Flour Mills of Nigeria’s (FMN) Q3 2018 (end-Dec) results showed that PBT grew by a stellar 303% y/y. The marked y/y growth in PBT was mainly driven by a gross margin expansion of 322bps y/y to 15.9%. To a lesser extent a positive result of N431m in other operating income compared with a loss of –N3.7bn in the corresponding period of 2017 also contributed. These positives completely offset a -4% y/y decline in sales, a 26% y/y spike in interest expense and a 17% y/y rise in opex. Further down the P&L, PAT accelerated by 418% y/y. Sequentially, sales, PBT and PAT fell by between 13% q/q and 17% q/q. Compared with our forecasts, although sales missed by 13%, PBT and PAT beat by 41% and 31% respectively, thanks to the positive surprises in gross margin
In terms of sales split, the foods business grew by 9% y/y and contributed around 79% of total group sales. However, the revenue contribution from the agro-allied division fell to 16% (from 18% in Q2) due to a -33% y/y reduction in sales. Sales for FMN’s packaging business which contributed around 4% of group sales also fell by -43% y/y. Similar to the prior quarter, we believe the improvement in fx liquidity brought about by NAFEX, and the lower costs of inputs and power were the key drivers of the marked improvement in gross margin y/y. We note that the USD:NGN rate has now stabilized to c. N360/US$ on the NAFEX compared with over N400/US$ prior to the platforms introduction. We also believe that the 9% reduction in wheat prices between July and December 2017 was a key driver in the gross margin expansion. Bloomberg consensus wheat forecasts indicate that prices are expected to rise marginally by around 10% through 2018 (end-Dec). As such, the company still faces downside risks from an uptick in raw material costs.
FMN’s 9m PBT of N19.5bn tracks well ahead of consensus 2018 PBT forecast of N20.4bn. 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 broadly tracked the index. The shares have gained 18% ytd compared with 16% ytd return delivered by the NSE ASI.
We rate FMN shares Outperform. Our estimates are under review.
Flour Mills of Nigeria Q3 2018 (end-Dec) results: actual vs. FBNQuest Capital Research estimates (N millions)