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Flour Mills of Nig Plc: Strong full year earnings

Dismal Q4 performance

By Emeka Anaeto, Business Editor

THE much awaited full year 2016/17 financial results of Flour Mills of Nigeria Plc (FMN) was released late last week with revenue coming in 53 per cent higher year-on-year (YoY), less than significant deviation from analysts’ estimate of N524 billion.

The impressive performance was driven by strong topline growth across the Group’s major business segments with Agro-Allied business segment growing by 72 per cent YoY, Packaging at 71 per cent YoY and Food segment by 51 per cent YoY.

However, the surge in revenue is largely attributable to price increases but with significant contribution by volume growth in the period.

Earnings were further supported by improvement in costs which saw operating profit rise to N41 billion from N9 billion.

Gross margin expanded by 170 bases points (bps) to 12.7 per cent supported by product price increases implemented to protect margin and support earnings.

Another positive to earnings  was a moderation in net operating losses to  N1.5 billion from  N11.7 billion in 9M’16/17   largely due to a  N7.5 billion decline in exchange losses.

 Outstanding ex-overdrafts

However, interest expense rose by 36.9 per cent YoY to  N29.0 billion given the Company’s huge debt profile (N192.6 billion debt outstanding ex-overdrafts as at FY’16/17) and elevated cost of debt.

Despite reporting impressive YoY growth in operating profit, Profit After Tax (PAT) went down by 39 per cent YoY to N8.8 billion as against N14.4 billion recorded in 2015/16 financial year. The PAT decline was within estimate of  N8.7 billion by Cardinal Stone Partners, a Lagos based investment house, but slightly above consensus estimate of  N8.5 billion.

Analysts at Vetiva Capital, another Lagos based investment house, had noted that the YoY decline in PAT is not a fair comparison given that bottom line in the prior year was bloated by a N23 billion exceptional item arising from the sale of its subsidiary, UNICEM.

Vetiva analysts, consequently stated: “Save for the exceptional item, we highlight that prior year’s bottom line would have come in at a N12.2 billion loss before tax.”

Analysts at Cardinal Stone Partners concurred, stating: “We however highlight that the prior year was a high base where FMN reported  N23.7 billion from the sale of its stake in UNICEM. Excluding the gain, the company would have reported a loss after tax of  N9.3 billion in FY’15/16. Therefore, current earnings performance of  N8.8 billion is an improvement over FY’15/16.”

With the Board of Directors proposal of a  ¦ 1.00 per share dividend, same as 2015/16, the stock shows up with a current dividend yield of 4.0 per cent.

Quarterly perspective

Looking at the quarter-on-quarter (QoQ) performance, however, FMN reported a quite dismal fourth quarter (Q4’16/17) result with most line items trending below estimates.

Whilst revenue remained flat QoQ and 8.0 per cent above Vetiva estimate, earnings were knocked by a moderation in gross margin at 287 bps QoQ and an uptick in operating expenses (OPEX) to sales ratio at 294bps QoQ amidst high conversion and administrative costs respectively.

With foreign exchange related losses moderating from N13.3 billion in 9M’16/17 to  N5.7 billion at full year, these pressure points were offset by a 57 per cent reduction in the accumulated FX losses. But a rather unexpected 119 per cent QoQ surge in financing costs brought profit before tax (PBT) to a modest  ¦ 0.2 billion, about 88 per cent QoQ decline.

With a N1.3 billion tax credit FMN was able to squeeze in a profit after tax (PAT) of N1.4 billion for the quarter.

 Analysts worry over internal risks

Still commenting on the FY 16/17 results the analysts at Vetiva Capital stated: “Whilst the YoY performance for FMN remains impressive, the Q4 numbers look quite disturbing and we are wary as to how well the company will leverage the improvement in the operating environment amidst prevalent internal risks which could quickly derail earnings prospects.

“We are specifically most concerned about FMN’s debt levels. Following a 29 per cent YoY rise in total borrowings in FY’16/17, the company has an elevated debt to equity ratio of 187 per cent and interest expenses take up almost 80 per cent of operating profit realized.

“We believe the company needs to look at deleveraging its balance sheet and given the recovering equity market, Management may speed up equity capital raising plans given that the company obtained Shareholders’ approval to raise  N40 billion through a 3- year shelf program in Q1’16/17.

“Further supported by an improving macroeconomic environment, we remain optimistic about revenue growth, particularly in the Food and Agro-Allied segments, and forecast a 9.0 per cent rise in topline in FY’17/18.

“We however revise our EPS (Earnings Per Share) for the period lower given our more cautious stance on cost efficiency and an upward revision to interest expense estimate.

“Our FY’17/18 EPS is revised to N4.16 (Previous: N5.40) and 12-month Target Price is cut to N31.71 (Previous: N34.63).”


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