FMN Plc. share stays flat despite border closure driven earnings beat

Flour Mills of Nigeria Plc www.fmnplc.com beats analysts’ estimates as government policy on border closure impacted performance positively.

FMN share stays flat at N22 with the company’s cap at N90.208 billion on 4,100,379,605 shares outstanding. However, on year to date basis, the stock has delivered 11.68% returns.

Commenting on the policy that drove the earning beat, analysts said it is not sustainable but the company would enjoy upbeat performance while it last.

WSTC Securities Limited however adjusted the earnings per share (EPS) forecast upward from N2.20 to N2.50.

In its recently released 9-months result for financial year 2020, FMN reported a relatively strong top-line growth.

Revenue grew by 6% year-on-year to N423.48 billion in from N400.64 billion in 9-months period in financial year 2019.

However, the company’s operating profit declined by 10% to N24.68 billion from N27.29 billion in the comparable period.

The company’s profit before tax (PBT) rose by 9% to N12.29 billion, while profit after tax surged 3% year-on-year.

Border closure delivers for FMN

WSTC Securities stated in a note that smuggling activities and influx of imported goods has subsided significantly; thus creating an increased market share.

Resulting from the supply gap induced by the border closure, FMN was able to push more goods in the market, analysts reckoned.

Consequently, revenue grew by 17% in the third quarter as volumes grew by 8%.

Segmental analysis

In the food business segment, which had hitherto reported revenue decline in the last two quarters, dropped 3% in the first quarter of 2020 and 2% in the second quarter, bounced back to growth as the business segment grew by 14% in the third quarter of 2020.

Further review also shows that the sugar and agro-allied business segments also grew by a double-digit of 20% and 52% respectively.

However, the upside recorded in the three business segments mentioned above was partially offset by the support services business segment, which declined by 27% to N6.10 billion in third quarter of 2020 from N8.30 billion in the comparable period in 2019.

Analysts stated that for the food, agro-allied and sugar business segments, the revenue growth reported majorly resulted from improved sales during the period as the Group took advantage of the border closure in terms of increased market share.

Cost of Sales however Rise with Revenue Growth

As activities level spiked, cost of sales rose by 17% in the third quarter of 2020 to N136.66 billion from N116.43 billion in the comparable period in 2019.

The increase in cost of sales in the period was the highest compared to 1% drop recorded in the second quarter and 2% uptick in the first quarter of 2020.

The sharp increase in cost of sales in the third quarter of 2020 is attributed to raw material cost which increased by 19% and direct staff cost that grew by 11%.

Other line items that recorded major increases in the cost of sales were depreciation and maintenance cost.

This 17% increase in the cost of sales was the major driver of the 6% growth in cost of sales in the 9-months of financial year 2020 result.

As of 6-months period, the cost of sales growth was flat. Nonetheless, gross profit grew by 3% in the third quarter 2020 to N47.83 billion from N46.59 billion in third quarter of 2019.

Spike in Operating Expense Hits Profits

FMN’s operating profit declined by 10% year-on-year to N24.68 billion in the 9-months of 2020 from N27.92 billion in the prior year.

WSTC analysts said the factor that drove operating profit to a decline despite a growth in gross profit was higher operating expense during the period. Operating expenses increased by 13% in the period.

Meanwhile, this was also due to the increase that majorly resulted from higher personnel expenses and general expenses.

Effective Balance Sheet Optimization Delivers Value

FMN, however, returned to the path of profit growth in the period, as PBT grew by 9% to N12.29 billion from N11.28 billion in 9-month of 2019.

Analysts attribute the higher profit recorded during the period to lower finance cost incurred during the period.

Finance cost declined by 21% year-on-year, saving the Group as much as N3.00 billion.

WSTC analysts call the lower finance cost reported manifestation of the deleveraging efforts by the management of the Group.

Specifically, total borrowings declined by 21% to N112.56 billion in the 9-months of 2020 from N141.86 billion in 9-months of 2019.

In addition, the portion of short-term debt to total borrowings reduced significantly from 51% to 37% in 9-month of 2020. Then, Profit after tax grew by 3% year-on-year.

Analysts said the slow growth in PAT relative to the higher growth in PBT was due to a higher effective tax rate during the period.

“According to the management, prudent steps were taken in estimating the tax bill due to uncertainties regarding the recently implemented Finance Bill. An effective tax rate of 34% was reported in 9-month of financial year 2020 as against 30% in the comparable period in 2019”, analysts at WSTC Securities said.

Analysts at the Securities firm said: “In our third quarter of 2020 forecast, we underestimated the positive impact of the border closure on the revenues of the Group due to our thought that increased competition in the industry, weak consumer demand, and an overall challenging business environment would limit the upsides associated with the border closure.

“However, it appeared that the Group, in the absence of cheaper smuggled products, was able to establish its leadership status in the market”.

WSTC analysts said: “We note the solid performance of the Group in the third quarter. We also note that the solid performance resulted from the border closure policy by the Federal Government.

“In the near term and till the end of the Group’s financial year, we expect the Group to continue benefitting from the favourable government policies”.

“However, in the medium to long-term, we believe that the border closure is not sustainable, and that earnings growth might be under pressure again”, analysts added.

Then, analysts expect the Group to pay a dividend of N1.20 for the financial year 2020, said they believe that the stock is currently trading at its fair value. Hence, recommend a HOLD.

FMN Plc. share stays flat despite border closure driven earnings beat by Julius Alagbe

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