FMN Plc.’s Bloated Finance Costs, Declining Profit Prompt Sell Rating

FMN Plc.’s Bloated Finance Costs, Declining Profit Prompt Sell Rating

Preceded by a weak financial scorecard, Flour Mills of Nigeria’s (FMN Plc) profit before tax expenses is expected to decline by 55% in the financial year 2023, equity analysts’ estimates showed.

This projection came after the company’s pretax profit slumped by about 41% in a 9-month unaudited financial statement filed with regulators. While stock market valued FMN Plc at N135 billion over 4.1 billion shares outstanding at a unit price of N32.95.

Excelsior Shipping Company Limited remained its largest shareholder for the 9-month of 2022/2023 financial reporting period when pretax profit slumped more than 40%. Year to date, FMN has gained 16.02%, according to stock market data.

In its equity report, CardinalStone analysts’ estimated future price for the company’s share was set at N30.75.  Equity analysts said in the report that Flour Mills of Nigeria’s share is trading above its fair value at the reference date of March 9, 2023.

“Ticker: FLOURMILL is slightly overvalued on a relative valuation basis”, CardinalStone Securities Limited said in its equity report.

Following its disappointing financial scorecard in 9 months, analysts’ estimates indicate that Flour Mills of Nigeria (FMN) faces a turbulent year ahead. Its full-year net profit is projected to fall behind by 55%. 

FMN Plc 9-Months Financial Scorecard

In its 9-month results published in January 2023, the group revenue jumped 35.05% year on year to N1.113 trillion followings its aggressive market penetration, rising from N824.980 billion in the comparable period 2021/2022.

Costs of sales inched upward, relatively higher than revenue growth- marginally. Then, gross profit climbed 28.69% year on year to N103.229 billion on account of product price increments implemented amidst an inflation uptrend in the Nigerian market.

The company actually delivered a 28.35% year-on-year growth in operating profit, helped by a reversal of impairment loss on receivables, thus reducing the negative impacts of a surge in administrative and distribution expenses.

Based on its financials, FMN’s administrative expenses spiked by about 44% year on year to N30.941 billion from N21.523 billion in the comparable period in 2021/2022.

Following an aggressive marketing plan backed by increased advertisement spending, the company’s distribution expenses increased by 38.32% to N13.334 billion as against N9.640 billion.

A strong increase in net finance costs eclipses the company’s performance following a higher leverage position maintained in the year – driven by a more than 104% year-on-year increase in borrowings which settled at N303.717 billion.

In its 9-month results, net finance costs inched upward by more than 143% to N36.959 billion from N15.190 billion in the comparable period – driven by more than 132% year-on-year increase in interest payment while interest income declined by about 42% to N544 million.

Flour Mills of Nigeria is heavily dependent on overdrafts from local banks, detail from its unaudited financial statement for the 9-month showed.  The company overdraft addition surged 243.65% year on year to N34.151 billion apart from other borrowings.

Other liabilities item at heaven’s high, up 307.63% to N64.234 billion, though the company recorded an improved cash lockdown in prepayment, trade and other receivables, inventories and cash & cash equivalent.

This resulted in 40.81% year on year in pretax profit which settled at N25.255 billion 12-month ago. FMN reported a profit before tax of N14.952 billion in its unaudited financial statement at the end of 9 months of its 2022/2023 financial period.

With lower tax payment in the period, pressures on the company’s profit after tax was reduced, albeit, it fell more than 41% to N10.018 billion at the end of the period.

CardinalStone Estimates

In its equity report, analysts at CardinalStone revised the financial year 2022/23 revenue projection to N1.5 trillion from N1.4 trillion previously forecast. The investment firm said the revision primarily reflects sustained revenue enhancement strategies -improved route-to-market and expansion of fertiliser blending capacity- and the impact of higher product pricing.

Analysts wrote that already, FMN Plc has attained 75.3% of CardinalStone’s full-year projection, with north of 34.0% sales traction across the Food, Agro-Allied, and Sugar segments.

Despite the robust topline projection, analysts said they expect 2022/23 gross margin to remain mostly unchanged at over 9.0% on the impact of the 29.5% year-on-year increase in wheat prices over 2022.

“While we note the 6.4% decline in wheat prices in the first quarter of 2023, the pass through to the company’s numbers will likely become evident in the next financial year due to the historical lagged impact”.

The investment firm stated that the weaker leverage ratio linked to the acquisition of Honeywell Flour Mills is likely to stoke more finance cost pressures in 2022/23, with interest coverage expected to nosedive to 1.4x from 2.6x in 2021/22.

However, analysts said management has prioritised its ongoing balance sheet restructuring and reduction in foreign currency exposure to tackle future negative pass-through to earnings.

“…we project a 55.0% year-on-year contraction in pretax profit to N18.6 billion in 2022/23, we see latitude for a pretax profit cumulative average growth rate (CAGR) of 33.0% over the next five years.

Analysts said estimated average annual profit growth also captures the potential impact of continued commodity price correction.

However, the company is projected to record a buoyant cash conversion cycle. Despite current pressures, analysts stated that Flour Mills of Nigeria has recorded some improvements in earnings quality ratios.

Specifically, the company improved its operating cash ratio to 0.70 in 9-month 2022/23 from negative 1.76 in the comparable year. The company also recorded a decline in its cash conversion cycle and increased working capital in 9M’22/23.

“We expect these gains to subsist over the full-year period on sustained improvements in accruals and trade payables management”, analysts stated in the equity report.

CardinalStone said from a relative valuation standpoint, FLOURMILL appears slightly expensive, with its enterprise value to earnings before interest tax depreciation and amortization (EV/ EBITDA) multiple trading at an 8.2% premium to its historical mean.

“Adjustments to our model resulted in a new 12-month target price of N30.75 from N27.71 previously. We retain a SELL recommendation on the ticker”.

MarketForces Africa gathered that a SELL rating is given to equities that are highly overvalued or with weak fundamentals, where a potential return of less than 0.00% is expected, between the current price and analysts’ target price.

With declining earnings and excessive leverage with no significant prospect of improvement in cost profile, it is difficult to justify a possible investment upside.  #FMN Plc.’s Bloated Finance Costs, Declining Profit Prompt Sell Rating

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