HONEYWELL FLOUR Opens 2018 Financial Year With Strong Q1 Earnings, May Sustain Price, Payout

Honeywell Flour Plc recently presented its first quarter earnings report for the period ended June 30, 2017 to traders and investors through the Nigerian Stock Exchange (NSE) as part of keeping investors abreast of the state of their investment. It is noteworthy that the company has consistently released its numbers within the regulatory timeframe, a situation that has always helped investors and traders make projections. The numbers, this time around, came slightly earlier, when compared to those of 2016.
The company’s performance for the period beat expectations, despite challenges facing Nigeria’s manufacturing sector which continues to negatively impact operating cost at a time the purchasing power amongst the populace is dropping as the economy struggles to regain momentum after five consecutive quarters in recession. Nigeria’s economy recorded the first positive but fragile GDP growth rate of 0.55% since slipping into negative in the 2016Q1.
The real growth in the Honeywell Flour’s top and bottom line reflected the impact of capacity building and investment that support sustainability of the business over the medium to long-term. Profitability and investment ratios for the period revealed value to discerning investors with sales revenue for period soaring by 83.07% to N18.27bn, from N9.98bn in 2016, while profit after tax grew even more significantly from N101m in 2016 to N643m, which represented a 536% growth over that of the corresponding period of last year. Shareholders’ Funds and Total Assets increased by 221.87% and 73.26% to N52.98bn and N120.71bn respectively; just as Earnings per share rose from 0.01 kobo in 2016 to 0.08 kobo.
Based on its intrinsic value of Honeywell, its shares are fairly price at N6.00 each, going by the recent numbers emanating from the company.
The growth in its numbers shows that the company has capacity to meet market demand and service the new captured markets as reflected on the top line, especially given that the increase in cost of sales and production resulted from foreign exchange losses, just as the country’s decaying infrastructure in terms of poor road and almost inexistent rail networks, as well as power that has forced many manufacturers to depend on their self-generated electricity. This has put serious pressure on the company’s operations, just like others.
Honeywell Flour Mills’ Net Profit Margin is still below international standards of 15%, even when it improved over the previous year’s level. The strong earnings and improved net asset have given investors high margin of safety, considering its market value in a recovering stock market and economy, where the stock is trading more than 200% discount to its book value.
The marginal improvement in the national output has impacted growth in the company’s revenue as consumption had equally moved up slowly due to slight improvement in disposable income of consumers as salaries gradually become regular. As a result, products are now leaving shelves as economic fundamentals are improving, helped by foreign exchange gains resulting from interventions by the Central Bank of Nigeria (CBN) in the foreign exchange window of the inter-bank market that has reduced cost, given that their major raw materials are imported, which therefore impacted on the food segment of the company, comprising of flour, pasta, noodles, semolina, sugar, rice edible and snacks.
The food sector contributed 86% of total revenue of N18.27bn in Q1 2017 from N9.98bn in 2016. The significant growth in sales was a boost for the bottom line, which interests investors if it sustain with company business model and products that are essential to the body to keep demand even when there is price hike.

The company’s rebounding earnings power was sustained in Q1 as economic recovery continues to support the fall in the cost of production and other cost elements in its operations, added to other incomes from sale of by-products, exchange gain and sundry income that boosted the period bottom line. This was also supported by management’s cost cutting efforts which impacted on bottomline, looking at the marginal improvement in profit margin for the period. With the continued turnaround in the company’s operation, which if sustained, shareholders can safely expect a better dividend payout at the end of the 2018 financial year.
Valuation/Recommendations
Honeywell Flour Mills’ price to earnings ratio stood at 6.20x, down from 31.41x to shorten investors waiting period on the strength of the improving earnings. Price-to-book for same period stood at 0.30x to revealed value and high margin of safety.
Investors with short, medium and long-term horizon should look the way of this stock. Traders and investors can take advantage of the low price to position now. We have revalued Honeywell and upgraded it to a BUY.

Technical View

The stock has been trending up since March 17, 2017, but pulled back in July as a result of profit taking and rebounded before this pulling back again that is finding support at N1.90. But now that the stock is side trending with moves to breakout the yellow downtrend line a as the market expect the company’s Q2 financials. The price action had formed a descending triangle chart pattern that revealed continuation of trend or reversal. Traders should watch for the first breakout at N2.05 and second resistance level at N2.18 as the market and analysts look forward earnings season in October.

Five-Year Earnings Performance
Honeywell Flour’s mixed performance for the past five years has reflected in its sales revenue and profitability level that led to an unstable dividend payout for the period under review. The company’s sales revenue for the period has been on the rise, helped by its penetration into new markets. As stated earlier, this has reflected in its bottom line, despite the fluctuating cost centres that continue to influence profit.
With the economic recovery and improving output from the manufacturing sector that have reflected on Honeywell Flour’s performance to place a fair value that matches the current market price, investor confidence and sentiments for the equity’s price to retain strength.
Nevertheless, when all other ratios such as the low Price to Earnings (P/E) ratio and high Book Value, are compared to current market price, it will be appropriated to place the equity at an intrinsic value of N6 to reflect the recent numbers posted for 2017.
Over the past five years specifically, the company’s turnover grew by 16.45% to N53.23bn from N45.71bn in 2013 after touching a high of N55.08bn in 2014, while within the same period, profit after tax has oscillated to a negative position of N3.02bn in 2016 and low of N1.12bn 2015 from N2.84bn in 2013, representing 51.41% growth to N4.5bn.
The company’s profit level has been unstable in the five-year period and at the beginning of the financial year 2017. In the same vein, dividend payout has been irregular to indicate its earnings power that may result in investors retaining their shares, while the company’s current shareholding structure and float are expected to support its share price.

Profitability Ratios
The company’s rebounding earning power and low P/E ratio of 3.24x as against the 5.61x in 2013, has reduced investors’ waiting period to recoup their investment as at 2017 release date. Along with the high estimated Earnings Yield of 30.84% of the price.
Please note that the fluctuations recorded year-on-year in P/E ratio and Earnings Yield in the table below was due to the company’s unstable earnings and price movement. Estimated ratios show that the Book Value of company has not been stable in the last five years. Also, profit margin has been low significantly, due to the increasing cost of operations from a low of 2.28% in 2015 to 8.09% in 2017. Return on Equity for investors have been mixed also for five years as depicted in the table below.