Flourmills Nigeria Plc released its 9M 2020 financial results and recorded an improved Q3 2020 performance. In Q3, revenue was up 12.3% q/q to N152.7 billion from N136.0 billion in Q2 2020.
The much-improved Q3 2020 revenue growth pulled 9M 2020 Revenue performance higher with Revenue growing 5.7% y/y (H1 2020 – 0.4% y/y) to N423.5 billion ahead of our 9M estimate of N404.7 billion.
The growth in revenue was driven by growth across major Revenue lines with Agro-Allied (+19.6% y/y to N81.3 billion) leading while Sugar (+13.5% y/y to N67.6 billion) trailed. Food segment turned positive in Q3, up 3.0% y/y to N262.1 billion as at 9M 2020. On the negative, Support Services remained dour with revenue down 32.8% y/y to N12.5 billion as at 9M 2020. We note that volumes grew 8% in Q3, higher than the 6% volume growth recorded in H1.
Management highlighted the positive impact of the border closure on Revenue from Pasta and Bread Flour while Fertilizers and Animal Feeds sales continue to strengthen the Agro-Allied business.
Cost of Sales (adjusted for depreciation) grew 6.1% y/y to N361.6bn in 9M 2020 from N340.9bn in 9M 2019. We note the growth in Cost of Sales was largely in line with the growth in Revenue and volumes which in our opinion reflects a fairly efficient performance in the face of pressured grains prices.
The growth in Cost of Sales was reflected in higher Material costs (+5.6% y/y to N323.4 billion) and Factory Staff payments (+12.5% y/y to N13.0 billion). Consequently, Gross Profits was up 3.6% y/y to N61.9 billion for 9M 2020 from N59.8 billion in 9M 2019. However, we note a marginal 0.3ppts decline in Gross Margin to 14.6% in 9M 2020 as Cost of Sales growth was still higher than revenue growth by 0.4ppts. The mild uptick in Cost of Sales was driven by increases in direct staff costs (up 13.4% y/y) and factory rent payments (up 268.0% y/y).
The company recorded a 10.5% y/y increase in Operating Expenses (adjusted for depreciation) driven by increases in Selling & Distribution Expenses (up 8.0% y/y) and Administrative Expenses adjusted for depreciation (up 11.6% y/y). We believe the rise in Opex must have been driven by increased spending on Advertisement as the company tries to expand its B2C channels.
While EBIDTA remained flat y/y, Q3 EBITDA grew double digits (up 10.2% q/q due to decline in Opex and faster Gross Profit growth within the quarter). Depreciation and Amortisation was up 11.3% y/y to N15.9 billion in 9M 2020. Consequently, EBIT slipped lower by 6.1% y/y to N24.2 billion in 9M 2020 from N25.7 billion in 9M 2019.
The company’s sustained efforts at deleveraging its balance sheet continued to bear fruit as finance cost dipped lower by 20.7% y/y to N13.1 billion in 9M 2020 from N16.6 billion in 9M 2019. Finance Income increased by 35.8% y/y to N728.3 million in 9M 2020. Consequently, Net Finance Costs slid lower by 22.6% to N12.4 billion in 9M 2020 from N16.0 billion in 9M 2019. Against this backdrop, Profit before Tax grew 9.0% y/y to N12.3 billion for 9M 2020 from N11.3 billion for 9M 2019.
Tax Expense grew 22.1% y/y to N4.1 billion with management declaring it took a prudent approach in estimating the impact of the finance bill on its tax bill. Nevertheless, Net Income was up 3.4% y/y to N8.2 billion in 9M 2020. However, Earnings per share for 9M 2020 declined to N1.84/s from N1.89/s in 9M 2019 on the back lower Net Income attributable to shareholders with Profit growth driven by subsidiaries.
We have a BUY recommendation on the stock with a target price of N29.00. Current price N22.35/s.
CSL STOCKBROKERS LIMITED CSL Stockbrokers,
Member of the Nigerian Stock Exchange,
First City Plaza, 44 Marina,
PO Box 9117,
Traders’ Voice: Trading during a curfew
The NSEASI finally crossed into positive territory YTD this month after suffering a major blow from the Covid-19 induced sell-off.
Excerpt from my dairy (21/10/2020)
“Hmm! How did we get here? What did I miss? How did we go from a historical peaceful protest to reports of
violence and looting? 2020, haven’t you done enough already? Oh lord, I know I don’t normally pray for
Nigeria, but please protect everyone stranded in Lekki. The night started on Twitter. Pictures of the cameras
being taken down was shared. Theories of conspiracy, the unsafe location and ‘get out of there’ tweets were being tweeted all at once, but no one saw this coming. I couldn’t believe it was daybreak when I looked outside the window as my eyes were still wide open and my heart still kept beating fast as if I had just come back from a morning jog. I took some time out, talked to some of my loved ones I couldn’t reach before and it gave me some level of comfort and ease. I decided I had to keep it cool and focus on work. Then it hit me like a ton of bricks. The first gunshot I heard this year. I heard it once, twice, thrice, and then I couldn’t keep count anymore.
