Equity Analysts Adjust Flour Mills of Nigeria Valuation

Ahead of the conclusion of its acquisition of rival foods producer, Honeywell Flour Mills , equity analysts at Pan African Capital Holdings have revalued Flour Mills of Nigeria Plc to N36.31 which is about 26% upside to the market price of N28.85.

Valued by the Nigerian Exchange at N120.756 billion on the company’s 4.1 billion outstanding shares, Flour Mills of Nigeria share price closed Friday trading session at N29.45. With the bullish mood on the foods company that recently made a strategic move to acquire Honeywell Flour Mills, analysts at PAC Capital advised investors to take positions with buy recommendations.

Though, the investment firm is not upbeat about dividend growth, anchored on the fact that the food producer recently announced acquisition deal would change its structure. In its latest unaudited financial statement, Flour Mills of Nigeria reported solid growth amidst weak consumption spending due to macroeconomic pressures on households finances.

The consumer goods giant saw its revenue expanding 48.55% to ₦824.98 billion from ₦555.34 billion in nine-month to December 2021, detail from its unaudited financial statement filled with regulator showed.  Analysts said in the equity note that FMN Plc stellar performance was driven mainly by the strong volume growth across the board.

It was noted food segment, Agro-allied segment and support segment recorded over 50% growth in revenue during the period, PAC Capital said in its equity report. “This showed that FMN remains a market leader in Flour and Pasta manufacturing in Nigeria”, analysts stated. On the downside, there was a surge in the company’s costs profile in the period. Read: Flour Mills of Nigeria CEO Seeks to Rally Shareholders Wealth

Analysts hint that improved production volumes and higher input costs resulted in higher cost of sales as it increased significantly by 54.23% to ₦744.76 billion in 9M’2022 from ₦482.90 billion in 9M’2022

In addition, the administrative, selling and distribution expenses rose by 24.13% to ₦31.16 billion in 9M’22 compare with ₦25.11 billion reported in 9M’22, driven by higher expenses on an advertisement, sales and increased salaries & related staff costs, among others.

Notwithstanding, the higher operating expenses, the earnings before interest tax depreciation and amortisation (EBITDA) of the company rose by 9.47% to ₦58.57 billion in 9M’2022 compared against ₦53.50 billion in 9M’22.

PAC analysts said as a result of higher borrowings and lower finance income during the period, the net finance cost of the company grew by 30.92% to ₦15.19 billion in 9M’22, from ₦9.13 billion in 9M’22.

Despite the setback recorded in non-operating activities, the profit before tax grew by 6.97% to ₦25.26 billion in 9M’2022, the company’s result shows. In the period, analysts noted that the company made a provision of ₦8.21 billion for tax, moderately higher than ₦8.03 billion in 9M’22.

Consequently, profit after tax grew by 9.40% to ₦17.05 billion compare to ₦15.58 billion in 9M’21 and this resulted in a 12-month trailing Earnings Per Share of ₦6.63 in 9M’22, the equity report stated.

Based on the recent figures released, PAC Capital analysts upgrade their target price slightly to ₦36.31 from ₦36.26 and maintain a BUY recommendation on Flour Mills of Nigeria.

Reviewing the figure, analysts at PAC Capital spotted that all the business segments of FMN witnessed various levels of growth in nine-month to December 2021/22 due to improved demand during the period.

The overall revenue of the company grew by 48.55% to ₦824.98 billion in 9M’22 from ₦555.34 billion reported in 9M’2021.

Precisely, revenue from the Food Segment, which contributed about 65% to the total revenue of the company, rose significantly by 55% to ₦534.5 billion in 9M’2022, compare with ₦343.9 billion in 9M’2021.

This was driven by 24%, 8%, 7% and 3% growth in Flour, Noodles, Ball Foods and Pasta respectively, according to analysts.  The Food segment also witnessed significant volume growth in Golden Vita, Amazing Day and Goat Meat Pepper Soup during the period.

In addition, analysts noted that revenue from the Agro-Allied business segment improved by 49% to ₦157.1 billion in 9M’22 from ₦105.6 billion in 9M’2021. This was driven by 48% revenue growth in the Oil and Fats value chain and 21% volume growth in fertilizers.

The higher local demand, improvement in export operations and market penetration in the northern part of the country contributed to growth in Agro-Allied Segment. Although the revenue from the support segment of the company is the least contributor to the overall revenue of the company, analysts hint that the segment grew faster than all the other segments during the period.

