Dangote Flour Mills Q1 2014: Market sentiment likely to be muted – FBN Capital

The Nigerian Stock Exchange (NSE) published Dangote Flour Mills (DFM’s) Q1 2014 (end-March) results which showed that its after-tax loss narrowed to N1.3 billion from N1.8 billion in Q1 2013. Sales grew by just 8 percent y/y to N10.2 billion.

However, gross profit grew markedly by 79 percent y/y to N296 million on the back of a gross margin expansion of 115bps to 2.9 percent. Although opex declined by 64 percent y/y, a combination of factors including impairment charges of N777 million and net interest expense of N750 million resulted in DFM’s pre-tax loss coming in at -N1.9 billion.

The pre-tax loss is an improvement on the loss of -N2.5 billion reported in Q1 2013. A tax credit of N533 million limited the post-tax loss to –N1.3 billion. In terms of sequential trends, sales were up 22 percent q/q. Both the pre-tax and post-tax loss improved relative to the -N2.9 billion and –N2.8 billion reported on Q1 2013.

Last week, the management of Tiger Brands (DFM’s parent) announced that the company had taken an impairment charge of around $82 million on Dangote Flour Mills. According to Tiger Brands, the company’s under-performance combined with excess milling capacity in the Nigerian flour market led the company to review the carrying value of its investment in the business. This write down is around 45 percent of the $182 million that the company paid for the asset.

In Q1, the management of DFM had stated that its top-line was negatively impacted by intense competition and oversupply, while rising input costs weighed on margins. Although there were visible improvements on the top-line, in gross margins and on the opex line, we cannot comment in detail about the factors that drove these due to the company’s limited communication with analysts.

However, we believe that the company must have benefited from the decline (-18%) in wheat prices between October and January 2014.

Bloomberg consensus forecasts indicate that wheat prices are likely to increase by about 5 percent through 2014. Nevertheless, the elevated levels of wheat prices (up 20% ytd) are likely to weigh on gross margin in the next couple of quarters.

We expect a muted reaction from the market to the results given that the loss was already widely anticipated following the statement by Tiger Brands. Year-to-date DFM shares have underperformed the index; the shares have shed 22 percent compared with a -5.2 percent loss on the ASI. We rate DFM shares Underperform.