Survival instincts set in; I shut all windows and doors and then the typical Nigerian in me came alive and I
started praying. I have never prayed so hard in years, even whilst executing clients’ trade orders. This will surely
be a day to remember.”
In spite of all the unrest and violence we all witnessed in most part of the country especially Lagos, the commercial hub of Nigeria, markets still witnessed a positive showing in the Bonds and Equities space WoW. This begets the question, “Is Nigeria’s financial market defying all rules of logic?”
Before I delve into this, we should let you all know that our heart is heavy and goes out to everyone who lost a
loved one or got injured during this traumatic period of unrest and also to all SMEs, corporate and government,
whose properties were vandalized and looted. I must say, it was extremely exhausting and heart-breaking to
watch people’s sweat go down the drain especially with how challenging this year has been already. Amidst the current unrest happening in our dear country, we would like to encourage everyone to keep staying safe and pray for our dear country.
Market defying logic…
The equities market managed to close in positive territory last week despite the insecurity and unrest seen in
the country. The Nigerian Stock Exchange All Share Index (NSEASI) advanced by 0.13% WoW to close at
28,697.06 points as it witnessed gains on three (3) out of five (5) trading days of the week. The NSEASI YtD
improved further, climbing up to 6.91% YTD from 6.77% YTD in the prior week. However, we saw weakness
in investors sentiment, as market breadth closed at 0.80x (vs. 1.52x recorded last week) as the market recorded
twenty-eight (28) advancers against thirty-five (35) decliners in the week. The hunt for yield (Particularly from
a dividend perspective) coupled with the unattractive fixed-income yields and fairly robust system liquidity
continues to provide support in the equities market as the dip witnessed in the middle of the trading week was
met with sizeable bargain hunting activities across most sectors of the market.
The Bond market also sustained its bullish momentum last week on the back of the liquidity improvement
coupled with the unmet bid at the monthly FGN bond auction. The Bond auction which held on October 21,
2020 (I know, right? I didn’t think it was going to hold too but I guess we still have a budget deficit to fund)
was relatively strong with a bid to cover of 5.24x as DMO sold NGN45 billion(as against NGN30 billion
offered) across the 15-Year and 25-Year papers, at stop rates of 4.97% and 6.00% respectively. Consequently,
yields declined by 69 basis points on average across the curve. By the way, speaking of defying the odds, did
you notice that even with everything happening the local sovereign bond yields remained lower than the
Nigerian Sovereign Eurobonds? (Not sure they teach this in school).
Three major hypothesis that have been confirmed this week are:
H1: Market liquidity has a significant impact on financial market performance in Nigeria
H2: Fundamentals may not necessarily impact financial markets as anticipated in Nigeria
H3: The market can stay irrational longer than you can stay liquid.
Nevertheless, we expect the impact of largely felt disruption and looting seen in the past week to put downward
pressure on the already depressed economy, with Lagos State alone estimating the cost of its damage to be
about a N1 trillion, although figures are yet to be confirmed (That is slightly above the entire state’s revised
budget at N920.469bn). As we continue to face economic challenges, with inflation on the rise, mounting
pressure on our reserves, weaker crude prices and declining FDIs and FPIs, the road to recovery seems more
distance than ever.
Where is the money?
The recent volatility seen across all dollar underlying assets coupled with the security crises-driven sell-off has
created entry point in the Nigeria Eurobond market which currently yield higher than the local FGN bonds.
The equities market has been on a rally this October 2020 as local investors resumed bargain-hunting as yields
remain depressed in the fixed income market. The NSEASI finally crossed into positive territory YTD this month
after suffering a major blow from the Covid-19 induced sell-off. NSEASI is currently up 6.91% YTD. We expect
the bullish trend to persist in coming weeks as investors will be looking to position themselves ahead of Q3
earnings as yields remain depressed in the fixed income market. Dividend yield remains the major play.
#EndSARS events and the impact on the Insurance industry
The massive destruction of both public and private property has sparked worries on the ability of the insurance sector to cope with the expected number of claims.
The peaceful protests staged by youths across the country, mobilized through various social media platforms to protest against the activities of the Special Anti-Robbery Squad (SARS), took a sad turn last week following alleged shooting of unarmed protesters at the Lekki toll gate. In what could be referred to as a reaction to the shootings, hoodlums hijacked the protests and began the destruction of both private and public properties. For example, In
locations like Surulere, almost every shop, bank, shopping mall and ATM gallery along Bode Thomas and Adeniran Ogunsanya streets were damaged and goods carted away freely and there were reports of similar incidences in other parts of Lagos and in other states. There were also reports of BRT buses burnt at terminals and buildings razed down by fire. The Lagos State governor Babajide Sanwo-Olu was reported to have said the state alone would need c.N1 trillion for reconstruction after the destruction caused by the hoodlums.
