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.
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.