Event: Flour Mills of Nigeria (FMN) reports Q2 2018 (end-Sep) results
Implications: Likely upward revisions to consensus 2018 PBT forecast
Positives: PBT and PAT grew by 149% y/y and 156% y/y respectively.
Negatives: Gross margin contracted by -331bp to 12.2%.
Late yesterday Flour Mill of Nigeria (FMN) published its Q2 2018 (end-Sep) results which showed marked y/y growth across key headline items. While PBT of N7.3bn grew by a stellar 149% y/y, PAT grew faster, by 156% y/y. The strong y/y growth in earnings was mainly driven by negative base effects, underscored by an fx loss of -N9.3bn. Further up the P&L the sales growth was more modest at around 10% y/y. Sequentially, sales were flat q/q. However, PBT grew by 17.6% q/q, primarily due to a -20% q/q decline in net interest expense and a 65bp q/q expansion in gross margin. In contrast, PAT growth decelerated to 5% q/q mainly because of a higher effective tax rate of 33.8% compared with 26.8% in Q1 2018. Relative to our forecasts, although sales were broadly in line (-1.9%), PBT and PAT beat by 47% and 31% respectively, primarily driven by a combination of positive surprises in gross margin, other operating income and interest expense.
In terms of the sales split, the foods and agro-allied segments were the biggest contributors to groups sales, accounting for 79% and 18% respectively. While sales for the foods business grew by 10% y/y to N117.3bn , agro-allied sales came in flat at N27.3bn. FMN’s packaging business which contributed around 3% of group sales also grew by 83% y/y. We believe that topline growth continues to benefit from price increases more than unit volume growth. Similar to Q1 2018 (end-Jun), FMN’s gross margin shrunk by 331bps y/y to 12.2% We believe this was driven by a 21% y/y spike in raw material costs in H1 2018. We note that wheat prices which form the bulk of FMN’s raw materials peaked (+34%) in July 2017 before trending downwards. Bloomberg consensus wheat forecasts indicate that prices are expected to rise marginally by around 7% through Q2 2019 (end-Sep). As such, the company still faces downside risks from an uptick in raw material costs.
FMN’s H1 PBT of N13.5bn tracks well ahead of consensus 2018 PBT forecast of N18.3bn. As such, we expect to see upward revisions to consensus 2018E PBT forecast and a positive reaction from the market.
Year to date, FMN shares have outperformed the market. The shares have gained 62% ytd compared with 35% delivered by the NSE ASI.
We rate FMN shares Outperform. Our estimates are under review.
Flour Mills of Nigeria Q2 2018 (end-Sep) results: actual vs. FBNQuest Research estimates (N millions)