Flour Mills of Nigeria Plc H1'18/19 results - Revenues drag amidst stiffening competition

Flour Mills of Nigeria Plc H1'18/19 results - Revenues drag amidst stiffening competition
(Source: Cardinal Stone, Date: 01-Nov-2018)

01 November 2018

Flour Mills of Nigeria Plc (FLOURMILL) H1'18/19 results "" revenue declined by 9.6% YoY to N269.7 billion during the period, slightly lower than our estimate of N277.4 billion (-2.8% deviation). Similarly, after tax earnings tanked by 45.8% YoY to N5.1 billion, underperforming our estimate of N6.9 billion due to higher than expected operating expenses.

Other highlights:

Â· In Q2 standalone, revenue declined by 8.5% YoY to N136.7 billion. This was occasioned by the contraction in the food (-7.2% YoY) and agro-allied (-18.5% YoY) segments respectively"”which contribute 79.7% and 16.2% to overall revenues apiece. Meanwhile, the support services segment posted a positive growth of 15.3% YoY to N5.6 billion in the period.

Â· During the period, gross margin contracted by 1.4ppts YoY and 2.1 ppts QoQ to 10.9% (the lowest in 5 quarters), as cost of sales declined at a slower pace (-7.1% YoY) than revenue (-8.5% YoY). We suspect that management took price cuts during the period in a bid to maintain its market share"”specifically in the food and agro-allied segments.

Â· Elsewhere, we highlight that EBIT margin was depressed, as it contracted by 3.7 ppts YoY and 2.5ppts QoQ to 5.9% in the period (Q2'17/18: 9.6%, Q1'18/19: 8.4%). This was impacted majorly by much higher selling and distribution expenses (+39.3% YoY).

Â· Due to the restructuring of its debt profile, finance costs have continuously been on the decline. In the period under review, net finance charges declined by 30.4% YoY to N4.9 billion (Q2'17/18 "" N7.1 billion).

Â· In sum, earnings before tax declined by 57.6% YoY to N3.1 billion, weighed by lower sales and higher SGA expenses. However, after-tax earnings tanked more than three-fold (-70.6% YoY) to N1.4 billion, as a consequence of a much higher effective tax rate of 54.0% (vs. 33.8% in Q2'17/18) in the period.

Analyst take: While we like that FLOURMILL was able to bring down finance costs during the quarter, we are worried about the decline in bottom line"”largely impacted by lower sales and higher marketing expenses. In the past 4 quarters, the company has struggled to grow its top line due to intensified competition across key segments. For context, all segments contracted over the 6-month period (Food: -7.1% YoY, agro-allied: -14.1% YoY, Sugar value chain: -16.0% YoY and support services: -3.2% YoY). For us, we expect the narrative to remain unchanged through the rest of the year, as prices are expected to remain soft in the face of intense rivalry, particularly in the food and agro-allied businesses, while the influx of smuggled sugar should continue to weigh on the sugar business. Also, we envisage a marked increase in marketing expenses, specifically on pasta, noodles, edible oil and sugar through the year, as the company strives to retain its market share. Our target price for the counter is under review.

Kindly click here for a copy of FLOURMILL's H1'18/19 result.

Regards,

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