Margin pressure undermines revenue growth
In Q2’25, Flour Mills of Nigeria (FMN) reported a robust 84% y/y increase in revenue to ₦934.3 billion. This strong performance in Q2 lifted the company’s H1’25 revenue to ₦1.7 trillion (+76% y/y), underscoring FMN’s position as a leader in Nigeria’s food and agro-allied sectors. This growth reflects effective pricing strategies amid mixed volume performance, as the firm expanded its catalogue and market reach across its segments. However, for the first half of its fiscal year, gross margin fell to 9.5% (H1’24: 10.9%), indicating a faster growth in cost of sales. This led to a slower growth in gross profit, up 79% y/y to ₦161.1 billion.
Cost profile stays elevated
On the operational end, the company’s, OPEX printed at ₦35.6 billion (+81% y/y) in Q2, bringing total operating expenses in H1’25 to ₦65.2 billion, a 76% y/y increase. This increase was driven by higher energy costs. as well as increased selling and distribution expenses. Following this, FMN reported a milder growth in Q2 operating profit of 21% y/y to ₦56.0 billion, bringing H1’25 EBIT to ₦105.9 billion, up 40% y/y.
Net finance costs remained elevated in H1’25 at ₦86.2 billion, but only slightly up from ₦84.1 billion in H1’24, as FMN managed a slight reduction (-3% y/y) in net finance costs for the second quarter. This was driven by milder volatility in the FX market. Despite elevated finance costs, FMN’s bottom line remained positive, with profits in the second quarter rising to ₦7.4 billion compared to ₦954 million in Q2’24. This brought PAT in the second half of the fiscal year to ₦14.4 billion, compared to a loss of ₦8.4 billion in H1’24.
Earnings outlook
Looking forward, we project FY’25 revenue to reach ₦3.9 trillion (+70% y/y), still driven by higher pricing, amid mixed volume performance. Further down, the company is expected to continue to face significant cost pressures. As a result, we project a slower growth in EBIT to ₦256.9 billion (+23% y/y). Additionally, we expect a reduction in Net finance costs to ₦170.0 billion (-17% y/y), given milder FX volatility. All in, we see bottomline printing at ₦55.4 billion, a 15.8x increase y/y.
What shaped the past week?
Equities: In the week, the local equity market witnessed mixed sectoral performances, with the bears coming out on top, despite having more sectors close in the green. At Friday’s close, the market recorded a marginal 0.2% loss w/w to settle at 97,236.19 pts. The Industrial Goods sector (-0.02%) closed in the red this week, driven by losses in JAPAULGOLD (-8.86% w/w) and BETAGLAS (4.96% w/w). Meanwhile, Banking (+2.81% w/w), Consumer Goods (+0.02% w/w), Oil & Gas (+5.43% w/w), and Insurance (+0.11% w/w) all saw green closes. Major drivers for these sectors were: CONOIL (+37.35% w/w), SOVEREINS (+21.05% w/w), PZ (+13.41% w/w), STERLINGNG (+11.70% w/w), ACCESSCORP (+11.54% w/w), ARADEL (+8.91% w/w), UBA (+6.90% w/w), GUINEAINS (+6.67% w/w), and FLOURMILL (+3.23% w/w).
Fixed Income: This week, system liquidity opened positive (₦376 billion), but ended the week negative (₦525 billion), following OMOs and NTBs settlements that occurred midweek. As a result, OPR jumped by 12.70ppts to 31.95% w/w. At the end of the week, the secondary market closed on a mixed note, as investors chased instruments with attractive yields, amid liquidity challenges. For specifics, yield movements were seen on the 91-Day (+12.63bps w/w), 182-Day (-300bps w/w), and 364-Day bills (-144bps w/w), Additionally, the 2-year (+56bps w/w), 3-year (+10bps w/w), 5-year (+322bps w/w), and 10-year (+4bps w/w) papers inched higher w/w.
Currency: At the NAFEM, the Naira depreciated by ₦12.15 w/w to close the week at ₦1,678.87 per dollar.
Domestic Economy:
About 352 Local Government Councils in 17 states and the Federal Capital Territory failed to remit or generate any revenue to the coffers of their respective state governments in 2023, data sourced from the National Bureau of Statistics showed. This is coming amid the ongoing tussle to grant Local Governments financial autonomy. An analysis of data from the Internally Generated Revenue of the councils recently published by the NBS revealed that the figure was an increase of 10 states from seven states that did not remit or generate revenue in 2022. The statistics agency in the report said only 20, out of Nigeria’s 36 states, generated revenue from their Local Governments in 2023. That said, barring any last-minute resistance from state governors, direct payment of statutory allocations to Local Government Areas will kick in by November 2024.
Global: On Thursday, just as markets had anticipated, the Federal Reserve delivered a quarter-point rate cut. Following this, focus turned back to the outcome of Tuesday’s U.S. election and headlines out of Beijing. Wall Street shares hit record highs for a third consecutive day, while Treasury yields retreated on Friday, as investors again cheered Donald Trump’s decisive victory, while China kicked off a fresh round of fiscal support for its flagging economy. The broader index, S&P 500, opened on Friday 0.06% higher at 5,976.76 ppts, while the 30-stock Dow Jones Industrial Average was up 0.09% at 43,729.34 ppts. . The tech-heavy Nasdaq Composite opened lower by around 14 points at 19,255.14 ppts but ticked fractionally higher minutes into the trade. Outside the United States, the mood was more subdued. The MSCI index for world stocks was flat, while the pan-European STOXX 600 lost 0.6%. Germany’s DAX stock index fell 0.8%, a day after posting its best daily performance of 2024, helped by expectations that Germany could scrap its debt brake. In Asia, China unveiled a 10 trillion-yuan ($1.40 trillion) debt package to ease local government financing strains and stabilize flagging economic growth. However, Mainland blue chips (. CSI300), fell 1%, a day after rising 3%. Hong Kong’s Hang Seng also slid, 1.07% in a sign of some caution ahead of the announcement.
What will shape markets in the coming week?
Equity market: We expect to see further mixed sessions to start the week, with share price appreciations, followed by profit taking activities as seen in sectoral performance, whilst investors continue to cherry pick fundamentally sound names.
Fixed Income: Following the bullish close to the past week, we expect more of the same sentiments to filter to the new week pending rate direction from next week’s NTBs auction.