Revenue from the support segment grew by 62% to ₦25.4 billion in 9M’22 from ₦15.6 billion in 9M’21, driven mainly by increased demand in Bagco.

Mainly as a result of improved demand for Brown Sugar during the period, especially from industrial customers and the Northern part of the country, revenue from the Sugar business segment of FMN increased by 20% to ₦108.0 billion in 9M’2022 from ₦90.2 billion in 9M’21.

“We maintained that the acquisition of about 72% majority shareholding in Honeywell Flour Mills Plc, the installation of an additional noodles line, training of over 1,486 farmers, the commencement of cassava production, among others, are expected to improve the company’s revenue in the coming quarters”.

Nine-month to December 2021/22 witnessed a significant rise in demand and input costs, which raised the cost of sales of FMN during the period, analysts said.  PAC equity report noted that the cost of sales accelerated by 54.23% to ₦744.76 billion in 9M’2022, from ₦482.90 billion recorded in 9M’2021.

Specifically, the material costs, which constituted about 90% of the total cost of sales, increased by 58.11% to ₦673.26 billion in 9M’2022 from ₦425.82 billion a year ago; driven mainly by higher production volume and input costs.

Analysts stated that the higher cost of inputs reflected on the cost-to-sale margin which increased to 90.28% in 9M’2022 from 86.95% in 9M’2021, and this remains a major threat to the profitability of the company.

“We anticipate that the adoption of backward integration by FMN will address the high input costs in the coming quarters”. In line with analyst projection, the administrative, selling and distribution expenses of the company increased by 24.13% to ₦31.16 billion in 9M’2022 from ₦25.11 billion reported in 9M’2021.

This was driven by higher expenses on an advertisement, sales, salaries, wages and other staff costs, among others.

“With the expectation of improved production volumes and high inflation rate in the country, we may continue to see higher figure for selling, distribution, and administration expenses in the coming quarters”, PAC projected.

Although FMN reported improved operating performance during the period, there was a setback in the non-operating activities of the company, especially from both finance cost & investment income. The net finance costs of the company declined by 30.92% to ₦15.19 billion in 9M’2022 versus ₦11.60 billion in 9M’2021, mainly driven by higher loans and borrowings during the period.

Analysts at PAC Capital stated that notwithstanding the setback recorded in non-operating activities during the period, the profit before tax improved by 6.97% to ₦25.26 billion in 9M’22 from ₦23.61 billion.

The company made a provision of ₦8.21 billion for tax in the period.  Consequently, profit after tax improved by 9.40% to ₦17.05 billion in 9M’22 from ₦15.58 billion reported in 9M’21 and this translated to a 12-month trailing Earnings per Share of ₦6.63 in 9M’22

Robust balance sheet signals dividend payment

Flour Mills of Nigeria continued with a robust balance sheet in the third quarter of 2021/22 as the total assets of the company improved by 42.53% to ₦702.91 billion from ₦493.16 billion in the third quarter of 2020/21.

The growth was a result of improvement in both the current and non-current assets, according to analysts.  The current assets of the company improved by 75.84% to ₦449.69 billion in Q3’2021/22 from ₦255.73 billion in Q3’2020/21.

This was driven by a 128% increase in inventory and a 229% increase in prepayment & deposit for import during the period. In addition, the total noncurrent assets of the company improved by 6.65% to ₦253.22 billion in Q3’21/22 from ₦237.43 billion in Q3’2020/21.

“We may not see positive growth in dividend payment in FY’21/22 as we expect the acquisition of 71.69% majority shareholding in Honeywell Flour Mills Plc (HFMP) to have an impact on the balance sheet of the company”, PAC Capital said in its equity note.

The investment firm’s valuation puts the target price of the stock at ₦36.31, representing an increase of 25.86% from the current market price of ₦28.85. Consequently, analysts maintained a buy recommendation on the stock of the company.

“We like that Flour Mills of Nigeria maintained broad-based expansions across all business units, reflecting positive results from product innovations, investments in its route-to-market strategy and operational efficiencies”, Cordros Capital said in a note.

However, analysts at the firm think the company’s elevated costs, which translated to weak margins, remains a source of concern. Nonetheless, Cordros Capital believes that Flour Mills of Nigeria remains well-positioned to maintain decent topline growth given its well-diversified product portfolio and the inelastic demand facing its products. #Equity Analysts Adjust Flour Mills of Nigeria Valuation