The massive destruction of both public and private property has sparked worries on the ability of the insurance sector to cope with the expected number of claims. According to news reports, many operators expect claims to run into billions of naira which may be overwhelming for the insurance players if the government fails to offer some sort of aid especially as the sector is right in the middle of a recapitalisation exercise. In what may be a
reaction to these fears, the Nigerian Stock Exchange (NSE) Insurance Index, a benchmark to measure the performance of the insurance sector closed lower by 0.59% for the week (ended 23-Oct-2020). It is however not too clear how much of the #EndSARS loss incident is covered under the different types of available policies.
The Nigerian Insurance sector remains largely underdeveloped with Insurance penetration still at c.2% and with the sector contributing less than 0.5% to GDP. The sector which contracted by 29.5% in the Q2 GDP report released by the Nigerian Bureau of Statistics is set for a deep recession this year. Yet to recover from the effect of the Covid-19 pandemic which has resulted in an increase in health, travel and business disruption claims, players will now have to face the impact of the recent destruction of properties across the country on claims amidst trying to meet the new capital requirements set by regulators.
CSL Stockbrokers Limited, Lagos (CSLS) is a wholly owned subsidiary of FCMB Group Plc and is regulated by the Securities and Exchange Commission, Nigeria. CSLS is a member of the Nigerian Stock Exchange.
Theory of Motivation: Solving immunization and child education challenges
Nigeria should experiment with opening up the RSA and Health Savings to all Nigerians irrespective of age or occupation as a policy to reduce infant mortality.
Every CEO knows that when you want to improve performance, you track and reward. Every mother knows this as well, you have kids and you want them to wash their dishes, you could threaten them with “no TV until plates are washed”, and they will reluctantly do it. However, if you offer them N10 for every plate they wash – that can be used to buy sweets, they will be motivated to go beyond washing only their own plates, but yours as well.
This simple concept that humans are driven by rewards is the basis for incentive programs in the workplace and marketplace. Airlines offer miles program, where you earn a reward for spending your money to fly with them. Some employers will offer you club membership if you stay with the company for a length of time; thus, rewarding your length of service and taking advantage of your experience. Businesses are happy to invest in these “reward” programs because they create brand loyalty, retain customers, and even create referrals.
The incentive theory is a major theory of motivation. The theory of motivation essentially states that “human behavior is motivated by a desire for reinforcements or incentives.” The incentive theory states that “The greater the perceived rewards, the more strongly people are motivated to pursue those reinforcements.”
Governments have recognized the positive benefits of reward programs, and have sought to reward their citizens for performing certain actions. For example, in Brazil, there is a social welfare program called the Bolsa Familia, which provides aid to poor Brazilian families, but what is unique is that the scheme only pays benefits if the children attend school and are vaccinated.
In this case, the Brazilian Government is seeking to track educational attainment and reward it. If kids from poor families do not attend school, the direct cash payments stop, if they attend and get vaccinated, then each family gets $34 per month. The Government is offering a reward of 17% of the minimum wage as an incentive to motivate and reward poor Brazilians to get children vaccinated and educated.
In Nigeria’s Kebbi State, The World Bank’s Africa Gender Innovation Lab, in collaboration with Catholic Relief Services (CRS) conducted a study on cash transfers. It found that “cash transfers offered to women from ultra-poor households in Northwest Nigeria have an immediate positive impact on household consumption, as well as female employment and well-being”
Nigeria should experiment with opening up the RSA and Health Savings to all Nigerians irrespective of age or occupation as a policy to reduce infant mortality, promote a saving culture, and create a pool of long term savings in Nigeria.
Imagine if every child born in Nigeria received a one-time deposit of N100,000 into his Retirement Savings Account from the Federation, provided that by the 5th year, the child has been enrolled into a primary school and has taken all immunizations; and the one time Federation contribution cannot be accessed until the child retires or reached the age of 65 -whichever is later.
This account balance can be transferred to a Nigerian Housing Fund where it can also be accessed if the owner seeks to make a one-time payment for a first-time home purchase. Funds can also go to an education fund and the account owner can continue to make contributions during his working life – tax-deferred.
Clearly, this scheme would incentivize primary enrollment and immunization, and we know there is a direct correlation with education, maternal health, and family income – especially for the girl child. Most importantly, this will create a savings culture for the parents, the children; and in the long term, reduces the societal burden of paying pensions. The tax-exempt status will also allow savings to grow uninterrupted for 18 years minimum – compounding those returns.
The maths is good. If the Federation invested only N100,000 per child and contributed nothing for 65 years, at a very low rate of 2% per year – the return in 65 years (using compound interest) will be N262,252.32. However, if the parents invested just N100 a month (N1200/year) to this same account at the same rate, the payout in 65 years will be a total of N265,399.35.
Remember this is at a 2% annualized rate, what happens if parents contribute N500 a month at say 5%? It is definitely worth considering.