Event: Flour Mills of Nigeria Plc (‘The Group’) recently released its FY 2022 financial performance where she reported a record N1.16trn revenue, an 51% year-on-year (YoY) increase from the previous year.  However, net profit only grew by 9% YoY to N28.02bn, effectively implying a c.100 basis points net margin decline.

On the back of the higher profit generated in FY 2022, the management declared a higher dividend payout of 31% in FY 2022 (FY 2021: 26%). This translated to a N2.15 total dividend for shareholders, up by 30% from N1.65 declared in the previous year.

Improved Distribution and Higher Pricing Drive Revenue Growth: The Group’s management sustained efforts to deepen market penetration by enhancing route-to-market and expanding focus on B2C segments. This, in combination with improved product mix and higher pricing, supported revenue growth. The need to raise prices became imperative due to a persistent rise in commodity prices in the international market. Notably, wheat and sugar prices rose by 30% and 20%, respectively during the financial year.

Global supply chain constraints and the pass-through effect of the geopolitical tensions in Eastern Europe (i.e., Russia-Ukraine war) were the key catalysts to the higher prices in the global commodities market. For context, the combined export value of the two conflicting countries accounted for 22% market share in 2021. Therefore, expectations of supply disruptions due to the war resulted in significantly higher wheat prices.

Sugar prices increased due to a combination of global supply chain disruptions and product scarcity. During periods of higher crude oil prices in the global market, the incentive to produce raw sugar becomes lower because of the higher opportunity cost (production of ethanol).

Besides from the high raw materials prices, an additional layer of cost pressures during the financial year was the unavailability of foreign exchange to import.

These factors discussed above drove cost of sales higher by 59% YoY. To manage margin erosion, the management raised prices on products. However, the cost burden was not totally passed on to consumers due to the underlying constraints on household income and consumption. The implication of the partial transfer of cost burden resulted in a 500 basis points decline in gross margin to 9% in FY 2022.

Other developments – Update on Honeywell Share Acquisition

The Group recently announced that she had gotten regulatory approvals for the acquisition of a 71.69% stake in Honeywell Flour Mills Plc (HFMP) together with a 5.06% additional stake held by First Bank of Nigeria Limited. This brings the Group’s total equity stake to 76.75% with operational and managerial control. The transaction was executed at a N4.20 per share. In absolute terms, the Group is expected to pay N25.56bn for the deal.

Outlook

We expect to see additional price increases in FY 2023, majorly from the sugar segment whose margins have been under significant pressure. Across other business segments, we expect revenue growth to be driven by higher volumes resulting from capacity expansion and sustained route-to-market strategies. We also expect the ongoing efforts on product innovation to continue delivering value.

On the back of these, we estimate a total revenue growth of 24% YoY for FY 2023, and a net margin of 3%, a 100-basis point higher than 2% in FY 2022. Our estimation of net margin expansion stems from a combined impact of improved product mix, higher effective pricing, and operating scale. Based on the net margin expansion, profit after tax is expected to grow by 71% YoY to N43.96bn – which implies a N10.72 earnings per share. Our dividend projection for FY 2022 is N2.50 (7% dividend yield).

Our fair value for the stock is N52.77, which translates to a 4.92x justified price-to-earning (below the 5-year average of 6.05x). At the current market price, the stock offers a 58% total return (price return: +51%; dividend yield: +7%). Hence, we recommend a BUY.

Please follow the link “Flour Mills of Nigeria FY 2022 – Cost Pressures Weaken Earnings Growth Potentials” to view the whole report.

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