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Flour Mills of Nigeria Plc 9M'20 - Cost Optimisation Efforts Yield Impressive Result
Flour Mills of Nigeria Plc 9M'20 - Cost Optimisation Efforts Yield Impressive Result



Flour Mills of Nigeria  (‘FMN’ or ‘The Group’), in its recently released half year earnings result, reported a 31% YoY year-on-year (YoY) revenue growth from N270.76bn in H1’2020 to N355.11bn in H1’2021. Operating profit grew by 43% YoY from N16.82b in H1’2020 to N24.02bn in H1’2021. Therefore, the operating margin advanced by 100 basis points from 6% in H1’2020 to 7% in H1’2021. Profit before tax surged by 69% YoY from N8.63bn in H1’2020 to N14.61bn in H1’2021. Profit after tax rose by 68% YoY from N5.90bn in H1’2020 to N9.93bn in H1’2021.

In Q2’2021 standalone, the Group recorded a 47% YoY revenue growth from N136.02bn in Q2’2020 to N200.53bn in Q2’2021. Operating profit grew by 88% YoY from N6.93bn to N13.03bn. Profit before tax soared by 160% YoY from N3.13bn to N8.15bn, while profit after tax increased by 198% YoY from N1.67bn to N4.96bn.


We anticipated the solid performance by the Group in Q2’2020, and we expect to see a continued improvement in the short-term. In the long term, we are cautious because we posit that the revenue growth driver might be unsustainable in the medium and long term. Based on our perspective, the strong demand for the Group’s products was induced by the sustained land border closure and COVID-19 pandemic. Given that we do not see the borders to remain closed going forward due to the negative implications for the Nigerian economy, a possible re-entry of smuggled products might take place, therefore eroding market share for the Group.

Nonetheless, we believe that the fundamentals of the Group are strong. The Group remains a market leader across most of its business segments. The Group has positioned itself to take advantage of growth opportunities in the industry based on its market leadership status. We also maintain that the previous and continued efforts of the Group to optimise costs and drive operating efficiency, particularly in the Agro-Allied business segment, will be value accretive to margins in the medium to long term.


We incorporated our view of the Group’s operating performance both in the short term and long term. We maintain our BUY rating on the stock, with a fair value of N35.20 (previous: N23.46). The higher fair value resulted from an improved outlook for earnings and cash flows (in the short term), as well as a lower cost of equity used to discount our projected earnings and cash flow due to lower opportunity costs. At the current price of N28.40, the stock trades at 7.03x to earnings, relative to our justified 8.72x to earnings. Therefore, we believe that the stock trades at a 22% discount to our fair value estimate. Incorporating our estimated dividend yield of 4%, the total return on the stock stands at 26%


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