned for Next Growth Chapter

  • The global experience entertainment company gets a S$235 million shot in the arm, closes its private fund raising in April 2021
  • Investors both new and existing include Singapore's Pavilion Capital, Seatown Holdings International and EDBI, Qatar's Doha Venture Capital and financial institutions and family offices in Singapore and China
  • These now join other existing Cityneon shareholders CITIC Capital, veteran entrepreneur and investor Mr. Johnson Ko, and Executive Chairman & Group CEO Mr. Ron Tan
  • Funding comes just after the Group acquired multi-year licensing rights for James Cameron's AVATAR touring exhibition, and two original artefacts IP on the ancient civilization Machu Picchu from Peru and Ramses the Great (Ramses II) from Egypt
  • Investments position the Group well to bring experiences across the globe, targeting to launch six experiences in China and five in the U.S. by the end of 2021, with more in other parts of the world
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SINGAPORE - Media OutReach - 21 April 2021 - Cityneon Holdings ("Cityneon", the "Company"/collectively with its subsidiaries, the "Group") raised S$235 million in the most recent round of private funding. The latest round of funding adds seasoned investors to Cityneon's already strong stable of shareholders.

This funding round was led by Singapore's Pavilion Capital, Seatown Holdings International, EDBI, and Cityneon's Executive Chairman & Group CEO, Mr. Ron Tan. EDBI and Pavilion Capital are existing shareholders of Cityneon whilst new investors include Seatown Holdings International, Qatar's Doha Venture Capital, which will now own approximately 4 per cent of the Group, and other financial institutions and family offices in Singapore and China.

These now join other existing Cityneon shareholders CITIC Capital, veteran entrepreneur and investor Mr. Johnson Ko, and Executive Chairman & Group CEO Mr. Ron Tan to form a new and strong shareholder base for the Group. Mr. Johnson Ko and Mr. Ron Tan remain as the largest shareholders of the company via their combined entity, West Knighton Limited.

The Group is now well positioned for its next growth chapter and will use the proceeds for capital expenditure that includes building more of its various intellectual property (IP) exhibition sets, totaling 24 travelling and four semi-permanent sets under the Studio IP partnerships and three travelling sets under the original artefact IP partnerships by the end of 2022.

Already, the Group just signed its fifth IP rights with Avatar from 20th Century Studios last year. Amidst the anticipation from Avatar fans worldwide, Cityneon will debut a multi-sensory Avatar exhibition in Chengdu, China in May 2021, ahead of the Avatar movie sequel which is slated for release in 2022. Avatar is the world's top grossing film of all time at over US$2.8 billion, and adding millions more after its successful re-release in China in March 2021. Avatar's director James Cameron has announced that he will be producing four sequels with 20th Century Studios, with the first sequel slated for release next year. Disney acquired 20th Century Studios for US$71 billion in 2019.

The Company also recently entered the original artefacts IPs space and will stage international exhibitions of the treasures of the ancient civilization Machu Picchu from Peru in Boca Raton, Florida and Pharaoh Ramses II from Egypt in Houston, Texas. These two experiences will start welcoming visitors in October and November 2021, respectively.

Other IP rights that the Group holds include partnerships with Universal Studios for Jurassic World: The Exhibition, Marvel for Avengers S.T.A.T.I.O.N., Lionsgate for The Hunger Games: The Exhibition and Hasbro for Transformers Autobot Alliance. All in, Cityneon holds the IP rights for five of the top 10 worldwide box office hits and two artefacts IP from Peru and Egypt. The Group expects to have six sets of its various IP rights travelling across China, and five travelling and permanent sets in the United States, with a few more in other parts of the globe.

The Group will also be reopening experiences that were temporarily closed in 2020, aiming to provide visitors with a safe entertainment option. These include the Marvel Avengers S.T.A.T.I.O.N. in Toronto, Canada that will be re-opening in May 2021; and the Marvel Avengers S.T.A.T.I.O.N. exhibition in Lotte Mall in Seoul, Korea in April 2021; the same exhibition space which previously housed Jurassic World: The Exhibition, another IP experience exhibition by the Group in 2019. In the past month, the Group also witnessed record visitor numbers at their semi-permanent installations in Las Vegas, USA, signaling a strong comeback and demand for their immersive experiences, as they step into the 6th year of operations there.

While there are exciting plans lined up, the Group is not resting on its laurels. More Hollywood IPs and artefact IPs can be expected, and there will be further announcements on new IP verticals in entertainment experiences that the Group is looking to enter.

Mr. Ron Tan, Executive Chairman & Group CEO of Cityneon, said: "It is exciting that the Company is going through such strategic expansion as one of the largest providers of exhibition entertainment experiences globally. The S$235 million funding round sets a solid foundation for us to invest in developing more of our entertainment experiences, to stage even more exhibitions of the five box office hits and two artefact IPs that we hold the rights to all over the world. I'm thankful that our strong investors base, now from Singapore, Hong Kong, China and the Middle East, have trust in our vision, and believe alongside us that this space of big ideas and big experiences will only grow."

By the end of this year, Cityneon will arguably be the largest provider of exhibition entertainment experiences internationally; with global footprints in more than 50 cities and welcoming 10 million unique visitors across the world by 2022.

Cityneon Holdings

With its global reach and international partnerships, Cityneon has the capability to serve its clients anywhere in the world. Cityneon was listed on the Mainboard of the Singapore Stock Exchange since 2005, and was privatized on February 2019 by West Knighton Limited, a company wholly owned by Cityneon's Executive Chairman and Group CEO, Ron Tan, together with Hong Kong veteran entrepreneur and investor, Johnson Ko Chun Shun. Johnson is a capital markets veteran and has held controlling interests and directorships in many listed companies. In May 2019, Cityneon welcomed CITIC Capital as a new shareholder, who holds approximately 10% shares in Cityneon. CITIC Capital is part of CITIC Group, one of China's largest conglomerates, and has over US$25b of assets under its management across 100 funds and investment products globally. Other institutional shareholders of the Group include EDBI - a Singapore government-linked global investor, and Pavilion Capital - a Singapore-based investment institution which focuses on private equity investments, that made strategic investments in August and October 2019 respectively, to support the Group's further expansion globally. For more information, please visit www.cityneongroup.com.


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