• Tuesday, September 26, 2023
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Border closure lifts 2020 outlook for FMN 

Border closure lifts 2020 outlook for FMN 

With Nigeria’s land borders shut, the shift from the country’s favourite staple food to a substitute means pasta makers would gain. Flour Mill of Nigeria (FMN) is one of such producers to bet on.

Nigerian consumers are already adapting to the closure of land borders in August by switching to local rice and pasta.

For FMN, “Shifting demand to pasta suggests stronger earnings in 2020,” say analysts at Lagos-based Chapel Hill Denham.

According to the analysts, the renewed demand for pasta to boost food turnover in 2020, as the recent border closure has impacted rice importation, inducing a shift in demand to Pasta (Spaghetti, Macaroni etc).

Chapel Hill Denham’s market price survey indicates that FMN’s Golden Penny Spaghetti retail price has increased to an average of N235/500grams stock keeping unit (from an average of N200), while the price of Power Pasta Spaghetti (produced by Dufil) has increased to N200/500grams SKU (from N180).

Read also: Dangote Flour Mills becomes the 110th firm delisted from NSE since 2002

This is expected to lead to a higher sales volume in the consumer good firm’s food segment which in the first half of next year.

Chapel Hill Denham’s projection, however, shows a 0.4 percent growth in FMN revenue and a decline in the company’s top-line in the period.

However, they expect profit to grow 16.4 percent to N5.9bn in the first six months of next year.

The analysts also expect the Sugar and Agro-Allied segments to maintain current growth trajectories (grew by 15.1 percent year-on-year and 5.1 percent year-on-year respectively to N44.94bn and N49.40bn in H1-20) pushing 2020 turnover to N548.32bn, up 4.0 percent year-on-year from N527.41bn in 2019.

The pressure on gross profit will arise from cost pressures which would remain high next year. Sources of the pressure would be the cost of barging, demurrage and port related costs.

However, weaker wheat and CPO input prices are likely to marginally support gross margin to 11.8 percent in 2020 from 11.7 percent in the first half of next year and 10.1 percent in 2019 as revenue rises by 4.0 percent year-on-year

Given the lower interest rate environment, FMN is expected to tap into the debt market for more refinancing. The company has raised about N22.72bn in Commercial Papers in the 2019/2020 year.

“We believe the company’s current N3.00bn CP in the market (closes 19 December 2019) is a strategic move to take advantage of the current low-interest-rate environment, as we expect more issues before the end of the financial year,” Chapel Hill Denham.

The analysts also expect Lower Capex to support Free Cash Flow to Equity next year given the completion of its business expansion and restructuring (merger of Golden Sugar and Sunti Golden Sugar Estates).

Chapel Hill Denham retains a buying rating on the stock and raised its target price to N25.58 from N17.99. The new TP represents a potential total return of 38.7 percent (capital gain of 32.5 percent and a dividend yield of 10.3 percent).