Flour Mills of Nigeria Shows Resilience

Despite recording poor performance in the fourth quarter of its financial year ended March 31, 2018, Flour Mills of Nigeria Plc ended the full year with higher profitability, reports Goddy Egene

When Flour Mills of Nigeria (FMN) Plc posted earnings per share (EPS) of 456 kobo for the nine months ended December 31, 2017, shareholders had anticipated a high dividend payment for the full year ended March 31, 2018.

Their expectations were hinged on the fact that when the company posted EPS of 303 kobo the previous year, a dividend of 100 kobo per share was paid. Considering the fact that payout ratio was 33 per cent, they had expected that if the company maintained the rate of growth recorded in nine months in the last quarter and end the year with higher profitability, then the dividend would also be higher than the previous year’s.

However, last week when the company released its audited results for the year ended March 31, 2018, it announced a dividend of 100 kobo, same as what was paid the previous year. The reason for the same dividend payment may not be unconnected with the slower growth recorded in EPS in the fourth (Q4) quarter. While the company ended the nine months with a profit after tax (PAT) of N13.27 billion, the full year PAT was N13.6 billion, indicating that a mere N400 million was added in Q4.

Specifically, the company recorded a loss in Q4 and only got a boost from tax credit. Hence, it ended the full year with a PAT of N13.6 billion and an EPS of 483 kobo, up from 303 kobo in 2017. However, the board lowered the dividend payout ratio to 20 per cent instead of 33 per cent paid in 2017.
Full year results

The flour milling firm recorded a marginal growth in top-line with revenue rising 3.5 per cent to N542.670 billion, compared with N524.64 billion in 2017. It cost of sales rose from N457.775 billion to N473.895 billion. Selling and distribution cost rose from N5.341 billion to N6.180 billion, while administrative expenses jumped from N18.499 billion to N20.115 billion. It cost of finance recorded a marginal growth from N32.529 billion to N32.697 billion. The financing cost is expected to fall lower this year due to injection of equity capital from a rights issue.

Also, the company reduced its borrowings from N141.7 billion to N103.9 billion in 2018. Profit before tax improved from N10.473 billion to N16.546 billion, while profit after tax settled at N13.615 billion in 2018 compared with N8.836 billion in 2016.

Company explains performance
Commenting on the results, Group Managing Director, Paul Gbededo of FMN said: “Our 2017, year end result, shows a remarkable growth in the group’s revenue of N542 billion, which represents an impressive 3.5 per cent year on year growth.

“This was achieved through a combination of resilience in the face of a challenging environment, volume growth and product mix from our food and agro-allied businesses. The results are a clear indication that our efforts to continually push for improved efficiency and synergy in the Group, are yielding the expected results.”

According to him, in the agricultural space, the company has continued to consolidate its position, with a firm commitment to lead in this space while aligning with the agricultural promotion policies in the federal and state level where it operates.
“We are critically looking into our investments in our backward integration initiatives and have confirmed our commitments towards future profitable growth by recapitalising various subsidiaries.

“We are also impairing at company level, part of our investment in Kaboji Farm, our first agricultural investment which has now become our center of excellence for seed and best agricultural practices in maize and soybean,” he said.

Also commenting, the Chief Financial Officer of FMN, Mr. Jacques Vauthier, said that the group had also decided to accelerate the depreciation period of some support services assets, resulting in a onetime expense of N1.2 billion.

According to him, in spite of these one-time exceptional expenses, and initial losses in some of our early stage agro-allied businesses, the group still recorded a PBT of N16.4 billion, confirming its commitment towards cost controls and increasing our margins.
“In an effort to strengthen the company’s capital base, deleverage our balance sheet, and support our working capital needs, we embarked on, and have completed a rights issue program during the past months.

“With the successful completion of the rights issue programme, we have now positioned the company to exploit value-accretive opportunities, whilst giving greater operational and financial flexibility to ensure business growth and continuity,” he said.

“We have also taken various actions towards reducing our financial expenses, including a commercial paper program. Our focused, but limited investments in capital expenditure as well as tight control over our working capital has helped us to manage our financing costs with a view to a material reduction in the coming year,” he added.

Analysts’ assessment
Assessing the fourth quarter (Q4) performance, analysts Cordros Capital Limited (CCL) said it was below expectations.
According to them, although Q4 contributes the least to FMNL’s top-line, they were quite surprised by the much lower outcome this year – wherein sales came short of our estimate by seven per cent considering the strong trajectory over nine months and that prices were lowered in December 2017 to support sales in 2018.
“We note the surprise six per cent quarter/quarter decline in food revenue (vs. our 20 per cent 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 per cent, but better than we expected, considering the company had reported negative numbers on this line in the last two years,” they said.
CCL explained that in Q4-18, finance cost came in atN7.54 billion, two per cent ahead of their N7.4 billion estimate, and lower by 49 per cent year-on-year and 15 per cent quarter-on-quarter.

In their own assessment, analysts at FBN Quest said the Q4 results disappointed across all key headline items due to the weak performance of its foods and agro-allied businesses relative to the three preceding quarters.

According to them, sales for both businesses – foods and agro-allied – declined by -14 per cent and -41 per cent respectively compared with their average quarterly run-rates over the nine months period due to losses in its new sugar factory, Sunti Sugar Mills, and ROM Oil, its edible oil business.

“Although management did not provide specific guidance, it alluded to a stronger start to the year compared with the previous quarter. Despite management’s optimism, we would like to see evidence of this going forward.

“As such, we have cut our EPS forecasts significantly over the 2019E-2020E period and our price target by –18 per cent to N39.6. Although the shares have shed -15.8 per cent over the last three months, our new price target still implies a potential upside of 28 per cent.
“On a relative basis, the shares are trading on a 2019E (end-Mar) P/E multiple of 9.4x for 36 per cent EPS growth in 2020E,” they said.