PAN RESEARCH – Flour Mills of Nigeria (FMN) has been consistently benefiting from the closure of the land borders since August 2019. However, in the middle of December 2020, the Federal Government of Nigeria opened the land borders at Seme, Illela, Maigatari and Mfun.
As expected, the re-opening of the land borders had no adverse impact on the turnover of FMN as revenue increased by 31.14% to ₦555.34 billion in 9M’20/21 (vs. ₦423.48 billion in 9M’19/20).
The improvement in the top-line may be attributed to the benefit derived from the border closure and improved Christmas demand, as all the business segments of the company grew by 25% plus.
Mainly as a result of higher sales during the period, the cost of sales increased by 28.55% to ₦482.90 billion (vs. ₦375.65 billion in the corresponding period of the previous year), and this translated to a lower cost-to-sales ratio of 86.95% (vs. 88.71% 9M’19/20).
Mainly as a result of higher salaries, wages and other staff costs, the administrative expenses of the company rose by 6.28% to ₦18.35 billion in 9M’20/21 (vs. ₦17.26 billion reported in 9M’19/20). With the impressive operating performance, EBITDA improved by 64.84% to ₦66.08 billion in 9M’20/21 (vs. ₦40.09 billion in 9M’19/20).
In nine-month to December 2020/21, Flour Mills of Nigeria further optimised the cost of financing and debt levels as net finance costs declined by 6.36% to ₦11.60 billion (vs. ₦12.39 billion in 9M’19/20). With the impressive operating and non-operating performance, profit before tax improved significantly by 92.06% to ₦23.61 billion in 9M’20/21 (vs.
₦12.29 billion in 9M’19/20). However, the company made a higher provision of ₦8.03 billion for tax in 9M’20/21 (vs. ₦4.13 billion in 9M’19/20).
Consequently, Flour Mills of Nigeria’s profit after tax improved significantly by 90.94% to ₦15.58 billion (vs. ₦8.16 billion in 9M’19/20).
Based on the recent figures released, we upgrade our target price to ₦30.63 (from ₦28.50 previously recommended) and maintain a HOLD recommendation.
Fig. 1: Quarterly results highlights
Revenue rises by 31.14% year-on-year, driven by improved demand:
Fifteen days to the end of Flour Mills of Nigeria’s third quarter, the Federal Government of Nigeria opened the land border, and as expected, this had no impact on the turnover of the company as revenue improved significantly by 31.14% to ₦555.34 billion (vs. ₦423.48 billion in 9M’19/20).
The improvement in the top-line could be attributed to impressive performance across all the business segments. Revenue from the food segment improved significantly by 31.21% to ₦343.89 billion in 9M’20/21 (vs. ₦262.10 billion in 9M’19/20), due to improved volume growth in the B2C segment., which translated to 20% volume growth in Pasta and 27% volume growth in Semovita and Golden Vita during the period.
In addition, the revenue of the Sugar segment of the company increased by 33.41% to ₦90.21 billion in 9M’20/21 (vs. ₦67.62 billion in 9M’19/20), due to improved demand for local sugar.
Agro-allied segment improved its revenue by 29.86% to ₦105.59 billion in 9M’20/21 (vs. ₦81.31 billion in 9M’19/20), largely driven by higher volumes in fertilizers and oils & fats. It should be noted that the export revenue from the Agro-allied segment grew by 23% during the period and we expect this to improve the diversification of revenue sources and mitigate FX exposures.
The revenue of the Support segment rose by 25.63% to ₦15.65 billion in 9M’20/21 (vs. ₦12.46 billion in 9M’19/20), driven by strong demand in ABTL (Apapa Bulk Terminal Limited) and Bagco with the scarcity of imported packaging in the market.
We do not expect the re-opening of the land borders to have an adverse impact on the demand for the products of FMN in the next quarter due to restrictions on the importation of some goods into the country. Again, the company has positioned itself for the possible competition from outside the country.
Fig. 6: Revenue – 9M’20-12M’23F (Billion NGN)
Cost of sales rises by 28.55% year-on-year due to higher production volumes:
From nine-month to December 20/21, the cost of sales rose significantly by 28.55% to ₦482.90 billion (vs. ₦375.60 billion in nine-month to December 2019/20), driven by higher production volumes.
