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.
| Q2 20 | Q2 19 | yoy | Q1 20 | qoq | |
|---|---|---|---|---|---|
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% |