June 11, 2018

Flour Mills Nig Plc: Sound fundamentals clash with macroeconomic realities

Flour Mills Nig Plc: Sound fundamentals clash with macroeconomic realities

From L-R: Paul Gbededo, CEO, Flour Mills & •John Coumantaros, Chairman, Flour Mills

By Emeka Anaeto, Business Editor

LAST week some stock analysts began review of their positions on some blue chip companies and one of them reviewed was Flour Mills of Nigeria Plc. Analysts’ position on the company was, however, reiteration of a positive outlook taking into consideration the firm’s historical performance, improving metrics and strategic positioning. However, analysts at Cardinal Stone Partners made adjustments to their estimates and projections, and consequently slightly revised their target price upwards to N46.64 (previous:N44.90). But they retained their BUYrating on the counter.

From L-R: Paul Gbededo, CEO, Flour Mills & •John Coumantaros, Chairman, Flour Mills

Company finances

Building on its robust performance in full year 2016/ 17, (FY’16/17) the analysts verdicts expect the company to sustain its revenue performance in FY’17/18. But they slightly revise top line expectations downwards toN566.6 billion (previous: N572.1 billion, FY’16/17: N525.5 billion).

This is probably because of the lower than anticipated Q3’17/18 revenue of N129.1 billion, which was affected by the Apapa gridlock during that period.

Apapa gridlock

The revenue expectation only represents a growth of 8.0% Year-on-Year, YoY, but the analysts highlight that this reflects an impressive trend of revenue generating capability as the firm’s asset turnover has recovered from 0.96x in FY’14/15 to 1.27x in FY’16/17.

Flour Mills has some key attributes in its market segment. The company continues to dominate the food space through a large product base, notably across ball foods, flour and pasta, with market share of 55%, 42% and 58% respectively, according to company estimates.

Flour Mills’ capacity expansion and backward integration initiatives across the food value chain is also outstanding while it takes advantage of Nigeria’s huge population and growing food market. There is also an ongoing initiative to improve the firm’s product distribution network. All these, industry analysts believe, enhance optimism in the company’s revenue generating prospects.

Earnings forecasts

Focusing on the expectations for the financial periods ahead, analysts at Cardinal Stone stated: ‘‘We expect pre-tax FY’17/18 earnings to come in at N24.9 billion, 137.8% higher than the prior period.’’

The last time Flour Mill crossed the N20 billion threshold was in FY’10/11 (N21.3 billion). In fact, we note that this reflects sustained recovery from the pre-tax losses incurred by the firm in FY’14/15 and FY’15/16 of N6.6 billion and N12.2 billion respectively.

The analysts also stated: ‘‘We project growth of 31.3% and 13.1% in EBIT (Earnings Before Interests and Tax) and EBITDA (Earnings Before Interest Tax Depreciation and Amortisation) numbers for FY’17/18 amounting to N54.4 billion and N66.5 billion respectively.

‘‘We highlight that despite the concluded rights issue of about N39.9 billion to deleverage the firm’s balance sheet, we do not expect significant effect on the finance cost for FY’17/18.

‘‘This is due to the timing of the cash proceeds, which coincided with the company’s financial year end. Rather, we believe that the impact on finance costs will begin to take effect as from Q1’18/19.

‘‘All in, we project a strong bottom line growth of 83.9% to N16.3 billion after taxes. Our EPS (Earnings Per Share) forecast comes in 49.7% higher than the prior period after adjusting for the weighted impact of the rights issue (FY’18E – N4.61; FY’17 –N3.08).

Sector fundamentals

Flour Mills’ performance would largely be determined by what happens in the macroeconomic environment, especially the manufacturing sector, in the near future. Manufacturing GDP, at 3.39% Year-on-Year (YoY) in the first quarter of 2018 (Q1’18), consolidated the positive growth it posted in Q4-17, supported largely by continued improvement in foreign exchange conditions, positively changing consumer and business confidence, relative step-up in power generation (thanks to the cessation of hostilities by militants in the Niger Delta),  and partly the modest base of 2017.

The two biggest components of the sector further impressed – Food, Beverage & Tobacco (5.46% YoY, compared to 2.18% YoY and 4.07% YoY in Q4’17 and Q1’17 respectively), reflecting higher output from product manufacturers as consumers purchasing power gradually picks up. That was also consistent with the Q1’18 earnings performance of listed food and drink manufacturers, most of which showed volume-driven increase in revenues during the period.

Market Impacts

But market makers and stock dealers, particularly those with a bias for risky assets, had largely factored in the reported output growth into their investment decisions as a lagging indicator; thus making the case for the impact of the data release on investor sentiment less appealing.

If anything, the GDP figures had reflected in Q1’18 corporate earnings, the impact of which investors are done with and seeking fresh catalysts to bolster appetite in an environment of persisting sideways trading.

The data is equally consistent with analysts’ expectation for lower yields in the fixed income market, as it further supports the FGN’s drive to increase the foreign component of its debt profile while reducing domestic supply of debt instruments.

Extensively, the recent macroeconomic numbers will likely further keep the Monetary Policy Committee (MPC) comfortable with “improving” on the achievements of its past decisions of maintaining status quo across its policy tools while administratively guiding yields to its desired direction in the fixed income space.

Stock rating

Nevertheless, Cardinal stone analysts said that based on their assumptions and positive outlook for the firm, they would rather adjust their fair value estimate upwards to N46.64 (previous: N44.90).