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Flour Mills of Nigeria Plc: Q4-18 Revenue, Margins Lower-Than-Expected; Earnings Disappoint

 

July 2, 2018/Cordros Report

Update: FLOURMILL released Q4-18 and 2018FY results earlier today. The 2018FY result shows revenue grew by a marginal 3.5% while net profit increased by 54.1% over 2017FY numbers. Both were behind consensus estimates by 7% and 12% respectively. For Q4-18, revenue was down 14.4% y/y and 10.8% q/q while net profit was lower by 76% y/y and 91% q/q.
Lower-than-expected Q4-18 revenue: Although Q4 contributes the least to FLOURMILL’s top-line, we were quite surprised by the much lower outcome this year – wherein sales came short of our estimate by 7% – considering (1) the strong trajectory over 9M-18 and (2) that prices were lowered in December 2017 to support sales in 2018. We note the surprise 6% q/q decline in Food revenue (vs. our 20% growth estimate), which bucked the quarterly growth trend of the last two years. Compared to Q3-18 also, Agro-allied revenue was lower by 32%, but better than we expected, considering the company had reported negative numbers on this line in the last two years.
Margin slides in Q4-18, after three quarters of expansion: Q4-18 gross profit margin came in at 11.1%, about 484 bps lower q/q. The margin is the lowest in 2018FY. Management had informed us in March that it was well on course to achieve minimum 13% gross margin in 2018FY, despite the price cuts implemented late last year. The 12.67% margin achieved in 2018FY is below the 13.7% we estimated. On the COGS line, we observe a significant increase in rent/rates in Q4 compared to previous quarters.
EBIT margin in Q4-18 stood at 3.7%, significantly lower than the 10.3% average achieved as at 9M-18. Gross opex margin rose to 7.8%, from 9M-18 average of 4.1% while other gains stood at NGN436 million, 96% lower y/y and below the NGN1.8 billion average achieved over 9M-18.
In-line finance cost: In Q4-18, finance cost came in at NGN7.54 billion, 2% ahead of our NGN7.4 billion estimate, and lower by 49% y/y and 15% q/q. Gross outstanding loan stood at NGN153.2 billion, from NGN200.8 billion as at 9M-18. Long-term borrowing and bank overdraft facilities reduced by 53% and 42% respectively compared to previous balances. Management said during our last meeting that the proceeds of the recent rights issue would be deployed fully to debt repayment.
Comment: We expect negative reaction to the result on likely downward earnings revision. Apart from 2018FY net profit coming behind consensus forecast by c.12% (as stated earlier), the reported Q4-18 EPS of NGN0.27 (would have been a loss, excluding NGN3.3 billion tax credit) was also way-below the NGN1.30 expected by consensus. Our estimates are under review.

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