Flour Mills Remains Investors’ Toast for Medium, Long-Term Positions

Rating: Buy
Current Market Price: N30.00
Fair Value: N45.00

Key Financial Tickers:
• The next expected financial performance is its fourth quarter earnings which would hit the market soon.
• Our expectation of the result is positive.
• We expect a fairly reduced dividend (cash/scrip) in the full year financial performance due to the fact that its shares outstanding will increase because of the recently concluded N40bn Rights issue and funds being raised from the fixed income market.
• Nevertheless, since the funds being raised will be used to offset a major percentage of its outstanding debt. We are of the opinion that the financials will grow over the years following the fresh capital being sourced.

The major revenue drivers for Flour Mills are its investments to raise capacity in the different business segments. Most significant is the commissioning of a 750,000MT sugar refinery in Lagos to increase its operating capacity from 24% at the end of FY’14. The plant is currently operating at about 50% capacity, producing 375,000MT. We expect revenue from the sugar refinery to grow at a much lower compound rate of 2.6% annually till 2019.
Also, the increase in the company’s flour milling capacity will also contribute significantly to revenue growth in the ‘other foods’ segment (food businesses apart from Golden Sugar) over the next few years from when the company launched its products in the snacks, powdered drinks and breakfast cereals segment of the market. We estimate that the ‘other food’ segments will grow up to 3.5% YoY till 2019 as Nigeria’s population and middle income earners increase.

Corporate Figures
• On the strength of the most recent quarter’s (MRQ) financial statistics presented by the management of Flour Mills, one can safely conclude that the company is in a healthy state, helped by its good management skill. In the opinion of Investdata analysts, if such skill is maintained, the market will definitely revalue the equity’s share price over the coming years, especially when it starts enjoying the dividend of the ongoing fund raising moves.
• As can be seen in the MRQ, the management of flour mills effectively built her income statements at good rates above the comparable period of 2016. The sales figure grew by a marginal 9.63% from N389.943bn to N427.502bn. Earnings before Interest and Tax (EBIT) appreciated over comparable period figure by 62.10% from N27.264bn to N44.194bn, while Profit before Tax (PBT) improved by 89.46%, just as Profit After Tax for the period (PAT) stood at 78.99% above profit posted in the similar period of 2016.

Liquidity/Risk Ratios
• Given the Quick and Current ratio estimated from the company’s figure, we can safely conclude that a fair adjustment should be considered by the management of Flour Mills in this regard.
• At 1.06x interest coverage, it is evident that the company possesses enough muscle to offset interest on outstanding debts. Nevertheless, to keep the status intact, it is necessary for the management to only use facilities with low cost.
• The company’s volatility is only fairly below a unit. With this, we can safely conclude fair investors’ flair for its shares. Financial leverage of 3.79x is fair enough although this reduced from the 4.73x estimated in the similar period of 2016.

Profitability Ratios
• Typical of its business, the cost of sales is quite on the high side. From our estimates, Cost of Sales is 86.89% of the Turnover/Sales figure reported for the period.
• This explained the low 4.56% margin between Profit before Tax and Sales figure for the period. Please note that same factor accounted for the 3.10% Profit Margin.
• Return on average equity is 11.86% while Return on average Assets is 3.13%.

Efficiency Ratios
Both Total Assets Turnover and Equity turnover are very impressive. Total Assets Turnover increased from 82% in its last nine-month financials to 100.92% in the current quarter. Equity Turnover is equally impressive at 382.63%, slightly below the previous 387.87%. Also following the same trend is the Fixed Assets Turnover estimated at 189.64% as against the 175.45% in the previous quarter.

Investment Ratios
• Following the same pattern observed in Flour Mills’ income statement, all investment ratios soared against that of the corresponding period of 2016.
• Earnings per Share (EPS) and Total Comprehensive Income per share stood above last quarter’s by 78.99%, stemming from N3.10 to N5.55.
• This resulted in 18% yield over the market price of Flour Mills Share Price as at the time this result was unveiled to the market. In our opinion, this yield is quite attractive.
• The positive performance adjusted the P/E-Ratio down to 1.85x from 1.99x, while
• The company’s current share price becomes more attractive with a Price/Book Value ratio below 1, this has further confirmed our estimated fair value for the stock.
• In conclusion, investment in the share price of Flour Mills Nigerian Plc has and will remain profitable, all things remaining the same.

First though Third Quarter-2017 Compared
• All income elements ranging from the operating profit to total comprehensive income are on the rise QoQ.
• Nevertheless, the growth rate of the said figures reduced from the half year performance to the third quarter.
• From our observation, the growth rate should improve between the third and fourth quarter of the year. In other words, we expect more impressive financial in the full year earnings.
• Although non-current liabilities increased, while current liabilities dropped, total liabilities stood at 11.88% below the figures reported in the first quarter.

Our weighted average DCF and P/E valuation for Flour Mills Nigeria gives TP of N45.00 (which implies a 36.36% upside potential from current price of N33.00. We therefore maintain a BUY recommendation on FLOURMILL.

Technical View

• Observations from the technical tools revealed that short-term trade might not be frequently reliable on the share price of Flour Mills.
• The stock has been spotted to have a major resistance around N34.63 and quite strong support at N28.10.
• Ordinarily the gap between these two points should suffice for short term trade, but the probability of the stock hitting the support before reversing is quite slim.
• In other words we expect price to shuttle between N31.00 and N34.00 leaving a N3.00 margin which may not be too profitable after considering transaction charges.

• On the strength of the above, we recommend only medium and long term positions in the shares of Flour Mills as this holds stronger possibility of good returns for investors.
• We also believe that for better returns at the release of the full year performance due in the first week of July 2018, buying in tranches for now is an intelligent investment decision.

Equity Analyst