Flour Mills of Nigeria: Normalised loss swells to N5.3bn on FX, says Vetiva Capital

Revenue slows q/q but remains higher y/y.

Flour mills sustained its high single digit y/y growth (9M: 7.9%, Q3: 9.3%) in this nine months result for the period ended December 31 despite the 9.7% slow down q/q. The q/q slowdown in revenue is not surprising given that the October – December harvest season usually sees consumers switch to substitutes like yam from flour based products like bread. 

Normalised loss swells to N5.3 billion on FX related losses

Whilst reported earnings for the 9 month period amounted to N19 billion, supported by the N23.8 billion gains booked on the Unicem sale in Q2, normalised loss swelled to N5.3 billion (from N988 million as at H1) from what we believe to be FX related losses of over N4.9 billion in Q3 (FY’14/15: N5.1 billion).

With the share of imported raw materials at over 80%, we expect the volatility in earnings will persist amidst the continued risk of a further currency devaluation.

On a positive, operating expenses remained lower y/y despite inching higher in the quarter. However, despite total cash inflow of N38 billion from the Unicem sale, net interest charges remained 38% higher y/y even as total borrowings inched up to N165.2 billion (H1: N158.9 billion, FY’14.15: N188.5 billion).

We think the planned N30billion Rights Issue which is still pending regulatory approval is less likely to be pushed through under current market conditions.

Forecasts, TP revised downwards, BUY rating retained

We have slightly revised downward our FY’15/16 revenue estimate to N335.9 billion (Previous: N341.6 billion) to reflect ongoing challenges in the operating landscape.

Also, given our more conservative assumptions on the pace of debt reduction, our EPS estimates have been revised downward to N5.78 (Previous: N9.15) and N0.98 (Previous: N1.66) for FY’15/16 and FY’16/17 respectively. Consequently, our 12-month target price is revised downward to N43.93 (Previous: N54.48, BUY).