Flour Mills Nig. Plc: Momentous gain on divestment of investment greatly helps profitability pointers, despite rise in expenses
Flour Mills Nigeria Plc (“Flour Mills” or “FMN”) is one of the largest and most successful industrial conglomerates in Nigeria. The Company focuses primarily on flour milling, pasta production, importation, blending, distribution and sale of fertiliser, manufacturing of flexible packaging materials and woven propylene sacks, and livestock feeds. The food segment remains the biggest part of the Company’s business; contributing between 60% and 70% to total sales. The Company recently released its third quarter results for the period ended December 31st, 2015 showing an increase of 7.94% in turnover while operating profit declined by a significant 32.22%, due to a 43.27% hike in operational expenses during the period. However, pre-tax and net income swelled by 435.16% and 476.90% respectively due to a first time gain on disposal of investment in associates. Sometime in 2004, the milling giant divested from UNICEM (United Cement Company of Nigeria), thereby selling down on its 30% equity investment in the company. The first tranche was payed during first quarter of 2015 and the second tranche is due not later than February 29, 2016.
FOOD DIVISION STILL A FORCE TO RECKON WITH
Revenue for the period ended December 2015 grew by 7.49% to N263.68 billion from N244.28 billion in the corresponding period of 2014. The rise in revenue was primarily driven by the Company’s food segment comprising of flour, pasta, noodles, semovita, goldenvita, sugar, rice edible oils and snacks which contributed 78.23% of total revenue. The Company’s agro allied segment with products like cassava, sugarcane, soybean, maize, rice, oil palm, considerably to the growth in revenue. Cost of sales for the year also increased by 7.59% to N235.99 billion from N219.35 billion in 2014 as a result of a spike in the cost of raw materials used in the production, packaging and manufacturing process, and increase in importation tariffs on wheat and pastry materials which form the bulk of the Company’s imports. However, despite the spike in cost of sales, gross profit increased by 11.05% to N27.68 billion from N24.93 billion over the period.
DECLINE IN OPERATING PROFIT AS EXPENSES INCREASE
For the period ended December 2015, Flour Mills Nigeria Plc posted a significant increase of 43.27% in marketing, distribution and administrative to N15.20 billion from N10.61 billion in the corresponding period of 2014. Over the years, the Company have invested generously on the expansion of its milling plants and distribution network as well as increasing its presence through advertisement and various sales promotion, as it looks to deepen market penetration and consolidate its market share. In addition, the Company’s personnel/staff strength increased as the only way to respond to its increasing clientele base. Expectedly, as a result of the aforementioned significant rise in operating expenses, operating profit declined by 32.22% to N12.48 billion in December 2015 from N14.23 billion achieved in the same period last year.
PROFITABILITY MARKERS SWELL DESPITE SIGNIFICANT RISE
Finance cost increased by 13.40% to N17.40 billion in December 2015 from N15.34 billion in the corresponding period of 2014. Over the years, the company had upgraded its milling plants by distribution network all of which was financed by debt. This was further highlighted by the company’s financial position which revealed that short term borrowings grew by 45.91% from N54.24 billion in 2014 to N79.14 billion in 2015 and long term loans which increased by 12.14% to N61.99 billion from N55.26 billion over the period. Furthermore, the company recorded a decline of 28.73% in investment income from N965.53m in 2015 to N5.03 billion in 2014. However, despite the decline in investment income and surge in finance cost, pre-tax profit declined by 435.16% to N19.79 billion in December 2015 from N3.70 billion in December 2014. Net income for the period also fell to N19.00 billion in December 2015 compared to N3.9 billion recorded in the corresponding period of 2014. The reason for the surge in net income was due to a first time gain on disposal of investment in associates of N23.73 billion. Sometime in 2004, the milling giant divested from UNICEM (United Cement Company of Nigeria), thereby selling down on its 30% equity investment in the company. The first tranche was payed during first quarter of 2015 and the second tranche is due not later than February 29, 2016.
WE PLACE A BUY ON FLOUR MILLS PLC SHARES
Positive growth factors for Flour Mills Plc during the financial year were Nigeria’s population size, together with a 3.5% year-on-year population growth rate that sustains the demand base and a shift in consumer demand towards valueadded flour products like pasta, snacks, and cereals, driven by rising disposable incomes. These developments have resulted in strong revenue growth, however, earnings have consistently fallen below targets as input cost pressures have eroded potential increased profitability. In addition, the Company’s increasing use of debt appears to be hurting its financial performance. While the conglomerate is well positioned to deliver long term growth, current challenges may prolong the expected growth; hence the need to be conservative. To this end, we are projecting a turnover of N328.16 billion for the full year ended March 2016 and net income of N25.34 billion; leading to a forward EPS of N9.66. Using a Price to Earnings (PE) valuation method, we arrive at an intrinsic value of N26.22 for Flour Mills Plc over the next three months. Since this represents an upside potential of 33.78% we therefore place a BUY recommendation on Flour Mills Plc.
OPERATING PROFIT DECLINED BY A SIGNIFICANT 32.22%, DUE TO A 43.27% HIKE IN OPERATIONAL EXPENSES DURING THE PERIOD. HOWEVER, PRE-TAX AND NET INCOME SWELLED BY 435.16% AND 476.90% RESPECTIVELY DUE TO A FIRST TIME GAIN ON DISPOSAL OF INVESTMENT IN ASSOCIATES