1 Equity Research Initiation of Coverage Flour Mills of Nigeria Plc Capacity Additions to Boost Topline In this report we present our views on Flour Mills of Nigeria Plc (FLOURMILL) following its recent release of Q1’14 and FY’13 results, and updates on the company’s recently commissioned 750,000 tonnes sugar refinery and additional flour mills. Thus, we initiate coverage with a HOLD rating on the counter, as current price of N 83.90 represents an 8% upside potential from our FY’14 target price of N 90.67 Gains from recent capacity expansion to boost turnover… During the 2013 fiscal year, Flour Mills completed a number of projects expected to boost revenue considerably in the medium term. The most important of these projects is the commissioning of the 750,000MT sugar refinery in Apapa Lagos, which has since begun operation, selling to industrial customers, with plans to commence sale of retail sugar in the pipeline for September. Based on the company’s guidance of a 100,000MT raw sugar importation quota for the year, we estimate that about 93,500MT (using a standard 0.935 to refined sugar ratio) of refined sugar would be produced and sold. We believe that the low utilization of the installed capacity is due to the fact that the refinery has just been commissioned and will not be used at full capacity, at least in the first year. Also in the year, Flour Mills commissioned a 350,000MT pasta factory in Ogun State, and three new flour mills in Apapa, Lagos. The company also disclosed plans to complete the capacity expansion of the recently acquired Rom Oil Mills Ltd by the end of FY’14. The gains from the recent CAPEX were evident in the company’s Q1’14 result, where topline grew by an impressive 43% YoY. …But elevated cost still poses threat to profitability: The positive showing in Flour Mills revenue line was unable to trickle down, as PAT declined by 8% YoY in Q1’14. The poor showing in Flour Mills bottomline was hinged on a faster rise in cost of sales, which spiked 54% YoY, similar to the trend seen in the recently released FY’13 numbers, where cost of sales also paced ahead of revenue. Whilst we do not have the segmental breakdown of the Q1’14 numbers, we surmise that the sharp rise in cost of sales is attributable to increased input costs in the food and agro allied business as average wheat prices were up 8% YoY. We saw a similar trend in UACN’s H1’13 result (we consider Flour Mills and UACN as comparables, as food and agro-allied business contribute at least two-third in revenues for both companies) where the company recorded higher costs in its agriculture related business. Overall profitability margins were lower as both PBT and PAT margins came in lower for Q1’14, settling at 4.6% and 3.6% from 7.3% and 5.6% in corresponding quarter of the 2013 financial year, respectively. For FY’14, we expect the recent investments in capacity to translate into a 41% YoY growth in topline, while we expect Flour Mills after tax earnings to rise by 40%. Despite the 8% decline seen in Q1 after tax earnings, we expect some improvement in the other quarters, based on the recent trend in quarterly PAT contribution to full year earnings figure. Over the last four years (except for FY’13 where the company recorded a loss in Q4 and FY’10 where Q4 contributed 50% to FY earnings) Q1-Q3 have accounted for an average of 85% of FY earnings. Taking the above into account, our revised EPS for FY’14 comes in at N 4.55, 40% higher than FY’12 EPS of N 3.24. 27 August 2013 Stock Data Bloomberg Ticker: FLOURMIL:NL Market Price (N ) 83.90 Shares Outs (Mn) 2,386 Market cap (N ’Mn) 200,158 Price Performance FLOURMIL NSE 12-month (%) 61 58 6-month (%) 10 8 YTD (%) 29 30 Key Ratios 2012A 2013A 2014F EBITDA Margin 10.32% 6.55% 9.00% EBIT Margin 8.21% 7.82% 7.41% PAT Margin 3.24% 2.56% 2.55% ROAA 3.60% 2.96% 3.58% ROAE 12.66% 8.70% 11.11% Valuation 2012A 2013A 2014F P/E (x) 23.38 25.90 18.45 P/BV (x) 2.22 2.18 1.95 Div. Yield (%) 1.91% 2.38% 2.56% 0.80 1.00 1.20 1.40 1.60 1.80 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 FLOURMIL NSEASI Analyst Tochukwu Ezeoke* [email protected]YTD Price Performance (rebased) Source: NSE, CardinalStone Research
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1
Equity Research
Initiation of Coverage
Flour Mills of Nigeria Plc
Capacity Additions to Boost Topline
In this report we present our views on Flour Mills of Nigeria Plc (FLOURMILL) following its recent release of
Q1’14 and FY’13 results, and updates on the company’s recently commissioned 750,000 tonnes sugar refinery
and additional flour mills. Thus, we initiate coverage with a HOLD rating on the counter, as current price of
N83.90 represents an 8% upside potential from our FY’14 target price of N90.67
Gains from recent capacity expansion to boost turnover… During the 2013 fiscal year,
Flour Mills completed a number of projects expected to boost revenue considerably in
the medium term. The most important of these projects is the commissioning of the
750,000MT sugar refinery in Apapa Lagos, which has since begun operation, selling to
industrial customers, with plans to commence sale of retail sugar in the pipeline for
September. Based on the company’s guidance of a 100,000MT raw sugar importation
quota for the year, we estimate that about 93,500MT (using a standard 0.935 to refined
sugar ratio) of refined sugar would be produced and sold. We believe that the low
utilization of the installed capacity is due to the fact that the refinery has just been
commissioned and will not be used at full capacity, at least in the first year. Also in the
year, Flour Mills commissioned a 350,000MT pasta factory in Ogun State, and three new
flour mills in Apapa, Lagos. The company also disclosed plans to complete the capacity
expansion of the recently acquired Rom Oil Mills Ltd by the end of FY’14. The gains from
the recent CAPEX were evident in the company’s Q1’14 result, where topline grew by an
impressive 43% YoY.
