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Flour Mills reports growth of 8.2% y/y in Q4-22 standalone PAT

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Flour Mills of Nigeria Plc (FLOURMILL) released its 2022FY audited results on Monday, reporting a growth of 8.2% y/y in Q4-22 standalone PAT with accompanying EPS of NGN2.68 (Q4-21: NGN2.47), bringing 2022FY EPS to NGN6.83 (2021FY EPS: NGN6.27). FLOURMILL’s board proposed a dividend of NGN2.15/s, implying a c. 34.0% dividend payout ratio and yield of 6.1% based on the last closing price of NGN35.70/s.

FLOURMILL’s revenue grew by 56.7% y/y in Q4-22, culminating in a record sales year for the company as 2022FY revenue increased by 50.8% y/y to NGN1.16 trillion. Specifically, the sales outturn was driven by substantial growth across the Food (+59.4% y/y), Agro-Allied (+66.1% y/y), Sugar (+39.6% y/y) and Support services (+49.5% y/y) business segments. In its earnings call today, management cited (1) a favourable volume mix across its product portfolio; (2) gains from the recently introduced value product across noodles, pasta cereal, and edible oil; and (3) its strategy of maximizing the output from its B2C channel as the supporting factors for the broad-based topline expansion.

Sequentially, revenue grew by 12.1% q/q in Q4-22, following expansion in all business segments – Food (+8.8% q/q), Agro-Allied (+0.3% q/q), Sugar (+24.9% q/q) and Support services (+91.5% q/q).

Gross margin (-764bps) declined to 8.2% in Q4-22 (2022FY: -455bps to 9.3%), as the surge in international wheat prices (Average price: USD573.52/BU in 2021FY vs USD768.13/BU in 2022FY), the company’s primary raw material propelled a faster growth in the cost of sales (+70.9% y/y) relative to revenue (+56.7% y/y). We imagine that cost pressures were exacerbated by the pass-through impact of currency devaluation and the high inflationary environment.

Thus, EBITDA (-102bps) and EBIT (-46bps) margins came in lower at 8.7% and 7.4%, respectively, amid a 27.0% y/y decline in operating expenses. In the same vein, EBITDA (-209bps) and EBIT (-114bps) margins for 2022FY also declined to 7.6% and 5.6%, respectively.

Net finance costs increased markedly by 170.6% y/y, following a 151.0% y/y increase in finance costs and a 53.7% y/y decline in investment income. We attribute the surge in finance costs to the increased loan facilities obtained by the company in the review period. For evidence, we observed a substantial increase in total borrowings (+15.7% y/y to NGN148.83 billion in 2022FY).

Overall, Q4-22 standalone PBT grew by 16.8% y/y to NGN15.86 billion (Q4-21: NGN13.59 billion). Following a tax expense of NGN3.45 billion, PAT printed NGN10.97 billion (Q4-21: NGN10.14 billion).

Comment: We are impressed with the results delivered by FLOURMILL, particularly the broad-based expansions across all its business units and operational efficiencies amid the unfavourable operating landscape. For 2023FY, we believe the company remains well-positioned to sustain topline growth given its well-diversified product portfolio and the inelastic demand facing its products. Notwithstanding, we are concerned about the company’s ballooning costs which we believe will continue to drag margin expansion. Our estimates are under review.

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