FLOURMILL published its Q1-23 unaudited results recently, reporting EPS of NGN1.37 (Q1-22: NGN1.17), underpinned by solid revenue growth of 45.3% y/y in the period.
Revenue grew by 45.3% y/y driven by substantial growth across the Food (+45.1% y/y), Agro-Allied (+37.7% y/y), Sugar (+64.1% y/y), and Support services (+3.6% y/y) business segments. Management in its press release attributed the top-line increase to volume growth and a favourable mix.
Experts at Cordros Capital say we believe the higher volumes were driven by the (1) increased penetration into new and rural markets, (2) continuous investments in its route-to-market strategies with the establishment of 8,000 new outlets, and (3) launch of new SKUs in the starch and fertilizer segments. On a quarter-on-quarter basis, revenue grew marginally by 0.2%.
Gross margin (-121bps to 9.8%) sustained its decline in the quarter (Q1-22: 11.0%) as an increase in international wheat prices (average price: USD1,077.58/BU in Q1-23 vs USD680.60/BU in Q1-22), the company’s primary raw material propelled a faster growth in the cost of sales (+47.3% y/y) relative to revenue (+45.3% y/y). We also highlight further cost pressures from the pass-through impact of currency depreciation and the highly inflationary environment. Consequently, EBITDA (-104bps) and EBIT (-43bps) margins came in lower at 6.4% and 4.9%, respectively, amid a 52.0% y/y increase in operating expenses.
Net finance costs increased significantly by 87.1% y/y, following a 79.1% y/y increase in finance costs and a 35.1% y/y decline in finance income. We believe the higher finance costs was driven by the increased debt profile (Q1-23: NGN322.50 billion vs FY-22: NGN158.80 billion). According to management, the addition of Honeywell’s debt (NGN88.20 billion) to the books accounted for the significant growth in debt.
Overall, Q1-23 PBT grew by 0.9% y/y to NGN7.33 billion (Q1-22: NGN7.26 billion). Following a tax expense of NGN1.83 billion, PAT printed NGN5.50 billion (Q1-22: NGN5.45 billion).
Comment: FLOURMILL’s results once again highlights the impact of the company’s products innovations and investments in its route to market strategy. However, the company’s elevated costs which continues to inhibit margin expansion remains a cause of concern. With global wheat prices expected to temper following the Russia/Ukraine grain export deal, we believe there might be a respite in terms of the cost of sourcing the product, though FX illiquidity and the highly inflationary environment remain key pressure points. Nonetheless, we believe the company remains well-positioned to maintain decent topline growth given its well-diversified product portfolio and the inelastic demand facing its products. Our estimates are under review.
