Flour Mills Nigeria (FMN) Plc., Nigeria’s biggest milling company with an installed capacity of 2.9MMT per annum (c.31% of market share) grew both its Revenue and Net-Income (PAT) for the 6-months period ended September 30, 2020, by 31.15% and 68.44% respectively compared to the corresponding period of 2019.
Broad-based Improvement Across Business Value Chain Drove Improved Revenue
- According to its 6-months financial statements published on Tuesday 27th October 2020, on the Nigerian Stock Exchange (NSE) website, the company’s revenue grew by 31.15% compared to the corresponding period of 2019 to settle at ₦355.11 billion, driven jointly by increased earnings across all its business value chain.
- Specifically, Revenue from Food products increased by 26.97% y/y to ₦215.89 billion, Revenue from Agro-Allied products increased by 45.87% y/y to ₦72.06 billion, Revenue from the sales of Sugar increased by 29.47% y/y to ₦58.19 billion, and Revenue from Support Services increased by 40.62% y/y to ₦8.97 billion compared to 9M’2019.
- We attribute the broad-base improvement in Revenue (despite the slowdown of economic activities as a result of COVID-19 disruption since March 2020) to improved market penetration of the company aided by Nigeria’s protracted land border closure with neighbouring countries and the favourable fiscal and monetary policies of the current administration for Agriculture and related sectors.
Sharp Increases in Direct Cost of Sales, Administrative Expense, FX Loss, and Finance Cost Resized Bottom-line Gain
- In a near proportionate increase to that of Revenue, the company’s Cost of Sales rose by 27.55% y/y to print at ₦304.82 billion in the period under review. This was mainly driven by 30% and 42% increases in Material Cost (to ₦266.68bn) and Other expenses (to ₦3.73bn) compared to the corresponding period of 2019. We believe this was mainly in the reflection of the sustained increase in the domestic inflation rate and the associated expense that was brought about by the COVID-19 pandemic.
- The administrative expense also increased by a whopping 23.71% to print at ₦13.01 billion, driven by increases in Audit Fee, Depreciation & Amortization Provisions, Salaries & Other Staff Costs, and General Administrative Expenses.
- We noticed that the company reported a Foreign Exchange loss of ₦12.14 billion, and this translates to an increase of 3,636% when compared to the corresponding period of 9M’2019, owing largely to the twice devaluation of Naira/USD exchange rate from ₦306/$1 in 2019/20 financial year to the current rate of ₦387/$1.
- Also, the Finance Cost of the company grew by 12.59% to ₦9.95 billion compared to 9M’2019. This was mainly due to the 26.37% increase in interest-bearing Long-Term Borrowings to ₦75.76 billion, from ₦59.95 billion a year earlier.
- Despite the costs pressure, the company’s Pre-Tax and Net-Income settled at ₦14.61 billion and ₦9.93 billion respectively, representing an increase of 69.17% and 68.44% over 9M’2019. As a result, the basic EPS of the company increased by 52.29% over the corresponding period of 2019 to print at 233k.
Leverage Ratio Worsen Despite Improved Profitability
- Although the company’s recent issuing of Commercial Papers to meet short-term funding obligation has improved its Current Ratio to 1.23x compared to 1.09x in the corresponding period of 2019, its Leverage Ratio, however, shows that the company’s Total Liabilities is now more than double its Equity value (Debt-to-Equity ratio 2.10x).
- This suggests that the management of the company may need to reconsider equity-based funding options (either Right Issues or issuing of Additional Shares) to mitigate excessive leverage in the near term.
Business Outlook & Recommendation
Despite the current domestic and global disruption of activities as a result of the COVID-19 pandemic, the short-to-medium term outlook of Flour mills business remains buoyant, supported by the favourable policy of the fiscal and monetary authority, and the backward integration drive of the company’s management to optimize penitential.
Based on the current 6-months earnings performance of the company and our projection for the remaining 6-months of its 2020/21 financial year, we revise our 12-months target price for Flour mills up to ₦26.90 (from ₦23.10); and this put the current market price of ₦28.40 at a premium of 5.28% relative to our fair price.