FMN Plc: Analysts Upgrade Target Price, See Upside

FMN Plc: Analysts Upgrade Target Price, See Upside

For investment purposes, equity analysts have spotted an upside in flour and pasta maker Flour Mills of Nigeria Plc.’s share, thus, rate the food producer’s share strong buy. This indicates a potential capital gain is in the play if the assumptions come true.

In the market, Flour Mills of Nigeria is a fast expanding consumer goods producer that recently complete the acquisition of a rival brand – Honeywell Flour Mills. The consideration was funded by cash and debt finance.

Key performance indicators settled on a mixed note in the financial year 2022 result. FMN Plc.’s return on equity increased but its return on assets sloped downward. Gross margin was peppered by pressures on sales costs, and Earnings before interest tax depreciation and amortisation margin plunged.

Operating and net margin failed to grow but analysts maintain a positive outlook following its recent acquisition. Equities investors in the Nigerian Exchange value its outstanding shares at about N120 billion, after the company share price dropped lower to N32 from N35 when the price target was set, thus widening its upside potential.

In its equity report on the ticker, ARM Securities limited rerate the company’s share price target to N63.55, saying that current development within the business operating environment is the only potential downside. 

The company posted sustained revenue growth in 2022, as it grew topline by 50.8% year on year to join the league of listed firms in Nigeria with the enviable position of posting trillion-naira revenue. 

ARM Securities analysts said despite the momentous surge, however, the firm was only able to do a marginal growth in gross profit, up 1.2% year on year, as the impact of the rising cost of sales overshadowed an otherwise ‘top shelf’ year.

“We have reasons for optimism, seeing as the impact of scale, especially on segments with relatively better margins, and the continued implementation of its Backward Integration Plan (BIP) continues to portend decent performances into the future.

“Considering the preceding premises and concerns, and what it bodes for the firm’s future in line with its strategic efforts, we have reviewed our pricing of the ticker”. READ: FMN Struggles to Find Value as Rising Costs Squeeze Earnings

ARM Securities had set a target price of N41.00, now been upgraded to N63.55 per share.  In the recently released 2022 audited financial statement of Flour Mills of Nigeria Plc; the firm wrapped another year of momentous topline performance, analysts explained.

Revenue moved into the trillion Naira region, as it grew 50.8% to N1.16 trillion from N0.77 trillion in 2021, becoming one of the few Nigerian listed firms on that level.

The Food segment continued to lead the growth frontiers for the firm’s revenue, posting a 56.5% growth to N0.75 trillion which accounted for 64.3% of the total top line, an improvement on the 62.0% reported in the previous period.

The firm’s adjusted sales costs outpaced revenue, growing +59.4% to N1.05 trillion year on year.  Analysts said they noted that Energy costs jumped 29.76% year on year to N23.11 billion, Cost of Raw and Packing Materials increased 64.14% to N957.96 billion.

Other production expenses inched upward 45.80% year on year to N12.51 billion, and Factory Repairs and Maintenance rose 36.53% to N16.11 billion. This spurred significant impairment on gross profit, as it defied the growth in revenue to post a marginal rise of 1.2% year on year to N115.43 billion. In the same vein, its gross margin declined 329 basis points to 9.92%.

Effective management of its overhead reduced pressures on the company’s performance. In the period, FMN operating expenses adjusted for depreciation grew below-average inflation rate, up 6.4% to N25.73 billion from N24.18 billion in the corresponding period in 2021.

Though analysts noted that the company’s marketing and distribution expenses shed 45.98% to N1.29 billion, administrative expenses actually rose by 12.18% to N24.46 billion, according to the audited statement. 

This, coupled with the spike in finance costs jumped 62.60% year on year to N24.40 billion leading to the 5.18% growth in pretax to N39.22 billion.  For the year, profit after tax inched upward by 8.9% year on year to N28.02 billion.

In its projection, analysts opine that current developments within the business operating environment are the only potential downside for the company’s stock.

“We observed the trend in volume, price, and operating expenses (factors within the firm’s control) and found reasons for sustained optimism. We also observed the trend in return on equity and a decent trajectory since 2019, traced to sustained improvement in the firm’s Asset-Turnover ratio that has grown on the average, by 150 basis points annually from 2019 to 2022.

“… This development also bodes well for value, seeing as we have done an upward review of the firm’s fair value to N63.55 per share”. ARM Securities said. #FMN Plc: Analysts Upgrade Target Price, See Upside