Flour Mills Nigeria – Earnings tamed by FX revaluation loss

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Growth spurt in Agro-allied business sustains Revenue growth in Q1. Flour mills Nigeria has released its Q1’21 results, continuing with positive momentum from the last financial year. The firm’s topline performance came in line with our growth expectation, expanding 15% y/y for the quarter to f4154.8 billion (Vetiva: f4152.8 billion).

We believe this growth is as a result of sustained rewards from favourable border controls, which has proven a significant tailwind to demand its edible oil segment and its agro-allied business segment as a whole. While we expected the pandemic-induced lockdowns to have had some mild impacts on the domestic Agriculture sector, feed and fertilizer sales still expanded a remarkable 29% y/y.

Flour mills’ food segment also performed better than our expectations this quarter, despite our expectation of reduced consumption of packaged staples amidst a moderation in consumer wallets. However, we believe that sales from the company’s newly introduced value food brands helped offset the decline in high-end pasta, flour and ball-foods segment.

Thus, food revenue expanded by 12% y/y. In the same vein, we saw a significant 12% y/y expansion in sugar revenues despite a reduction in sugar import duties this quarter. On a q/q basis, Group revenue expanded by 3%.

Foreign exchange losses impair Earnings

Remarkably, in spite of pandemic and exchange rate driven inflationary pressures, cost of sales only grew by 9% y/y to f4129.0 billion, taking gross margin Sppts higher y/y to 17%.

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Furthermore, we believe that Flourmills has started to reap some benefits from its B2C marketing strategy, evidenced in its reduced distribution expenses. Meanwhile, the company recognized a f49.4 billion Fx loss after it revalued c.f447.5 billion in foreign trade payables owing to the recent currency adjustment.

Despite this revaluation, operating profit expanded 11% y/y to f410.9 billion, with operating margin coming in flat y/y. In keeping with their debt restructuring strategy, management refinanced f430 billion via commercial paper in April. Accordingly, net finance costs fell 29% q/q (+7% y/y) to f’t4.9 billion.

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After accounting for tax, PBT and PAT both grew 17% y/y to f46.5 billion and f44.4 billion respectively.

Increased growth expectation weighed down by Fx losses

Following the gradual relaxation of lockdown measures across the country, we are slightly optimistic of merely a mild slowdown in aggregate income levels (although we still maintain that income levels would remain somewhat depressed) and even expect an uptick in consumer demand in the second half of the year.

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We marginally adjust our FY’21 Revenue projection in line with the Q1 performance and estimate a 9% y/y growth for the full year (Previous: 7% y/y) to f4624.8 billion. We also adjust our Gross margin expectation to reflect the impressive Q1 performance and project a 3ppts increase to 14% for the full year.

Additionally, we tame our Opex forecast slightly to fd34.4 billion following management’s impressive cost management in Q1. Adjusting for the operating FX losses, we project a 34% jump in EBITDA to f474.2 billion and an expect EBIT to print at f448. 6 billion.

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Although the company has managed to restructure its loans given the low rates environment, we revise our finance cost expectation (+ 14% to f422.8 billion) given the company’s intent to issue new bonds under its current bond programme in the next quarter.

In all, we revise our projected PBT upwards to f428.9 billion (+68%y/y) and estimate a PAT of f419.1 billion (+68% y/y). We also revise our target price marginally upwards to f425.55. With a forward P/E multiple of 5.5x (current P/E: 3.9x), we maintain a BUY rating.

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Flour Mills Nigeria -  Earnings tamed by FX revaluation loss

VETIVA CAPITAL MANAGEMENT LIMITED

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