Building on the momentum gained in the first-quarter (year-end is March), Flour Mills of Nigeria Plc. (FLOURMILL) reported yet another record-breaking performance in its recently released Q2:2021 financial scorecard. The company generated NGN200.53bn in Q2:2021 standalone ( July – September 2020) – heads and shoulders above the previous quarter’s NGN154.58bn (a revenue highpoint as we called it in our Q1:2021 Earnings Update).

This brought total revenue for the first half of the year to NGN355.11bn, 31.15% higher than the NGN270.76bn generated in the corresponding H1:2020 period. Flour Mills continues to reap the benefits of the turnaround in its Agro-allied business division (which is up 45.87% YoY and accounts for 20.29% of total revenue), alongside impressive top-line growth in its other business segments (Food:+26.97%, Sugar:+29.47% and Support services: +40.62%).

An improved focus in its Business-to-Customer channels (B2C), investment in its Route-to-market (RTM), and a more robust product offering have proven to be the strategic pillars of the company’s growth this period. Despite the weakened purchasing power of consumers due to the soaring inflation rate, we maintain our positive sales outlook for the firm. Our expectation is premised on the essential nature of the firm’s products, its affordable pricing strategy, and robust capacity in its agro-allied division. On this note, we forecast a top-line growth of 20.26% to NGN690.05bn by yearend 2021.

Profitability Margins Show Laudable Improvement

Cost of sales for H1:2021 shot up by 27.55% YoY to NGN304.82bn, mainly triggered by increases in raw material costs. The impact was, however, moderated by the growth in top-line, resulting in an improvement in cost-to-sales to 85.84% (vs. 88.26% in H1:2020). Despite the increase in operating expenses by 16.10% and a revaluation loss on FCY payables, operating profit still rode on the revenue growth momentum, up by 41.09% to NGN23.73bn (vs. NGN16.82bn in H1:2020).

Although, Flour Mills recorded a 12.59% jump in finance costs to NGN9.95bn, interest coverage ratio improved to 2.38x from 1.90x on the back of the surge in EBIT. At 3.62x, the company’s Debt to EBITDA ratio, although high, compares favorably with its industry peer HONYFLOUR (10.42x).

Management reiterated its intention to issue NGN30bn in bonds later in the year as part of its NGN70bn bond programme; a move which we believe would be advantageous to the company considering the currently depressed yield environment and its recently upgraded credit rating by Agusto & Co. Armed with a new “A-“ rating, we envisage that the company would be able to access cheaper debt, hence easing the burden on its debt metrics in the long run.

Overall, both PBT (+69.17% to NGN14.61bn) and PAT (+68.26% to NGN9.93bn) improved YoY, resulting in enhanced profitability ratios. Net margin, ROE and ROA climbed to 2.80%, 6.30% and 2.14% (from 2.18%, 3.80% and 1.47% respectively). Notably, asset turnover also improved slightly from 0.64x to 0.76x, fueled by revenue growth despite the 14.80% growth in total assets. For 2021FY, we have revised our earlier PAT forecast to NGN16.10bn – implying a net margin of 2.33%.

Outlook and Recommendation

Premised on our 2021FY expected EPS of NGN3.93 and revised target PE of 7.5x, we arrived at a Target Price of NGN29.48. This represents a 2.18% upside when compared to its closing price as of 2nd November 2020. Hence, we place a HOLD recommendation on the ticker.