Flour Mills of Nigeria – Maintaining OP rating on strong Q1 results

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Material increases to our EPS f’csts and PT; maintaining OP rating
Flour Mills of Nigeria’s (FMN) Q1 2018 (end-Jun) and Q4 2017(end-Mar) results came in ahead of our forecasts. In Q1 2018, the key driver behind the positive earnings surprise was solid topline growth of 25% y/y which completely offset significant increases in opex and interest expense.

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In addition to the robust sales growth, fx related gains of N3.2bn on the other operating income line also contributed to the strong results. In contrast to Q4 2017 (end-Mar) when a pre-tax loss of –N6.6bn for the foods division constituted a drag on Group earnings, the division was the key earnings driver in Q1 2018, with PBT of N6.5bn or around 104% of Group PBT.

The gains by the foods business was partially offset by the pre-tax loss of – N1.7bn delivered by the agro-allied division – which was the major earnings driver in Q4 2017. Following the strong results in Q1 2018, we have increased our EPS forecasts by 13% on average over the 2017-19E period and our price target by 16% to N35.0.

On a relative basis, FMN shares are trading on a 2018E (end-Mar) P/E multiple of 8.3x for 51% EPS growth in 2018E. This is more compelling than the average P/E multiple of 36.4x for 21% EPS growth that our universe of consumer names is trading on. Our price target implies a potential upside of 21% from current levels. As such, we retain our Outperform rating on the shares.

Q1 PBT up by 6% y/y
FMN’s Q1 2017 (end-Jun) PBT grew by a modest 6% y/y to N6.2bn, much slower than the 25% y/y growth reported on the topline. A combination of factors including a 124bp y/y contraction in gross margin to 11.6%, a 23% y/y rise in opex and a 74% y/y spike in net interest charges were the primary factors underpinning the subdued PBT growth relative to sales.

Further down the P&L, PAT declined by 3% y/y to 4.1bn mainly because of a 2.1x increase in minority interest to N490m. In Q4 2017 (end-Mar) FMN’s PAT grew to N2.2bn from a post-tax loss of –N4.3bn in Q4 2016. Although Q4 sales grew by 71% y/y to N135bn, the firm reported a modest PBT of N179m.

The key factors underpinning the subdued PBT included a 153% y/y spike in interest expense, a 17% y/y rise in opex and a -279bp y/y contraction in gross margin to 9.8%. However, thanks to a tax credit of N1.3bn, and a positive result of N771m in other comprehensive income, PAT expanded to N2.2bn compared with a pretax loss of N4.3bn in Q4 2016.

Naija247news
Naija247newshttps://www.naija247news.com/
Naija247news is an investigative news platform that tracks news on Nigerian Economy, Business, Politics, Financial and Africa and Global Economy.

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