Nigeria’s biggest miller defies virus as revenues hit 9 yr-high
Flour Mills of Nigeria (FMN) Plc has defied tough economic conditions to grow revenue to the highest in nine years. Nigeria’s biggest flour miller saw revenues hit N728.35 billion in the half-year of 2020 despite expectations that the coronavirus pandemic could negatively affect its earnings as it has with several other companies in the consumer goods space.
Flour Mills’ revenue increased by 10 percent from N662.15 billion in H1 2019 despite the 7.5 percent rise in its cost of sales to N637 billion up from N592.3 billion within the same period.
What is driving revenues?
Flour Mills benefited from Nigeria’s land border closure and preference for value brands in growing its revenue.
Specifically, the trade restrictions stemming from the COVID lockdown also benefited its pasta and poultry segment with a 15 percent and 29 percent growth in volume for Q1 2020/21 YOY due to lower competition from imported alternatives.
The food segment accounts for over half of the company’s products with flour representing 65 percent of its food volume mix.
Also, introducing value products between 2019/20 and Q1 2020/21 to ensure affordability and higher value given lower consumer incomes as a result of the lockdown helped Flour Mills to boost revenues of the business to consumers (B2C) segment by 31 percent for Q1 2020/21 YOY.
These value brands include Golden Vita, Golden Penny Noodles, Auntie Pasta, Auntie B Spaghetti Slim, and Semovita.
PAT climbs by 98% to N16.35bn
In line with revenues rising faster than cost, profit after tax (PAT) grew by 98.4 percent to N16.35 billion in H1 2020 from N8.24 billion in H1 2019.
Similarly, profit before tax (PBT) hit its highest point at N23.95 billion in 2020, representing a 52.8 percent increase from N15.68 billion in 2019 on a half-year basis.
Share performance
Also, the share price of Flour Mills currently stands at N22, a 12 percent increase from N19.7 as at January 1st 2020 on a yearto-date basis despite fluctuations.
Other highlights
Administrative expenses grew to N28.26 billion in H1 2020, a 17.5 percent rise from N24 billion in H1 2019. Selling and distribution expenses increased by N11.28 billion, a 10.5 percent rise from N10.2 billion.
Advertisement also marginally increased to N2.27 billion in half-year 2020, a 4.7 percent rise from N2.17 billion in the same period of 2019.
Also, the company’s finance cost reduced by 9.5 percent to N24.8 billion in 2020 down from N27.45 billion in 2019 on a halfyear basis, showing that Flour Mills spent less money financing its expenditures.
Given the reduced costs relative to higher revenue, it is not far-fetched that the country’s biggest flour miller by market value saw its gross profit rise to N91.3 billion in H1 2020, a 30.8 percent increase from N69.8 billion in the same period of the previous year.
Interestingly, Flour Mill’s increase in gross profit, PBT and PAT was the second highest increase in these earnings in the 9-year period under review.
This brings to light the seeming trend that Flour Mills has an inclination to record its highest profit growths during economic downturns in the country.
This is evidenced in the reviewed period as the company hit its highest PBT and PAT growth of 94.8 percent and 99.4 percent respectively during the first six months of 2016 when Nigeria was experiencing economic recession.
Half-year 2016 also saw an 18.1 percent growth in revenue to N461.79 billion up from N391 billion in the same period of 2015.
This revenue increase of H1 2016 was despite the almost proportionate rise in cost of sales by 18.2 percent to N408.9 billion up from N345.79 billion in H1 2015.
The years that Flour Mills had reduced profits (either before or after tax) did not coincide with recessionary slumps of the country.
Outlook for full year
Taking an inference from this, it could be projected that Flour Mills might maintain its strong performance or record even higher growth if Nigeria fully dives into a recession as projected internationally and nationally by the World Bank, International Monetary Fund (IMF) and the Central Bank of Nigeria (CBN).
Already, Nigeria recorded a 6.1 percent contraction in real GDP growth rate in Q2 2020, thereby implying that Flour Mills might continue to blossom down the lane into Q3 while other companies struggle to stay afloat.
Cardinal Stone analysts in a research note identified 5 key pillars that will likely further boost profit after tax growth for (FY) 2020/21.
Trade restrictions
Lingering border closures and the recent exclusion of food and fertilizer importers from accessing official foreign exchange (FX) will likely spur regulatory bounce on these FMN segments.
Value-added innovations
Also, continuing in their innovative product launches and gravitations towards value brands to cater for price-sensitive customers will likely to remain supportive of Flour Mill’s growth for the rest of the year.
Decline in sugar duty
The reduction of sugar duty to 5 percent from 10 percent for FY 2020/21, greater investments in mechanized harvesting, planned 25 percent expansion of cultivation lands to 3,500 hectares from its current 2,800 hectares could lead to greater margin resurgence.
Lower lending interest rates by CBN and BOI
The reduced lending rate to FMN by the Bank of Industry (BOI) and Central Bank of Nigeria ( CBN) between March and April 2020 will likely flatten interest expense, thereby driving cost downwards.
The CBN and BOI slashed interest rate by 5 percent on FMN’S N42.4 billion facility and N10.8 billion outstanding loans respectively for one year such that these subsidized loans make up 40 percent of FMN group’s total borrowings as at June 2020.
FMN also disclosed its intention to leverage on the N70 billion bond program before year end to cushion pressure on repayments and related costs.
Possible drawbacks?
Despite the impressive performance of Flour Mills Nigeria, further currency depreciation, possible reopening of Nigeria’s borders and flood disruptions at Sunti could interfere with the company’s growth projections.
Already, FMN has seen N9.4 billion FX loss in Q1 2020/21 alone from naira depreciation in March and this could become worse especially since FMN imports take up cumulative 62.5 percent of raw materials for production.
Also, reopening of the borders will renew imported competition and dampen market share.
On 25 September 2020, FMN informed the stock exchange that excessive flooding disrupted operations and expansion project (to 4,000 hectares of cultivated land by mid-2021) timeline at its sugar estate in Sunti.
This puts caution on FMN’S margin projections since the full extent of damages is yet to be known until the flood subsides, according to Cardinal Stone analysts.
Nonetheless, analysts have a BUY recommendation on FMN’S stock, with an upside potential of 36.4 percent.
Given the reduced costs relative to higher revenue, it is not far-fetched that the country’s biggest flour miller by market value saw its gross profit rise to N91.3 billion in H1 2020, a 30.8 percent increase from n69.8 billion in the same period of the previous year