FMN’s Share Price Target Upgraded after Earnings Beat
Flour Mills of Nigeria Plc (FMN) reported a robust growth rate of 68.4% year on year in profit after tax (PAT) in the first half of 2021 (April-September 2020) to ₦9.93 billion.
This comes as the company continues raise market performance in relations with peers in the fast moving consumers segment.
The company financial statement showed 199% year on year growth in profit after tax in Q2-2021 to ₦4.96 billion.
In the stock market, FMN’s market capitalisation printed at ₦115.425 billion on 4.1 billion shares outstanding at market price of ₦28.15.
Broadly speaking; analysts at Chapel Hill Denham said they believe sustained improvement in the company’s volume/price mix supported the advancement in EPS in periods.
Equity analysts rated the stock buy following an impressive 47.4% year on year increase in turnover in Q2-21, which was driven by broad-based growth across all business segments.
According to the result, FMN agro-allied division grew by 64.0% in Q2-2021to ₦38.96 billion while the food business rose by 41.1% to ₦124.86 billion.
Similarly, analysts said the turnover of the sugar division advanced by 49.3% to ₦31.15 billion, followed by the support services segment, which increased by 91.3% to ₦5.56 billion.
Chapel Hill Denham however said FMN disclosed that the food segment was supported by a 10% increase in volume in H1-21, driven by business-to-customer sales.
According to management, 65% of volumes sold was attributable to demand for FMN’s flour products, 20% for Pasta, 11% for Semovita and the 4% Noodles.
For the agro-allied segment, management noted that sustained volume growth in the Edible Oil (24.4% of agro-allied volumes), Animal Feeds (41.8%) and Fertilizer (added 32.8% of volumes) subdivisions drove the remarkable growth in revenue.
On Sugar, analysts said the increase in turnover was supported by a 100% increase in volumes year-on-year, as the border closure continues to limit illicit sugar supply into the Nigerian market.
Flour Mills of Nigeria’s net operating cash flow also improved by 92.7% to ₦55.86 billion in H1-2021 from ₦28.99 billion in the comparable year.
“We believe this was partly due to the impressive earnings in H1-2021, combined with an efficient working capital management by FMN”, Chapel Hill Denham said.
A deep dive into the result showed that FMN’s trade and other payables jerked up 83.7% to ₦114.95 billion, while trade and other receivables fell by 6.6% to ₦26.14 billion.
However, there was a significant increase in inventories by 35.6% to ₦125.80 billion.
Analysts noted that net capital expenditure (CAPEX) declined by 32.7% to ₦5.86 billion resulted to CAPEX intensity of 1.7% from ₦8.71 billion in H1-20 when CAPEX intensity was 3.2%.
Notably, analysts said the growth of cash and cash equivalents was strong at 284.1% to ₦80.14 billion. Translating to an increase of 124% year to date from ₦26.21 billion in year end 2020 position.
Due to the company’s capital structure, finance costs increased by 18.8% to ₦5.09 billion in Q2-2021, as total borrowings rose by 13.8%.
Meanwhile, from the beginning of the financial year to date, finance cost has expanded 19.3%.
Management has disclosed coming to the debt market in the next few weeks to raise ₦30 billion fixed rate bond, which will be partly utilised to refinance some existing debts at currently low interest rates and support working capital.
“We believe this will underpin profitability, as interest expense growth should slow down”, Chapel Hill Denham said.
Expressing concerns over the company’s result, Chapel Hill Denham observed that Naira devaluation pressures drove cost of sales higher by 45.6% in Q2-2021.
The firm said FMN’s costs of sales increased by 27.5% year on year in H1-2021, largely on the back of higher raw material costs which grew 30.1% to ₦266.68 billion.
The management had said this was largely due to the impact of naira devaluation on the cost of importing sugar with global prices higher by 4.8% year to date and Wheat which has recorded about 6.7% uptick year to date.
“We recall that management noted that it sourced the US Dollars at rates between ₦385 and ₦400 at the CBN intervention windows”, analysts said.
FMN recorded foreign exchange loss of ₦12.14 billion in H1-2021 as the company recognised ₦9.44 billion in Q1-21 due to revaluation of receivables and inventory, partly limited the expansion of operating margin.
“This could be a concern if the Naira weakens further in the coming quarters”, Chapel Hill Denham said.
The firm however retain BUY rating on FMN with a 12-month target price of ₦31.40.
The company’s operating expenses adjusted for depreciation rose 14.0% year on year to ₦16.1 billion in H1 2021.
The increase was driven by double-digit growth in administrative expenses adjusted for depreciation.
In the period, adjusted administrative surged 21.3% year on year while selling & distribution expenses declined 1.8% year on year.
Nevertheless, EBIDTA jerked up 66.9% to ₦44.6 billion in H1-2021 from ₦26.7 billion in H1 2020 as depreciation and amortisation grew 20.9% to ₦12.0 billion in H1-2021.
CSL Stockbrokers said: In what can be regarded as the major negative in the result, the company booked net operating loss of ₦8.8 billion in H1 2021 which dampened operating performance.
CSL Stockbrokers review detailed that the Loss was driven by upfront FX losses of ₦12.1 billion booked by the company on revaluation of USD denominated payables in its support service business.
That said, the company recorded a decent 41.1% y/y growth in earnings before interest and tax (EBIT) to ₦23.7 billion in H1-2021 from ₦16.8 billion in H1-2020.
Overall, FMN net finance cost grew 11.5% year on year to ₦9.1 billion in H1-2021 from ₦8.2 billion in the comparable period.
This was well received the company’s bottom line as profit before tax grew by 69.2% to ₦14.6 billion in H1 2021 from ₦8.6 billion in H1-2020.
So, effective tax rate increased marginally by 0.4 percentage points to 32.0% in H1 2021.
Overall, CSL Stockbrokers stated that FMN’s net income grew by 68.3% to ₦9.9 billion in H1 2021 from ₦5.9bn in H1 2020.
However, net income attributable to equity holders grew at a slower pace, up 52.2% year on year as net Income growth was dominant in subsidiary where FMN group holds smaller ownership control.
Earnings per share strengthened to ₦2.33 per share in the H1-2021 from ₦1.53 in H1 2020, while annualised EPS of ₦4.66/s is ahead of CSL Stockbrokers 2021 estimates of ₦3.75 per share.
“We have a BUY recommendation on the stock with a target price of ₦36.12/s. Current price ₦26.50 per share”, CSL Stockbrokers estimated.
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FMN’s Share Price Target Upgraded after Earnings Beat
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