Flour Mills of Nigeria CEO Seeks to Rally Shareholders Wealth
By implementing a cost-cutting strategy, improving operational efficiency and reduce finance costs pressure, Flour Mills of Nigeria Plc.’s Chief Executive Omoboyede Olusanya has re-stated plans to rally the company’s shareholders wealth in the financial year 2022.
After the solid earnings debut in the first quarter, the consumers’ good company sees higher valuations from investment firms as analysts upgrade estimates for the current year with an improved growth outlook.
The review of the results shows that Flour Mills has deepened its footprint in the consumers market with sustained double-digit growth in the topline, not only driven by price inflation across the market but also volume growth despite rivalry in the consumers’ goods segment.
In the first quarter of 2021/22 result, the company’s delivered a 10% year on year growth in profitability, from N5 billion to N5.4 billion. As such, in the first three months, retained earnings jumped to N95.986 billion from N90.905 billion.
Analysis of the topline performance in its 2021 result shows that the leading consumers’ goods company sales printed at N771.608 billion, rising by 34% from N573.734 billion recorded in 2019/20.
Following the reported growth in the company’s revenue in the financial year 2021, analysts projected full year sales for 2022 to print at N824.211 billion, representing a 6% year on year increase.
Commenting, Omoboyede Olusanya, FMN Plc. Group Chief said, “The result shows a strong start to the year and a promising indication of the business’s future as we pursue our strategy of operational efficiency and long-term growth.
“… I envision even more organic growth across the group, fuel by our expanding ethos of putting consumers at the heart of our business…I am optimistic that we will meet our year-end growth targets while improving operational efficiency, lowering finance costs and ultimately increase shareholders wealth”.
Shareholders funds in the company settled at N180 billion, up 3.11% from N176.613 billion at the beginning of the company’s accounting year in March 2021 while analysts see 8.4% decline in net finance costs in the financial year 2022.
In its equity report, CSL Stockbrokers raised FMN Plc. target share price more than double, signal strong buy tendency, up from N30.25 to N61.97 a share.
Analysts noted that Flour Mills has continued to invest in restructuring its businesses and improving production processes. The company is now focused on improving the proportion of locally sourced raw materials in its raw material mix.
However, analysts spotted rising input costs as a key downside to the company’s operation but also noted the CBN directive allowing only three sugar refining companies to import sugar into the country would create some support in an otherwise unstable FX environment.
Operators with considerable progress in achieving an agreed backward integration plan would be allowed to source FX from the CBN official window.
CSL Stockbrokers recognised that ability of the company to de-risk its balance would help its earnings performance in 2020. FMN Plc. has N540 billion in total asset, of the sum, the company’s long term borrowings printed at N108.993 billion as it current asset settled at N301.766 billion.
In 2021, took a huge step in tapering its finance cost by issuing long term bonds at single-digit rates. As a result, the firm’s debt mix is tilted towards longer and cheaper debts which now constitute 78% of the total debt mix, driving down interest expense at the end of Q1-2022.
The upcoming repayment of bonds totalling N11.00 billion by the firm leaves room for an improved loan book, which should ultimately result in lower interest expense, said CSL Stockbrokers.
“In this light, we project a marginal decline in interest expense to N18.22 billion in 2022 while we expect the improved yield environment alongside the robust cash flow of the firm to jointly support Investment Income”, the firm added.
Price Target Estimate
Analysts at CardinalStone Partners place N34.10 as the tickers 12-month target price, though it is currently listed at the local bourse at N30.45 a share.
Rather impressed investment analysts at CSL Stockbrokers surprisingly raise their price expectation on Flour Mills of Nigeria to N61.97 a share. This signal that CSL would bet large on the leading fast moving consumers’ goods company’s stock amidst ongoing rally in the stock market.
With 4.1 billion shares outstanding, the company market capitalisation could be heading ahead of N200 billion in the stock market as investors re-rate the ticker for improving earnings performance and potentially good year ahead despite pressure on household demand generally.
The pressure is however potentially subdued due to inelastic demand for the company products despite across market increase in prices– foods.
Early in July, equity analysts at WSTC Securities put their 12-month price expectation on Flour Mills of Nigeria at N49.5, advised investors to buy the stock when the market price was N29.80.
Analysts said the Group’s operating performance in the financial year 2021 majorly came from the improvement in the Agro-allied segment and increased focused on B2C in the Food segment.
WSTC also spotted that renewed focus on local content, backward integration, and improved operating efficiency were also valued accretive to the Group in the form of relatively lower operating costs.
For the financial year 2022, WSTC analysts forecasted a 15% revenue growth in the Food segment and a 14% revenue growth in the Agro-allied segment. The firm also projects a 14% revenue growth in the Sugar segment, while we expect revenue growth in the Support segment to slow to 5%2.
