A combination of high costs at its Ikeja factory and competition may be weighing on Honeywell Flour Mills profits and dividend payout. Honeywell Flour Mills is our stock pick for the week.
About the company
Honeywell Flour Mills was registered as Gateway Honeywell Flour Mills Limited on 21st of June 1983. The company changed its name to Honeywell Flour Mills in 1995 and became a public limited liability company in 2008, and was listed on the Nigerian Stock Exchange in 2009.
The company is into the manufacture and marketing of wheat-based products including flour, semolina, whole wheat meal, noodles and pasta.
Siloam Global Resources holds 5.9 billion shares or 75% of the issued share capital, while First Bank of Nigeria Limited holds 400,000 million shares or 5%. Siloam Global is ultimately controlled by Oba Otudeko and his son Obafemi Otudeko (Jnr).
Full-year results for the 12 months ended March 2018. Revenue increased from N53.1 billion in 2017 to N71.4 billion in 2018. Profit before tax dipped slightly from N5.4 billion in 2017 to N4.8 billion in 2018. Profit after tax increased marginally from N4.3 billion in 2017 to N4.4 billion in 2018.
The company has proposed a dividend of N0.06 per share, unchanged from last year. In essence, it is paying out 10.7% of its profits.
Current share price –N1.94
Year High: N3.52
Year Low: N1.96
Year to Date: -7.62%
One year return: 1.95%
Chances of the Stocks going down or up
Investors are unimpressed with the company’s dividend, which was unchanged from the prior year. The stock would most likely witness a downward trend in the short term.
The stock’s poor performance year to date, is a signal investors are also unsatisfied with its low payout ratio.
Valuation using P/E: The stock is currently trading at a PE ratio of 3.57 times earnings, much lower than the average PE ratio on the NSE.
Honeywell is one of the smallest of the four listed flour milling companies on the Nigerian Stock Exchange, slightly bigger than Northern Nigeria Flour Mills (a subsidiary of Flour Mills of Nigeria Plc) which made just N2.8 billion in revenue for the 12 months ended March 2018.
Profit from the company’s Ikeja factory fell sharply to N89 million in 2018 as against N780 million in the prior year. This was largely due to the increased cost of sales and absence of foreign exchange gains.
The spike in the cost of sales was due to an increase in the cost of raw and packaging materials.
The firm may need to keep a tighter rein on costs as it had the highest increase in the cost of sales among the listed millers.
The Ikeja plant is largely concerned with the production of noodles and pasta, indicating competition in that space may be preventing the company from passing down increased costs to consumers.
Dangote Flour Mills in November last year, disposed of its noodle production lines located in Ikorodu and Calabar to Dufil Prima Ltd ( which makes Indomie noodles) in a deal valued at N3.7 billion
The company is currently constructing a plant at Shagamu, so cost pressures may still remain in a while.