Flour Mills of Nigeria Plc: Earnings outlook still strong, even as new shares shrink TP



Following the conclusion of the NGN38 billion Rights Issue (RI) and our recent discussions with management, we revise our TP and earnings estimates for FLOURMILL. Feedback is that the RI was successful (oversubscribed). On net, we (1) increase the post-rights shares outstanding by 56% to 4.1 billion and WACC by 158 bps to 15.2% and consequently, (2) lower our TP for the stock by 21% to NGN30.76.

Although we revised our net earnings estimates slightly higher, however, overlaid on the post-rights shares, we now look for 2019E and 2020E EPS of NGN4.8 (NGN7.5 ex new shares) and NGN6.4 (NGN10 ex new shares) respectively. FLOURMILL’s share price has accumulated 31% YtD and we maintain a HOLD rating on our new TP. On our estimates, FLOURMILL is trading on forward (FY18E) P/E and EV/EBITDA multiples of 6.1x and 3.7x respectively, at material discounts to the (1) peer average forward P/E of 11.5x and EV/EBITDA of 7.8x and (2) its five-year historical average of 14x and 8.1x respectively.

Notwithstanding the impact of the RI on valuation and EPS, we have a fairly strong view of FLOURMILL over the medium term. From 1% average between 2014-2016 (2017 was an outlier, in our view) and 5% in 2018E, we forecast sales revenue growth to increase to 9% average over 2019-2020E. Management has continued to reiterate that its emphasis going forward is on driving returns from the investments of the recent years. And it is our view that the group’s focus on food-based and agro-allied products, whilst favoured by Nigeria’s demographic potential and spending patterns, also provides a good hedge against cyclicality effects in the FMCG industry.

We also forecast EBITDA to grow steadily to NGN81 billion by 2020E, from NGN57 billion in 2017FY, and the margin to stabilize at 12% average, 300 bps above the rate achieved in the last five years. With a robust top-line, we view the sustenance of the opex margins of 4.5% achieved in 2017FY and 4% as at 9M-18, compared to 8% historical average, as positive for EBITDA formation going forward. Management said it does not expect opex-to-revenue ratio to change materially to the upside going forward, given its emphasis of growing revenue, while focusing strongly on containing costs.

On the highly leveraged balance sheet, we are not totally convinced that there will be a material reduction in the amount of FLOURMILL’s borrowings (NGN201 billion as at 9M-18) over the near term. That said, we also do not expect borrowings will be higher. On net, it is our view that savings from the refinancing of expensive borrowings will be positive – in the short term especially – for cash and earnings. Over the medium term, it is our view that faster growth in EBITDA over fixed financing costs will be positive for earnings.

Management discussion

We held discussions with management on the recently commissioned Sunti backward integration project in sugar, and also to understand the current market dynamics and outlook.


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