In the first quarter 0f 2021/22
In the first quarter of 2022 result, Flour Mills of Nigeria sales see a meteoric rise as the company ramps up market share despite tightening competition. Sales increased 51.2% year on year to N233.73 billion from N154.57 billion in the first quarter of 2021.
The company’s financial scorecard shows that the increased sales were supported by growth across major business segments. Specifically, the Agro-Allied segment witnessed a 44.1% year on year increase to N47.69 billion, revenue from the Sugar business jumped 24.0% to N33.53 billion and Food grew 61.4% to N146.93 billion.
According to the result, the company’s net income jumped 9.6% to N5.44 billion in the first quarter of 2022 from N4.97 billion in the first quarter of 2021.
In its equity report, CSL Stockbrokers said going forward, while the firm forecasts sustained revenue growth across the company’s major businesses, analysts expect the Food and Agro-allied businesses to be the growth drivers of the company’s sales.
“The investment in B2C channels, the launch of new discount-priced products and re-sizing of some products to lower SKUs are strategic moves that we expect to support Revenue in the near-term”, the investment firm said.
In their projection, CSL Stockbrokers analysts forecasted revenue growth of 6.8% year on year to N824.21 billion for full year performance in 2022. The firm also projected a 1.8% increase in the company’s net income to N26.09 billion in the period.
“We raise our target price to N61.97 a share from the N36.12, implying 104.9% upside from Friday’s reference price of N30.25”, CSL Stockbrokers said.
Explaining its rather bullish projection, analysts said the increase in target price was driven by a combination of the improving net income forecast, revenue, and Cashflow outlook in the coming years.
CSL Stockbrokers maintained that Flour Mills of Nigeria has significantly improved efficiency and analysts are expecting this to persist.
The first quarter of 2021 results further confirmed Flour Mills of Nigeria ability to raise its market share following sustained double-digit growth in topline performance in the past years.
Flour mills continued the trend of double-digit top-line growth, up 51.2% in the first quarter following the solid full year 2021 performance when sales grew 34.5% year on year to N771.60 billion amid a series of macro-economic headwinds.
Analysts said the performance reflects the strategic efforts of the firm aimed at sustaining growth, as it continues to consolidate its position as a leading brand in the Nigerian consumer goods space.
“We observe that despite volume growth, the company might be forced to hike prices on some of its products given the continued surge in the cost of input”, analysts stated.
Material Cost pressures
Flour Mills of Nigeria gross margin was pressured by the continued surge in the cost of local input owing to the logistics bottleneck and the foreign exchange pressure on its foreign input.
Gross profit took a hit, up 0.2 percentage points to N30.87 billion from N30.81 billion in the corresponding of 2021 while gross margin shrank 6.7 percentage points to 13.2%.
CardinalStone said Flour Mills of Nigeria’s stellar performance for the financial year 2020/21 rode on expansions in high margin B2C segments, increased regional distribution centres primarily targeted at B2Cs, the launch of new product offerings, and cost optimisations such as the replacement of the company’s expensive short term debt with cheaper long term borrowings in 2020.
Expectedly, return on equity (ROE) and earnings per share (EPS) more than doubled to about 15.6% and N6.30 to leave investors thrilled.
Albeit, analysts at CardinalStone said they worry about the sustainability of the record-breaking performance, especially given the potential high base effect from the Agro-Allied division, which experienced its first notable profit in 5 years in FY’20/21.
Indeed, Agro-Allied accounted for 17.1% of revenue increase, and an impressive 45.3% of pretax profit accretion in 2020/21, which underscored material improvement in operating efficiency.
“We note that the segment’s cost-cutting measures like the streamlining of raw material aggregation process and reduction of wastes appear sustainable”.
Analysts recognised that the expansion of blending plants and sales outlets in the northern and eastern markets and the introduction of Omega Catfish Feeds are also likely to contribute to 2021/22 performance.
Elsewhere, the Food business is reportedly set to benefit from 800 hectares of domestic wheat grain production next season, on the back of its strategic partnership with the Flour Milling Association of Nigeria.
“This initiative is likely to reduce reliance on foreign wheat and taper risk of foreign exchange losses”, CardinalStone analysts noted.
Analysts said they anticipate that the company’s operating costs will continue to rise, following rising local prices, and the firm’s quest to increase awareness of its products, but this will be under control relative to peers, given the firm’s conscious efforts at taming expenses.
The report added that FMN Plc operating expenses would likely grow by 19.4% year on year -excluding receivables impairment charges, hoping for a reduction in other operating losses.
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Flour Mills of Nigeria CEO Seeks to Rally Shareholders Wealth
