Equity Research

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1 Equity Research November 2016 Flour Mills of Nigeria Plc Earnings Report 6 months ended 30 th September, 2016 Price hikes offset input cost pressures (NEUTRAL: N21.61) Flour Mills of Nigeria Plc (FMN) released its unaudited FH1 17 result wherein revenue jumped 43.8% YoY to N255.3 billion while PAT contracted 73.1% YoY to N6.5 billion. Excluding N23.7 billion profit from sale of UNICEM, FH1 17 PAT was twenty-threefold higher YoY. Benign commodity prices and price hikes bolster gross margin In line with the pattern across FMCG coverage, FMN implemented price hikes across its food segment (Flour: +34% YoY, pasta: +23% YoY) in a bid to pass on input cost pressures. Consequently, as in FQ1 17, FMN reported strong topline growth (+42.8% YoY to N136.1 billion), 9% higher than our forecast. Top-line growth largely emanated from the food segment (+57.4% YoY to N105.3 billion), with gains also recorded at the Port (+47.9% N324 million) and Agro-allied (+16% YoY to N27 billion) divisions. Improved sales at these segments more than offset weakness at the packaging (-15% YoY to N2.4 billion) and other business (-63.1% YoY to N26 million). Income Statement Data M'm M'm %chg Revenue 255, , % PBT 8,800 24, % Tax (2,332) (91) 2463% PAT 6,468 24, % Balance Sheet Data 2016-Sept 'm Mar 'm %chg Inventory 90,657 56, % Receivables 11,629 12, % Cash 43,785 33,213 32% Payables 51,994 50, % Net Assets 99,606 95, % Stock Data Price N week range N16.13 N24.99 Market Cap. (N'm) 50,070 1-month Avg. Vol 582,253 Curr. PE N/A Bloomberg Ticker FLOURMIL:NL Flour Mills of Nigeria Plc- Share Price Trend Oct-15 Nov-15 Dec-15 Analyst(s) Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Usman Olubajo usman-olubajo.ajibola@arm.com.ng

2 In addition to the price hikes, benign wheat prices (-28.3% YoY) helped offset elevated raw sugar (+78% YoY) and domestic cereal (+118% YoY) prices, which in combination with the price hikes drove gross margin expansion (+6.8pps YoY to 15.5%) with gross profit nearly tripling YoY to N21.1 billion. Figure 1: YoY expansion in Gross margin (pps) (2.0) (4.0) (6.0) (8.0) (10.0) (1.4) (2.5) (5.3) (5.4) (6.0) (0.2) (2.8) (0.7) (7.6) FQ1 13 FQ2 13 FQ3 13 FQ4 13 FQ1 14 FQ2 14 FQ3 14 FQ4 14 FQ1 15 FQ2 15 FQ3 15 FQ4 15 FQ1 16 FQ2 16 FQ3 16 FQ4 16 FQ1 17 FQ2 17 Source: Company s financials, ARM Research Operational efficiency strengthens earnings In line with management guidance, FMN cutback on more expensive bank overdraft (-31.8% YoY to N26.9 billion) which helped drive a moderation in borrowing cost (-8.9% YoY to N5.6 billion) in the face of monetary tightening over the period. Assisted by a surge in finance income (threefold YoY to N290 million), net finance costs slid 12.3% YoY to N5.3 billion. In addition to subdued rise in OPEX (+28.3% YoY to N5.2 billion) which continues to reflect improved efficiency following last year s merger of five subsidiaries into the holding company, FMN reported PBT and PAT of N2.9 billion and N2.1 billion respectively vs. normalized pre- and post-tax loss of N810 million and N685 million in FQ2 16. Including gains on disposal of UNICEM in corresponding period of 2016, FQ2 17 PAT would have been 91% lower YoY.

3 Improved outlook drives upward revision to FVE Over the rest of FY 17, we expect impact of price hikes to sustain top-line growth at the food segment. In addition, recent recovery in livestock demand as bird flu pandemic 1 recedes should buoy Agro-allied top-line. Consequently, we raise our FY 17E sales 9% higher to N499.5 billion (+45.8% YoY). On cost, the surplus picture across global wheat markets should continue with the USDA forecasting that global wheat production should outstrip consumption by 248.4MMT. Assisted by onset of harvest in Nigeria which should temper domestic cereal prices, we see scope for tamer input cost pressures (ex-currency effects). Accordingly, we project gross profit to climb 87.7% YoY to N70.6 billion implying a 3.2pps YoY expansion in gross margin to 14.1% (prior: 11.2%) Leaving our FY 16E OPEX and net finance charges largely unchanged at N23.7 billion and N21.0 billion, we expect gross margin gains to more than offset FX induced operating loss of N12.2 billion. Consequently, we estimate PAT of N9.8 billion (prior: N6.8 billion, normalized FY 16 loss: N9.3 billion). Including FY 16 gains on associate disposal of N23.7 billion, PBT would be lower by 16% YoY to N13.3 billion. Net adjustment of the foregoing result is an 8% upward revision to our FVE of N FMN trades at a FY 2017 P/E of 5.3x vs. 13.1x for its Bloomberg Middle East & Africa peers. Last trading price of N19.70 is at a 10% discount to our FVE (N21.61), which translate to a NEUTRAL rating on the stock. 1 The Poultry Site reports sizable reduction in the reported cases of bird flu virus (Q3 16: cases: -98% YoY to 2, deaths: -99% YoY to 4900