…But elevated cost still poses threat to profitability: The positive showing in Flour Mills
revenue line was unable to trickle down, as PAT declined by 8% YoY in Q1’14. The poor
showing in Flour Mills bottomline was hinged on a faster rise in cost of sales, which
spiked 54% YoY, similar to the trend seen in the recently released FY’13 numbers, where
cost of sales also paced ahead of revenue. Whilst we do not have the segmental
breakdown of the Q1’14 numbers, we surmise that the sharp rise in cost of sales is
attributable to increased input costs in the food and agro allied business as average
wheat prices were up 8% YoY. We saw a similar trend in UACN’s H1’13 result (we
consider Flour Mills and UACN as comparables, as food and agro-allied business
contribute at least two-third in revenues for both companies) where the company
recorded higher costs in its agriculture related business. Overall profitability margins
were lower as both PBT and PAT margins came in lower for Q1’14, settling at 4.6% and
3.6% from 7.3% and 5.6% in corresponding quarter of the 2013 financial year,
respectively. For FY’14, we expect the recent investments in capacity to translate into a
41% YoY growth in topline, while we expect Flour Mills after tax earnings to rise by 40%.
Despite the 8% decline seen in Q1 after tax earnings, we expect some improvement in
the other quarters, based on the recent trend in quarterly PAT contribution to full year
earnings figure. Over the last four years (except for FY’13 where the company recorded
a loss in Q4 and FY’10 where Q4 contributed 50% to FY earnings) Q1-Q3 have accounted
for an average of 85% of FY earnings. Taking the above into account, our revised EPS for
FY’14 comes in at N4.55, 40% higher than FY’12 EPS of N3.24.
Sources: CardinalStone Research, Company Financials
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Equity Research
Initiation of Coverage
Flour Mills of Nigeria Plc
Disclosure
Analyst Certification
The research analyst(s) denoted by an “*” on the cover of this report certifies (or, where multiple research analysts are primarily
responsible for this report, the research analysts denoted by an “*” on the cover or within the document individually certifies, with
respect to each security or issuer that the research analyst(s) cover in this research) that: (1) all of the views expressed in this report
accurately articulate the research analyst(s) independent views/opinions, based on public information regarding the companies,
securities, industries or markets discussed in this report. (2) The research analyst(s) compensation or remuneration is in no way
connected (either directly or indirectly) to the specific recommendations, estimates or opinions expressed in this report.
Analysts’ Compensation: The research analyst(s) responsible for the preparation of this report receive compensation based upon
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Investment Ratings
CardinalStone employs a 3-step rating system for equities under coverage: Buy, Hold, and Sell.
Buy ≥ +15.00% expected share price performance
Hold +5.00% to +14.99% expected share price performance
Sell < +5.00% expected share price performance
A BUY rating is given to equities with strong fundamentals, which have the potential to rise by at least +20.00% between the current
price and the analyst’s target price.
An HOLD rating is given to equities with good fundamentals, which have upside potential within a range of +5.00% and +14.99%,
A SELL rating is given to equities that are highly overvalued or with weak fundamentals, where potential returns of less than -5.00% is
expected, between the current price and analyst’s target price.
Cardinal Stone Research distribution of ratings/Investment banking relationships as of August 26, 2013
Rating Buy Sell Hold
% of total recommendations 29% 53% 18%
% with investment banking relationships 0% 0% 0%
Valuation and Risks: Please see the most recent company-specific research report for an analysis of valuation methodology and risks
on any security recommended herein. You can contact the analyst named on the front of this note for further details.
Frequency of Next Update: An update of our view on the company would be provided when next there are substantial
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12
Equity Research
Initiation of Coverage
Flour Mills of Nigeria Plc
However, such sales and trading departments may trade, as principal, on the basis of the research analyst’s published research. Therefore, the proprietary interests of those Sales and Trading departments may conflict with your interests.
Company Disclosure: CardinalStone may have financial or beneficial interest in securities or related investments discussed in this report, which could,
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discussed in this report are disclosed hereunder:
Company Disclosure
FLOUR MILLS OF NIGERIA PLC
a. The analyst holds personal positions (directly or indirectly) in a class of the common equity securities of the company b. The analyst responsible for this report as indicated on the front page is a board member, officer or director of the Company c. CardinalStone is a market maker in the publicly traded equities of the Company d. CardinalStone has been lead arranger or co-lead arranger over the past 12 months of any publicly disclosed offer of securities of
the Company e. CardinalStone beneficially own 1% or more of the equity securities of the Company f. CardinalStone holds a major interest in the debt of the Company g. CardinalStone has received compensation for investment banking activities from the Company within the last 12 months h. CardinalStone intends to seek, or anticipates to receive compensation for investment banking services from the Company in the
next 3 months i. The content of this research report has been communicated with the Company, following which this research report has been
materially amended before its distribution j. The Company is a client of CardinalStone k. The Company owns more than 5% of the issued share capital of CardinalStone l. CardinalStone has other financial or other material interest in the Company
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