Flour Mills Of Nigeria: Earnings Trajectory, Best in a Decade

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Continued expansion across segments accelerates PAT growth

Sustaining the impressive growth momentum from the H1’21 period, Flour Mills reported a 31% y/y growth in topline to ₦555.3 billion and a 91% y/y growth in PAT to ₦15.6 billion in 9M’21. The expansion in the bottom line came down to impressive volumes, improved margins from cost efficiencies and increased investment income.

The company reported a 6% y/y increase in volume, driven by its emphasized focus on B2C marketing and investment in key distribution strategies. Thus, although the cost of sales increased 29% y/y – mostly from input sourcing challenges and other inflationary pressures, as well as a 6% y/y surge in Opex, the company’s operating margin grew 1ppt to 6%.

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Furthermore, boosted by higher cash and debt balances, Finance income and Finance costs surged nearly 400% and 14% y/y respectively, with Net Finance costs dipping 6% y/y to ₦12.4 billion. Overall, Flourmills’ PBT and PBT margin came in at ₦23.6 billion and 4% respectively (9M’20: ₦12.3 billion and 3% respectively), with EPS growing ₦1.81 to ₦3.80.

Following a 15x growth in PAT, Flourmills’ most profitable business line is now its Agro-allied segment, reporting ₦8.8 billion as PAT, largely boosted by an improved contribution from edible oils, feed and fertilizer as well as a low base.

That said, we suspect that topline growth in this segment may be peaking, given its underwhelming 5% y/y growth in this quarter, especially when we compare this to the performance from its other business segments, showing an average growth of 30% y/y (including its support services segment).

Boosted by operating efficiencies, cash flow from operations soared 11% y/y to ₦50.1 billion; this, in addition to increased borrowings, contributed to the company’s 2x y/y increase in overall cash balances to ₦81.2 billion and propped total assets to ₦493.2 billion. Thus, RoA for the company improved 1ppt y/y to 3%.

Expect a strong close to the year.

To end the financial year, we are still bullish on the company’s volumes, despite the possible headwinds that the AfCFTA poses, given its solid investments in new products and distribution as well as its placement in the value segment. However, we remain cautious on growth expectations for the agro-allied segment. That said, we expect the company to report full-year Revenue of ₦749.5 billion, which would represent a 31% y/y growth.

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This places the expected Q4’21 Revenue at ₦194.2 billion (+29% y/y). In terms of margins, expecting largely stable conditions (at least in line with the current run rate), we forecast gross margin at 13% y/y under the expectation that the company’s export effort would continue to mitigate FX sourcing costs.

Flour mills has been able to set up three Regional Distribution Centres in the North, with expansion plans to include four more centres possibly in this quarter, we project a 6% y/y increase in Opex for FY’21. Taking in all our assumptions we forecast an FY’21 PBT of ₦30.3 billion and PAT of ₦20.0 billion, each representing 75% y/y expansions respectively.

Therefore, we value Flourmill at ₦37.45 and rate the stock a HOLD.

Flour Mills Of Nigeria Earnings Trajectory, Best in a Decade Brandspurng
Source: Company filings, Vetiva Research
Flour Mills Of Nigeria Earnings Trajectory, Best in a Decade Brandspurng
Source: Company filings, Vetiva Research