Flour Mills of Nigeria Reaps Benefits of Border Closure

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Goddy Egene writes that closure of Nigeria’s land borders has led to an increased market share for Flour Mills of Nigeria, which recorded impressive financial performance in the third quarter ended December 31, 2019

One of the challenges faced by local manufacturing companies is the influx of imported goods from China and some other Asian countries. Nigerian consumers, with weak purchasing power, partly due to high inflation, prefer going for the imported goods that most times are of low quality and cheaper price.

This development always affects the financial performance of many listed manufacturing companies. Therefore, when the federal government announced the closure of its borders last October, many stakeholders hailed the policy, saying it would impact positively on the performance of some of the companies.

That positive impact has begun to manifest in the performance of Flour Mills of Nigeria (FMN) Plc going by the company’s third quarter (Q3) ended December 2019. The company recorded marginal increase in both top-line and bottom-line for the nine months ended December 31, 2019, which fell under the period of border closure recorded significantly improve results.

Precisely, FMN recorded a revenue of N423.48 billion in the nine months in 2019, showing an increase of six per cent compared with N400.64 billion in the corresponding period of 2018. Profit before tax (PBT) rose marginally from N11.278 billion to N12.292 billion in 2019, while profit after tax (PAT) increased from N7.896 billion to N8.161 billion.

However, in Q3 2019, FMN posted a revenue growth of 17 per cent to N152.7 billion, from N130.9 billion in the corresponding period of 2018. PBT grew by 23 per cent to N3.7 billion, while financing cost fell by 20 per cent from N5.3 billion to N4.3 billion.

Commenting on the result, the Group Managing Director, FMN, Paul Gbededo, said:
“I am pleased with our Q3 results. We have recorded impressive growth in our volumes, and profit before tax increased by 23 per cent. In line with our purpose of ‘Feeding the Nation, Everyday,’ I am positive that we are on the right track as we continue to deliver sustainable value for our stakeholders.

“Going into the final quarter of the financial year, continued growth is envisaged as we continue to implement targeted strategies, invest in our branding and distribution network and reduce operational costs that will bring even more value in the long run for shareholders.”

According to the company, the Q3 2019/20 results shows impressive performance across key segments of the business.
“The agro-allied, sugar and food value chains all had impressive results this quarter, with the food business now moving towards expected projections. Gains in the sector can be attributed to a combination of ongoing brand loyalty and refined regional strategies that are designed to increase market penetration.

“These strategies have been boosted by recent improvements in the domestic market as a result of gains from the boarder closure. The management’s strategy on increasing the efficiency of its balance sheet and improving working capital continues to yield the desired result, with finance cost recording a steady decline,” the company said.

Analysts’ assessment
Looking at the results, analysts at WSTC Securities Limited, said following the border closure policy by the federal government last year, and just at the start of the third quarter of FMN’s financial year, smuggling activities and influx of imported goods subsided significantly, thus creating an increased market share.

“Resulting from the supply gap induced by the border closure, FMN was able to push more goods in the market. Consequently, revenue grew by 17 per cent in Q3’19, as volumes grew by eight per cent.
“The food business segment, which had hitherto reported revenue decline in the last two quarters, bounced back to growth as the business segment grew by 14 per cent in Q3.

The sugar and agro-allied business segments also grew by a double-digit of 20 per cent and 52 per cent respectively. However, the upside recorded in the three business segments mentioned above was partially offset by the support services business segment, which declined by 27 per cent to N6.10 billion in Q3 from N8.30 billion in the previous Q3.

In summary, for the food, agro-allied and sugar business segments, the revenue growth reported majorly resulted from improved sales during the period as the Group took advantage of the border closure in terms of increased market share,” they said.
The analysts said a spike in operating expense made its operating profit to decline by10 per cent year-on-year, to N24.68 billion in nine months from N27.92 billion in previous period.

According to the analysts, the factor that drove operating profit to a decline despite a growth in gross profit was higher operating expense during the period, which increased by 13 per cent and resulted from higher personnel expenses and general expenses.
The effective balance sheet optimisation also added to the value delivery witnessed by the company. The higher profit recorded during the period nine months, WSTC said, was due to lower finance cost incurred during the period.
“Finance cost declined by21 per cent, saving the group as much as N3.00 billion. The lower finance cost reported was a manifestation of the deleveraging efforts by the management of the group.

“Specifically, total borrowings declined by 21 per cent to N112.56 billion in nine months (9M) 2019 from N141.86 billion in 2018. In addition, the portion of short term debt to total borrowings reduced significantly from 51 per cent in 9M’ 2018 to 37 per cent in 9M’ 2019 20,” they said.

The company explained that the slower growth in PAT posted in 9M of 2019 was due to higher effective tax rate during the period.
“According to the management, prudent steps were taken in estimating the tax bill due to uncertainties regarding the recently implemented Finance Bill. An effective tax rate of 34 per cent was reported in 9M 2019 (9M’19:30 per cent in 2018),” they said.

WSTC analysts said that in the Q3 forecast, they underestimated the positive impact of the border closure on the revenues of the group due to their thought that increased competition in the industry, weak consumer demand, and an overall challenging business environment would limit the upsides associated with the border closure.
“However, it appeared that the group, in the absence of cheaper smuggled products, was able to establish its leadership status in the market,” they said.

Similarly, in their assessment, analysts at FBN Quest said they had adjusted their earnings forecasts for FMN following stronger-than-anticipated recoveries in the flour and agro-allied businesses in Q3.
“PBT for food, which mostly includes flour and had declined by 94 per cent in Q2, but up 19 per cent year-on-year to N1.8 billion, while that of the agro-allied segment climbed out of negative territory to deliver a PBT of N192 million.
“As such, group PBT for the quarter grew by 23 per cent to N3.7 billion and overshot our estimate by 87 per cent. The results were, however, suggestive of strong headwinds in the sugar business as its PBT fell by 19 per cent despite a nine per cent volume growth,” they said.

According to FBN Quest, their 2020-22E average EPS forecast increase of 16 per cent is therefore well below the Q3 positive surprise.
“Nevertheless, given the forecast changes, our target price of N27.4 is around 15 per cent higher than previous. FMN shares are currently trading at a 2020 P/E of 11.5x for a 2020-22E average EPS growth of 26 per cent. The shares have gained 16% year-to-date, outperforming the broad market index by 11 per cent. Our new price target implies a potential upside of 20 per cent. Despite the upside, we are retaining our Neutral recommendation on the stock given the persisting headwinds,” they said.
FBNQuest noted that earnings supported by improved top-line Q3 PBT growth of 23 per cent was driven by a 17 per cent increase in sales to N152.7 billion.

The other positive was a 20 per cent decline in finance charge. Opex was up 26 per cent but this was offset by the strong top-line. On a sequential basis, PBT grew by 17 per cent q/q on the back of a 12 per cent q/q increase in sales. Relative to our forecasts, Q3 sales beat by 16 per cent, contributing to the PBT positive surprise of 87 per cent,” the analysts said.