FOCUS OF THE WEEK: FLOUR MILLS OF NIGERIA PLC H1’24 EARNINGS RELEASE

Flour Mills of Nigeria Plc – Macro headwinds drag profitability.

Consolidating on its Q1 performance, FMN saw Q2’24 revenue grow by 33.4% y/y to ₦508.3 billion, bringing H1’24 revenue to ₦964.6 billion (up 34% y/y). This came in despite the waning macro environment.  Dissecting the company’s segmental performance, three of the company’s four segments posted double-digit gains while one segment saw a decline. Specifically, Food, Sugar and Support segments grew 50.5%, 66.6%, and 16.8% y/y to come in at ₦349.8 billion, ₦82.7 billion, and ₦12.3 billion respectively. Price and volume increase across major products supported this growth. Meanwhile, the Agro-allied segment declined by 28.0% to come in at ₦63.3 billion due to lower volumes. 

Gross margins hit double-digits.

FMN recorded a slower expansion in costs of sales in Q2’24 (31.2% y/y), to ₦453.1 billion, and bringing H1’24 costs of sales to ₦859.1 billion. This led to a 1.6ppts increase in gross margin for the Q2 period to 10.9%, leading gross profit to ₦55.2 billion and bringing gross profit for H1 period to ₦105.5 billion.

Inflation, fx losses and finance costs pressure bottom-line.

For operating results, similar to what the company experienced in Q1, higher opex, FX losses and higher finance costs continued to pressure bottom-line in Q2. To put in numbers, OPEX rose 73.5% y/y in Q2 to lift H1’24 OPEX to ₦37.0 billion. FX related losses grew 89.0% y/y in Q2 to drive up H1’24 fx losses to ₦43.5 billion. In addition, finance costs in Q2 rose 26.9% y/y to lift H1’24 finance costs to ₦34.6 billion due to an elevated debt profile. We however like to note that the pace of growth for these cost items were slower in Q2 than in Q1 thus, bottom-line for Q2 came in at ₦816.0 million (up 299.8% y/y). However, this did little to abate losses in H1 (H1’24 -₦8.5 billion vs H1’23 ₦5.7 billion) given the magnitude of losses experienced in Q1. 

Earnings Outlook: TP estimated at ₦31.05.

Our full year expectation for revenue comes in at ₦2.1 trillion (up 33.7% y/y) driven by higher food prices. For operating results, while we expect a deceleration in losses for subsequent quarters, we still expect operating results for the full year to come in lower y/y, given these cost pressures. To put in numbers, we project FY’24 EBIT to come in at ₦55.8 billion (down 43.0% y/y). Meanwhile given expectations for higher finance costs due to increased borrowings, we project a net loss of ₦5.3 billion (FY’23 ₦29.5 billion profit).

What shaped the past week?

Equities: The NGX extended its bullish run advancing by 0.90% w/w. Notably, the Oil & Gas index posted the highest weekly gains (+2.91%) driven by CONOIL (+7.86%). Similarly, the Banking index (+1.17% w/w) extended its bullish run driven by sustained buy-interest in FBNH (+12.36%). Lastly, Industrial Goods (+2.73% w/w) was lifted by renewed buy-interest in BUACEMENT (+6.47% w/w).

Fixed Income: In the secondary market, trading activity was largely muted as investors traded in line with the NTBs auction that was held on Wednesday. The auction witnessed rates inching higher as liquidity levels thinned out.  Total subscriptions were about ₦876 billion while about ₦497 billion was allotted. Yields across benchmark bonds closed higher, largely due to rates moving in tandem with rates in the OMO market and interbank window. Of note, the 91-, 182-, and 364-days papers saw their stop rates rise by 100bps, 200bps and 375bps respectively to close at 7.00%, 11.00%, and 16.75%. Meanwhile, in the bonds space, yields closed relatively flat ahead of next week’s bond auction. The yields of the 2-, 3-, 5- and 20-years papers advanced by 5bps, 4bps, 2bps and 1bps to settle at 15.17%, 15.25%, 15.48% and 16.51% at week close.

Currency: The Naira depreciated by ₦4.00 at the NAFEM Window to close at ₦780.14.

Domestic Economy:   President Bola Ahmed Tinubu signed a ₦2.18 trillion Supplementary Budget into law this week. The budget is allocated between recurrent and capital expenditures in a 46:54 ratio on a 100 scale. The major allocations include the Service-wide vote (28%), Ministry of Defense (22%), Works (14%) and Capital Supplementation (10%). Notably, the budget includes allocations for the Independent National Electoral Commission, provisional wage increments for workers, and conditional cash transfers. With this supplementary budget, the total government expenditure for the year rises to ₦24.01 trillion, approximately 9% of the GDP.

Global:  Global markets exhibited a subdued performance throughout the week, with investor sentiment being influenced by the latest round of earnings, macroeconomic data releases, and statements from monetary authorities. In North America, the release of Q3’23 results by numerous companies garnered a mixed response from investors, with some disappointing outcomes. Additionally, attention was focused on remarks made by Jerome Powell, who maintained that current interest rates are sufficiently restrictive to alleviate inflationary pressures.  In contrast, the Reserve Bank of Australia implemented a 25 basis points increase in interest rates, setting the cash rate and the interest rate on Exchange Settlement balances at 4.35% and 4.25%, respectively. Shifting to the Asian region, China continued to grapple with deflation, with the Consumer Price Index (CPI) dropping by 0.2% year on year in October, according to the National Bureau of Statistics. The Producer Price Index (PPI) also registered a 2.6% decline in October year on year. Finally, in Europe, inflation proved persistent, notably in Germany, where the inflation rate reached 3.8% year on year. Economic data for the United Kingdom revealed stagnant GDP growth in Q3’23, according to the Office for National Statistics (ONS).

What will shape markets in the coming week?

Equity market:   It was a positive trading week, with decent gains recorded in most of the sectoral indices. Given the bullish close the market has witnessed in the last three weeks, we might see profit-taking activities dominate the market early next week, while further bargain hunting may likely resume in the later session of the week. 

Fixed Income: Looking ahead, we expect liquidity levels to determine investors sentiment in the NTBs market, while investors’ attention will be fixated on the bond auction slated for the next trading session.