Flour Mills of Nigeria Plc reports decline of 18.9% y/y in standalone PAT
Flour Mills of Nigeria Plc (FLOURMILL) published its Q2-23 unaudited results yesterday (October 27), reporting a decline of 18.9% y/y in standalone PAT with accompanying EPS of NGN0.60 (Q2-22: NGN1.27), bringing H1-23 EPS to NGN1.97 (H1-22: NGN2.43). The EPS decline was brought about by the 223.8% y/y increase in net finance costs.
Revenue grew by 31.8% y/y, driven by substantial growth across the Food (+22.0% y/y), Agro-Allied (+65.3% y/y), Sugar (+38.0% y/y), and Support services (+14.4% y/y) business segments. Though we await clarity from management on the specific drivers of the business segments, we suspect that the food producer continues to enjoy higher volumes from 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, amid sub-inflationary price increases. On a quarter-on-quarter basis, revenue grew by 12.2%.
Gross margin (-60bps) declined to 9.3% in the quarter (Q2-22: 9.9%) as an increase in international wheat prices (average price: USD814.76/BU in Q2-23 vs USD698.64/BU in Q2-22), the company’s primary raw material, propelled a faster growth in the cost of sales (+32.7% y/y) relative to revenue (+31.8% y/y). We also highlight further cost pressures from the pass-through impact of currency depreciation and the highly inflationary environment. For H1-23, gross margin declined by 86bps to 9.5% (H1-22: 10.4%). Consequently, EBITDA (-11bps) and EBIT (-39bps) margins settled lower at 6.3% and 3.9%, respectively, amid a 13.9% y/y decrease in operating expenses.
Net finance costs increased significantly by 223.8% y/y, following a 196.7% y/y increase in finance costs and a 59.6% y/y decline in finance income. The higher finance cost reflects FLOURMILL’s increased debt profile (H1-23: NGN334.60 billion vs FY-22: NGN158.80 billion) following the addition of Honeywell’s debt to its books.
Overall, Q2-23 PBT declined by 87.2% y/y to NGN1.05 billion (Q2-22: NGN8.22 billion). Following a tax expense of NGN850.52 million, PAT printed NGN204.11 million (Q2-22: NGN5.08 billion).
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Comment: As noted in our Q1-23 First Glance, FLOURMILL’s result reflects the company’s innovation around product offerings and tapping directly into the B2C segment. However, we are concerned about the company’s ballooning finance costs, following the significant effect on the company’s profitability. While we note that cost pressures remain existent, we believe the company remains well-positioned to maintain decent topline growth given its well-diversified product portfolio and the inelastic demand for its products. Our estimates are under review.
