Flour Mills of Nigeria Plc


Ticker:                       FLOURMILLNature of Business:    Food ProductsLocation :                            Nigeria
Recent Price:              NGN29.50   52-Week High/Low: NGN35.00/17.00Estimated Fair Value:    NGN40.68-NGN47.19
Expected Return:      42.6%Consider Buy:                   Below NGN40.68Business Risk:            Average
Financial Risk:    MediumEconomic Moat:             WeakCorporate Governance:  Strong


Company Overview
Flour Mills of Nigeria Plc (FLOURMILL), a foremost food and agro-allied company, was established as a private company in September 1960 but commenced operations in1962. It is a highly diversified company; its broad product portfolio includes flour, pasta, noodles, sugar, edible oils, margarine, refined sugar, livestock feeds, packing materials, farming, power generation, logistics, customs clearing, forwarding and shipping agency. The company boasts of the prominent Golden Penny brands such as Golden Penny Prime Flour, Golden Penny Semovita and Golden Penny Noodles,

It became a public company in 1978 and was listed on the Nigerian Stock Exchange in the same year. FLOURMILL is a subsidiary of Excelsior Shipping Company Limited, Liberia which controls 63% of its shareholding.

The company grows its business through both organic and inorganic means; it is a fully-integrated company having embarked on backward integration to secure assured source of supply and source for materials locally. The management continuously embarks on product innovation. Golden Penny Jollof (Chicken Flavour) Noodles, Dawavita and Mai Kwabo brands were launched by the company.

Mr. John G. Coumantaros chairs the Board of Directors while Mr. Paul Miyonmide Gbededo holds sway as the managing director. Atedo Peterside, a non-executive director, resigned on 31 March 2020. Mr. Omoboyede Oyebolanle Olusanya, who joined the company as group chief operating officer in March 2020, became an executive director in July 2020.

Investment Thesis
In order to streamline operations, some subsidiaries were merged. Sunti Golden Sugar Estates Limited and Golden Sugar Company Limited were merged. Besides, the operations of Olympic Towers Limited and Apapa Bulk Terminal Limited were combined. These mergers would lead to cost savings, and boost earnings and margins.

FLOURMILL organised its business into food, agro-allied, sugar and support services. There has been a strong growth in the food, agro-allied and sugar business segments. Food, its core business, involves the manufacture and sale of pasta, noodles and snacks; it has been, on average, responsible for 72.9% of total revenue and 62.4% of total gross profit over the past ten years. Agro-allied and sugar segments are also major contributors to earnings of the company. Revenue growth for food and agro-allied segments averaged out to 11.2% and 14.8% respectively in the last seven years.

FLOURMILL has a broad product portfolio which supports its core products and ensures risk is spread. We expect management’s resolve to source for materials locally to pay off going forward.

The company raised NGN39.3 billion from its rights issue of 2018. Consequently, it shored up its capital, paid down its debt and reduced its debt obligations. Total debt at the end of 2020 fiscal year was NGN109.6 billion, 54.7% down from the figure of year 2017. Shareholders’ fund and working capital have also been improving. It has started generating free cash flow in spite of the substantial capital investment.  The investment in capital should yield positive results in the nearest future.

FLOURMILL  has low profit margins because of high cost of materials. Both Return on Equity (RoE) and Return on Assets (RoA) are low. But shareholders receive dividends regularly; dividend yield reached a 10-year peak of 7.3% in 2020. The company presently trades below our fair value estimate. We maintain a buy position on the stock of  FLOURMILL in the light of its improved fundamentals.

FLOURMILL has an adjusted Earnings Power Value (EPV) of NGN22.20. Book Value Per Share (BVPS) was NGN38.00 and Price-to-Earnings (P/E) ratio was 7.2 times at the end of 2020 fiscal year. Currently, it trades at 0.8 times book value and 0.2 times sales. We have estimated that a share of the company is worth between NGN40.68 and N47.19. A return of 42.6% is expected in the next three years.

Financial Overview
FLOURMILL has grown its gross and net earnings by 3% and 8.8% respectively over the past three years. Its revenue of NGN573.8 billion translated into a rise of 8.8% in 2020 compared to a fall of 2.8% achieved in the previous year. Revenue from agro-allied and sugar business divisions grew by 19.7% and 18.1% respectively on a year-over-year basis. Food sales were down 6.8% while support services lost 41.3% in revenue within a year.

Operating profit gained NGN2.8 billion as against NGN16.1 billion drop of the earlier year. Profit Before Tax (PBT) leapt 72% from NGN10.2 billion to NGN17.5 billion while Profit After Tax (PAT) jumped by 184.4% to NGN11.4 billion at 2020 fiscal year end. Gross profit margin and PAT margin closed at 11.5% and 2% respectively. High cost of sales is the major factor responsible for low profit margins. Cost of sales has hovered around 87.3% in the past ten years.

Return on Equity (RoE) gained 4.2% to close at 7% while Return on Assets (RoA) moved up by 1.5 percentage points. Both Earnings Per Share (EPS) and BVPS shed 10% and 0.9% respectively on a 3-Year CAGR (Compound Annual Growth Rate) basis.

FLOURMILL’s total debt was NGN109.6 billion as at 31st March 2020; it amounted to 70.3% of total equity and 25.3% of total assets. Both operating cash flow and profit covered interest payments. In the past three years, the company’s indebtedness has been reducing. The company generated a positive free cash flow of NGN12.30 per share in 2020 fiscal year, up from NGN11.14 per share in the preceding year.

Business Risk
FLOURMILL is a major player in the market with its iconic Golden Penny brands. The company is plagued with high costs. We believe that revenue could be improved if markets outside Nigeria are explored by the company.

Recommendation: Buy

Earnings Chart of Flour Mills of Nigeria Plc

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