Last Friday, Flour Mills of Nigeria Plc (FMN) released its unaudited FQ1 2017 result wherein both PBT and PAT surged nearly five-fold YoY to
N5.9 billion and N4.4 billion respectively. The solid earnings largely reflect impact of stronger than projected revenue growth and cost control.
- Operational efficiency bolsters margins: Similar to trends across consumer names, FMN intensified its cost cutting measures over the period. In a bid to offset rising raw material costs (+49% YoY), FMN cutback on its direct labour costs (-3.7% YoY) with its cost optimization strategy also evident in the subdued movement in other input costs. In the absence of substantial weakness in FX rate (mean rates QoQ: interbank: -6.1%, parallel: -7.4%) FMN’s cost control initiatives resulted in a slower rise in COGS (+44% YoY) relative to revenue (+45% YoY). Consequently, gross margin expanded 80bps YoY to 12.8%. Further cost savings in OPEX and interest expense helped drive FMN’s normalized earnings to its highest level in 21 quarters.
- Currency weakness points to tempered earnings trajectory: Going forward, management guides to further price increases over the rest of FY 17 which portends upside to FY 17 sales and informs upward revision in our forecasts on the line item (+31% YoY to
N449billion). Over the rest of the financial year, we project a significant downturn in earnings as impact of naira weakness fully reflects in the company’s input cost. Overlaying current FX rate of N315/$ with FMN’s mean rate of N245/$ over FY 16 points to currency weakness of about 29%.
FMN trades at a current P/E of 3.0x (excluding the gains from UNICEM disposal, P/E would have been negative) vs. 15.3x for its Bloomberg Middle East & Africa peers. Last trading price of
N20.43 is at a 2.3% discount to our FVE ( N19.94), which leaves our SELL rating on the stock intact.