The higher cost of sales during the period could be mainly attributed to higher material costs as it rose by 31.67% to ₦425.82 billion in 9M’20/21 (9M’19/20: ₦323.39 billion).
Although the cost of sales increased by 28.55%, the cost-to-sales margin declined to 86.95% in 9M’20/21 (9M’19/20: 88.71) and this showed an improvement in the cost minimization strategy of the company.
The improvement in the cost- to-sales margin may be attributed to improved participation of FMN in partnership with Flour Milling Association of Nigeria (FMAN), successful implementation of the various programs such as farmers centre program and seed production program, as well as improved farmer engagement (478 farmers) and pre-season training completed for 2,100 wheat farmers across 15 target LGAs in Kano, Jigawa and Kebbi.
We expect the partnership of Flour Mills of Nigeria with FMAN and farmers to continue to boost the country self-sufficiency in wheat production, thereby improving cost-margin going forward.
Mainly as a result of higher salaries, wages and other staff costs during the period, selling & distribution and administrative expenses increased by 5.53% and 6.28% to ₦6.76 billion (9M’19/20: ₦6.40 billion) and ₦18.35 billion (9M’19/20: ₦17.62 billion) respectively in 9M’20/21.
Fig. 7: Revenue, COS to Rev. and GP Margin – 9M’20 – 12M’23F
With impressive performance across the board, PBT improves significantly by 92.06% year-on-year:
During the period under review, Flour Mills of Nigeria Plc reported impressive figures for non-operating activity as net finance costs fell by 6.36% to ₦11.60 billion (vs. ₦12.39 billion in the corresponding period of the previous year), as FMN continue to optimize the cost of financing and debt levels.
With an impressive performance in operating and non-operating activities of the company, profit before tax improved significantly by 92.06% to ₦23.61 billion in 9M’20/21 (vs. ₦12.29 billion in 9M’19/20).
However, Flour Mills of Nigeria made a higher provision of ₦8.03 billion for tax during the period (vs. ₦4.13 billion reported in the corresponding period of the previous year).
Consequently, profit after tax increased by 90.94% to ₦15.58 billion in 9M’20/21, from ₦8.16 billion recorded in 9M’19/20, and this translated to a trailing EPS of ₦4.58 during the period.
Fig. 8: PBT, PAT and Tax Margin – 9M’20-12M’23F
Balance sheet remains strong and solid; Expectation of improved dividend in FY’21:
Flour Mills of Nigeria Plc continued with the impressive balance sheet in the third quarter of 20/21 as net assets increased by 7.43% to ₦165.66 billion (vs. ₦154.21 in the second quarter of 2019/20).
This was majorly boosted by the significant improvement in the total assets of the company, which improved by 21.75% to ₦493.16 billion in the third quarter of 2020/21 (vs. ₦405.04 billion in the second quarter of 2019/20).
The improvement in the total asset was mainly driven by a significant increase in cash & cash equivalents and inventories. The increase in cash & cash equivalents could be attributed to the issuance of the N30bn bond in December 2020.
However, the total liabilities of the company rose by 30.56% to ₦327.50 billion in Q3’20/21 (vs. ₦250.84 billion in Q2’19/20), due to a notable increase in the long term borrowing, customer deposits, trades & other payables, among others.
Consequently, the net assets per share (NAPS) improved to ₦40.40 in Q3’20/21 (vs. ₦37.61 in Q2’19/20). With the improved balance sheet and impressive operating performance, we expect improved dividend payment (see fig. 9) from the company in the full year of 2021.
Fig. 9: Dividend Per Share and Dividend Yield – FY’19-FY’23F
Fig. 10: Total Liabilities Vs Net Asset in Q3’20/21
Our valuation puts the target price of the stock at ₦30.63, representing an increase of 4.70% from the current market price of ₦29.25. In arriving at the target price, we employed a discounted free cash flow methodology.
Consequently, we maintain a HOLD recommendation on the stock of the company. Our valuation and forecasts considered several factors (both quantitative and qualitative) among which are; the previous financial reports of the company, the current figures released by the company and the outlook from the management.