NIGERIA | CONSUMER GOODS | FLOUR MILLS NIGERIA PLC
Backward Integration to boost earnings
Flour mills of Nigeria Plc's (Flourmills) earnings have been growing steadily in recent years. In its H1 2024 (ended September 2023), the company reported a 33.87% y/y growth in Revenue to N964.65bn. This growth was driven by a combination of factors, including increased sales volumes, higher product prices, and improved operational efficiency.
However, the company's Net Finance Cost of N32.84bn in H1 2024 completely eroded the earnings. Consequently, Flourmill reported a Loss Before Tax of N8.52bn in H1 2024. In view of this, we have revised our FY 2024 forecast as we expect FX losses to result in a Loss After Tax of N57.98bn compared with our Post tax profit forecast of N53.69bn previously.
We forecast Flourmills will grow its Revenue by 24.72% y/y to N1.92bn in 2024e supported by the launch and reintroduction of products such as golden penny choco spread, golden bites chin chin and bagco zerofly sacks. We also expect the company to return to profit in 2025e as we do not expect any further significant FX losses. We retain our BUY recommendation on Flour Mills of Nigeria Plc. With a target price of N36.36/s. We arrived at our target price using have the discounted cash flow method.
H1 2024 Review
Flourmills' Sales reflects resilience in consumer demand
Flourmill's Revenue grew 33.87% y/y to N964.65bn in H1 2024 (6M ended September 2023) from N720.58bn in H1 2023 (6M ended September 2022) as demand for the company's products remains heightened. The company's consumer staples such as Golden penny sugar, Golden penny spaghetti and macaroni, Golden penny spread, Golden Penny vegetable oil and others are readily available in the market. Its Food, Sugar and support services Revenue segments all grew by 46.6%, 42.6% and 14.5% y/y to N653.48bn, N143.24bn and N18.72bn in H1 2024 respectively whilst its Agro Allied segment which involves production of livestock feeds, sale of fertilizer, livestock husbandry and others pared by 6.9% y/y to N143.24bn in H1 2024.
Flourmill H1 2024 Revenue by product segments
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Source: NGX, CSL Research |
Cost of Sales impacted by inflationary pressures
The Cost of Sales (adjusted for depreciation) grew by 32.19% y/y to N845.20bn in H1 2024 which was largely exacerbated by the rising cost of raw materials, direct staff costs and Insurance to the sum of N786.58bn (+34.84% y/y), N16.75bn (+18.40% y/y) and N1.08bn (+25.63% y/y) in the period whilst its power cost dropped to N21.96bn (-12.30% y/y) as its received subsidized power from its subsidiary Golden Penny Power Plant (GPPL). Consequently, Flourmill's Gross profit was up by 47.12% y/y to N119.45bn in H1 2024 resulting in an increase in its Gross Profit margin by 1.1ppts to 12.4% in the period. Due to the growth momentum of 29.1% in its Cost of Sales to N1.36bn in FY 2023, we have revised our forecast to N1.71bn from N1.76bn previously.
Operating Profit pressured by Net Operating Loss
The company's Operating expenses (adjusted for depreciation) rose by 46.04% y/y to N33.48bn in H1 2024 driven by increases of 52.5% and 43.22% y/y in its Selling and Distribution expenses and Administrative Expenses adjusted for depreciation respectively. All opex lines increased and one of the most notable increases was the Advertisement line which grew to N2.96bn (+76.46% y/y) as a result of the company's investments in distribution networks via B2C segments. In the same vein, the selling expenses, a line item under selling and distribution expenses which covers transportation and other logistic cost in the distribution of their goods also grew significantly to the sum of N5.27bn (+54.93% y/y). This could largely be linked to the high cost of fuel and its lubricants used in the distribution of the products to its consumers.
Flourmill's Net Operating Loss grew significantly by 262.88% to N43.46bn in H1 2024 which was largely due to the company's foreign exchange loss of N51.22bn in the period. Therefore, its EBITDA waned by 8.10% y/y to N42.12bn. The company's EBIT also declined by 18.56% with the rise of its Depreciation and Amortization to N17.42bn (+12.34% y/y).
FX losses undermines bottom-line performance
Flourmill's Finance Income rose significantly to N1.77bn (+368.1% y/y) but this was eroded by a jump in its Finance Cost to N34.61bn bringing its Net finance cost to settle at N32.84bn (+49.6% y/y). Thus, the company reported a Loss Before Tax of N8.14bn in H1 2024 from a Profit Before Tax of N8.38bn in H1 2023 while its Loss After Tax came to N8.52bn in H1 2024 compared with a Profit After Tax of N5.70bn in H1 2023.
Outlook and forecasts
Revenue to reach N1.92bn in FY 2024
We forecast Flourmills will grow its Revenue by 24.72% y/y to N1.92bn for FY 2024. The launch of the company's golden penny choco spread which comes in three sizes is good addition to the company's food segment. It is relatively cheaper in comparison to the other chocolate spreads currently in the market. This, in addition to the company's reintroduction of its golden bites ChinChin will support its Food segment and we expect Revenue from the food segment to rise to N1.31tn in FY 2024. Also, Revenue from its support services is estimated to grow to N104.12bn (+51.0% y/y) supported by the company's reintroduction of its Bagco Zerofly sacks as an additional stream of income. We forecast Revenue from the Sugar and Agro-Allied segments to maintain its growth momentum to N238.50bn (+23.6% y/y) and 388.77bn (+35.0% y/y) in 2024e respectively.
Backward integration to reduce dependency of foreign exchange
Since the unification of all the foreign exchange windows, the Naira has been depreciating at an exponential rate reaching as low as N900/US$ in the Nigerian Foreign Exchange Market (NFEM). We forecast the company's FX losses in its Net Operating Loss bringing it to N86.93bn in FY 2024. This would lead to a total Opex of N136.30bn (+71.8% y/y) in FY 2024 inclusive of a 21% and 30% jump in the expenses of Selling and Distribution and Administration.
Elevated Interest Expense to clamp down on bottom-line performance
We expect the company's Finance Cost to remain elevated and we forecast it to reach N120.53bn in FY 2024 given the company's high short-term obligations. We forecast Finance Income of N2.09bn in FY 2024. Consequently, the expected Net Finance Cost of N118.45bn in the period would bring the company to a Loss Before Tax of N70.88bn in FY 2024.
Valuation: Buy recommendation maintained
We retain a Buy recommendation on Flourmill with a price target of N36.36/s. We use the 5-Years Discounted Cashflow methodology. Parameters used include cost of equity of 30.4%, cost of debt of 13.1% and we assumed a 1.03% terminal growth rate.
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