Earnings Report /
Nigeria

Flour Mills Nigeria: Q2 20 review: Lower finance costs bolster earnings; Hold

    Eronmosele Aziba
    Eronmosele Aziba

    Equity Research Analyst, Consumers

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    Tellimer Research
    31 October 2019
    Published byTellimer Research

    Flour mills’ saw a positive bottom-line trend in Q2 20, but weak operating performance. EBIT fell 14% yoy due to operating cost pressures and a slight dip in revenues. Net income rose 17% yoy following a moderation in finance costs (down 15% yoy) and a lower effective tax rate (down 7.2ppts yoy). The trend for margins was mixed: gross margins improved slightly by 0.4ppts yoy to 11.3%, while EBIT margins declined by 0.8% to 5.1%. We note that margins for Flour Mills remain weaker than that of the other staples stock in our coverage, Dangsugar (gross margin: 21.3%, EBIT margin: 15.2%). 

    Maintain Hold with TP of NGN15.40 (ETR 10%). We maintain our tepid view on Flourmills as we expect sustained pressure from a weak macro backdrop as well as rising operating costs to weigh on operating performance. However, we believe the sustained reduction in the interest burden – as finance costs trend lower – presents a tailwind for earnings. The stock trades at FY 20f PE and EV/EBITDA of 6.8x and 3.8x, respectively, versus frontier peer average of 15.3x and 7.9x.

    Financial summary

    Q2 20Q2 19yoy Q1 20qoq

    Revenue

    136,017

    136,708

    -0.5%

    134,745

    0.9%

    Cost of goods

     (120,712)

     (121,850)

    -0.9%

     (118,272)

    2.1%

    Gross profit

    15,304

    14,859

    3.0%

    16,473

    -7.1%

    Opex

     (8,297)

     (7,180)

    15.6%

     (6,704)

    23.8%

    EBITDA

     12,054 

     12,750 

    -5.5%

     14,703 

    -18.0%

    EBIT

     6,926 

     8,035 

    -13.8%

     9,895 

    -30.0%

    Net finance income/(cost)

     (3,794)

     (4,947)

    -23.3%

     (4,393)

    -13.6%

    Net income (loss)

     1,667 

     1,420 

    17.4%

     4,237 

    -60.7%

    EPS (loss)

     0.50 

     0.35 

    42.9%

     1.03 

    -51.5%

    Total assets

     388,543 

     408,714 

    -4.9%

     420,172 

    -7.5%

    Total liabilities

    236,594

    257,148

    -8.0%

    264,966

    -10.7%

    Total equity

    151,949

    151,566

    0.3%

    155,206

    -2.1%

    Gross profit margin

    11.3%

    10.9%

    0.4%

    12.2%

    -1.0%

    EBIT margin

    5.1%

    5.9%

    -0.8%

    7.3%

    -2.3%

    Interest Burden

    54.8%

    61.6%

    -6.8%

    44.4%

    10.4%

    Source: Tellimer Research