4 QARTERLY Income Statement (N mln)* FQ1 2017A FQ2 2017A FQ3 2017F FQ4 2017F Turnover 119, , , ,071 COGS 103, , , ,261 Gross Profit 15,278 21,145 17,374 16,810 Operating Costs 3,982 5,162 4,778 9,782 Other operating costs 323 7,760 2,963 1,149 Operating Profit 10,974 8,224 9,633 5,879 interest income interest expense 5,340 5,586 5,717 5,146 Pre-tax Profit 5,873 2,928 4,311 1,120 Taxation Post-tax Profit 4,414 2,054 3, ANNUAL Income Statement (N mln) FY 2016A FY 2017F FY 2018F FY 2019F FY 2020F Revenue 342, , , , ,522 Cost of Goods Sold 304, , , , ,332 Gross Profit 37,625 70,607 78,018 82,999 83,190 Operating Cost 20,852 23,703 29,535 35,044 39,931 Other operating income (loss) 7,721 (12,194) 1,115 1,844 2,662 Operating Profit 9,052 34,710 49,597 49,799 45,921 Net Interest expense 21,294 20,479 22,864 21,859 19,415 Pre-tax Profit (12,242) 14,231 26,733 27,940 26,506 Tax (2,931) 3,798 7,218 8,941 8,482 Post-tax Profit (continued operations) (9,311) 10,433 19,515 18,999 18,024 profit from discontinued operations 23, PAT 14,420 10,433 19,515 18,999 18,024 Balance Sheet (N mln) FY 2016A FY 2017F FY 2018F FY 2019F FY 2020F Assets Fixed Assets 213, , , , ,480 Cash 33, ,612 (6,957) (14,410) Inventory 58,699 90, , , ,936 Trade Debtors 18,966 28,594 31,765 35,044 37,935 Total Assets 124, , , , ,610 Liabilities Trade Creditors 50,417 73,341 71,888 79,771 87,350 ST Borrowings 117, , , , ,785 Long Term Liabilities 66,543 68,371 71,105 73,976 76,966 Total liabilities 249, , , , ,480 Shareholders' fund 95, , , , ,710 Key Ratios FY 2016A FY 2017F FY 2018F FY 2019F FY 2020F Valuation multiples P/E EV/EBITDA ROA 12% 8% 13% 11% 10% ROE 15% 10% 16% 15% 13% EPS Debt/Equity Gross margin EBIT Margin PBT Margin N/A PAT Margin Source: ARM Research

5 ARM ratings and recommendations ARM now employs a two-tier rating system which is based on systemic importance of the security under review and the deviation of our target price for the stock from current market price. We characterize systemic importance as a function of a stock s ranking among the group of top 20 stocks by NSE market capitalization over a trailing 6 month period (minimum) to the review date. We adopt a 5 point rating system for this category of stocks and a 3 point rating system for stocks outside this group. The choice of top 20 stocks arises from the consideration that this group of stocks constitutes >75% of overall market capitalization and stocks outside this group are generally less liquid and individually account for <<1% of market capitalization. For stocks in both categories, the basis for ratings subject to target price deviation is outlined below: TOP 20 NON-TOP 20 Rating Deviation Rating Deviation STRONG BUY >20% BUY >20% OVERWEIGHT 10% 20 % NEUTRAL 5% 20 % NEUTRAL 0% 10 % SELL <5% UNDERWEIGHT -5% 0% SELL <-5% RECOMMENDATION KEY Rating BUY OVERWEIGHT NEUTRAL UNDERWEIGHT SELL Recommendation Accumulate security to a substantial extent constrained only by portfolio diversification considerations Accumulate security to an extent moderated by cognizance of its benchmark weight Maintain status quo for security with respect to current holding i.e. keep if already holding and don t buy otherwise subject to reasonab portfolio constraints Minimise exposure to security taking cognizance of its index weighting Sell-off security completely from portfolio

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