Event

Flour mills (“the Group”) grappled with the challenge of translating its top-line growth into a strong bottom-line performance. In FY 2023, the Group reported a modest 5% growth in profit after tax, and a significant 249% decline in its H1 2024 bottom-line, despite achieving a commendable revenue upsurges of 32% and 34% during both periods.

Return on Equity Declines in FY 2023

Following the integration of Honeywell Flour Mills, total asset grew by 65% to N1.10 billion from N667.01 million in FY 2022. However, we observe that the increase in assets did not properly reflect in the Group’s revenue generation as evidenced by the decline in its asset turnover ratio to 1.75x from 1.92x in FY 2022. Furthermore, net margin declined to 1.92% from 2.41% in FY 2022.

The decline in both asset turnover and net margin, despite the growth in financial leverage to 4x, led to a 100 basis point contraction in the Company’s RoE to 14% from 15% in FY 2022.

Outlook

Despite the persistent inflationary pressures adversely affecting consumers income, Flour Mills Nigeria has demonstrated commendable resilience, recording volume growth across its major segments. This can be attributed to their adept market penetration strategies, strong focus on operational efficiency, and supply chain optimisation.

We project a 26% revenue growth to N1.95 trillion for FY 2024. However, we expect high interest expenses and FX losses to exert significant pressure on the Company’s profitability in FY 2024.  Guided by careful analysis, we estimate a fair value of N35.45 for the stock, with EPS of N1.71 and a justified P/E ratio of 20.71x. At the current share price, the stock trades at a forward P/E ratio of 18.70x, implying a price return of 11%. Hence, we recommend a HOLD.

Please follow the link “Flour Mills of Nigeria FY 2023 & H1 2024 – Optimism Upheld Despite Macroeconomic Woes” to view the whole report.

Thank you.