Equity Analysis /

Flour Mills Nigeria: Pressured consumer spending weighs on performance

    Eronmosele Aziba
    Eronmosele Aziba

    Equity Research Analyst, Consumers

    Tellimer Research
    21 July 2019
    Published by

    Flourmills reports weaker FY 18/19 and Q4 earnings. EPS contracted by 80% yoy to NGN1.00 (from NGN4.83 in FY 17/18), 2.6x lower than consensus expectations. While weaker bottom line (down 71% yoy) was caused by higher cost pressures as well as topline weakness, the significant dip was mainly due to the net impact of a tax charge from its subsidiary, Golden Sugar, which was hitherto tax exempt. However, PBT contracted 39% yoy to NGN10.2bn (below our projection of NGN14.2bn for the period). Similarly, top line declined 3% yoy to NGN533.9bn (1% lower than our projection for the period). On the flipside, management’s attempt to reduce finance cost pressures showed positive signs, with finance charges declining 30% yoy. The quarterly performance was equally weak, as a net loss of NGN3.9bn was recorded in Q4 18/19 after a profit of NGN2.8bn in Q3, while turnover declined by 3% qoq.

    We maintain our Hold rating and our TP of NGN16.08 (20% ETR). Despite the upside, we retain our Hold recommendation as the earnings outlook for the stock remains tepid. Our view is shaped by: 1) topline pressures due to weak consumer spending as well as sustained customer downtrading within Flourmill’s product portfolio, which has dragged margins; and 2) operational bottlenecks tied to the gridlock in the Apapa ports which continue to affect distribution. On the upside, we expect finance cost pressures to continue to moderate as the company reduces its debt exposure. Flourmills currently trades at FY20f P/E of 4.5x and EV/EBITDA of 3.0x, versus the peer average of 5.0x and 2.7x respectively.

    Consumer spending pressures weigh on performance. The group recorded a 33% yoy decline in operating profit which settled at NGN32bn. Despite a relatively flat price environment and higher volumes (+2% yoy largely driven by sugar and agro allied), margins contracted yoy. We believe this was due to downtrading within Flourmill’s product range by consumers given spending pressures, and management alluded to this during the earnings call. Accordingly, gross profit and EBIT margin contracted 3ppt apiece to 10% and 6% respectively. Other drivers of the weak operating performance were: 1) topline weakness (declined to 3% yoy to NGN527bn); and 2) increased operating expenses (up 5% yoy), mainly due to higher advertising expenses. The higher advertising cost may be linked to the launch of new products (such as Mai Kwabo) during the year, as well as the drive to improve brand awareness amid mounting competition. Hence, opex to sale ratio increased by 0.5ppt to 5.2% in FY 18/19.

    Reduced finance burden to support earnings. The company continued to trim its debt with total borrowing declining 17% yoy in FY 18/19. Accordingly, finance costs contracted 31% yoy as management strove to reduce pressures from short-term debt. The group’s short-term debt/total debt decreased to 64% in FY 18/19 from 81% in the prior year. However, interest coverage remained relatively flat at 1.5x (but higher than the Nigerian peer average of 0.6x) due to the weaker operating profit, while the debt to equity ratio moderated 0.8x in FY 18/19.