Analysts forecast in June that Flour Mills will outperform the market has come to pass but they have since reversed themselves by advising investors to hold their positions. This may have something to do with the company’s first quarter run where revenues were sharp but profit, sluggish and reflective of the company’s year on year performance.
The stock, which sold for N27.55 as of Tuesday, September 12, has outperformed the All Share Index (ASI) in the last six months by delivering 58 percent return compared to the market that has turned in 40 percent. Even when seen from a longer time horizon, the stock delivered 46 percent relative to the ASI’s 29 percent. The performance has prompted analysts say investors should hold the stock and wait and see.
According to the Financial Times, which polls analysts on company performance on the Nigerian Bourse, they forecast a 12.52 percent increase in the company’s stock in the next 12 months. “As of Sep 08, 2017, the consensus forecast amongst 11 polled investment analysts covering Flour Mills of Nigeria Plc. advises investors to hold their position in the company. This has been the consensus forecast since the sentiment of investment analysts deteriorated on Aug 22, 2017. The previous consensus forecast advised that Flour Mills of Nigeria Plc. would outperform the market.
The 13 analysts offering 12 month price targets for Flour Mills of Nigeria Plc. have a median target of N31.00, with a high estimate of N38.21 and a low estimate of N19.80. The median estimate represents a 12.52% increase from the last price of N27.55”.
Diversification of earnings sources, which began in the last financial year helped revenues, shoot up by a quarter to N148.97 billion from N119.2 billion but a combination of rising cost of sales, falling investing income and burgeoning finance costs contrive to choke bottom line in the period.
With cost of sales jumping 13 percent to N131.74 billion from N103.93 billion, gross profit had a fairly good growth to N17.24 billion from N15.28 billion, a 12.8 percent rise. The rise helped the upward movement of gross profit margin to 15.6 percent from 12.82 percent. But operating profit rose by 37.5 percent to indicate an ability to rein in costs as the figure jumped to N15.08 billion from N10.97 billion. The cost management ability is also reflected in the rise in operating margin to 10.12 percent from 9.21 percent.
The big drop in investment income and a sharp rise in finance costs put the lids on pre-tax profits as it grew just 5.5 percent to N6.19 billion to N5.87 billion, resulting in a pre-tax margin that is just a tad better than the equivalent period, to 4.2 percent from 4.9 percent. The downward pull exerted by the slow growth saw net profit inching upwards to N4.53 billion from N4.41 billion and a consequent miniscule drop in net profit margin to 3 percent to 3.7 percent.
The pattern of decent revenues and restricted bottom line has been with the company since the last financial year when even though revenue improved 48 percent net profit receded 69 percent. Volumes were boosted by exports of the company products to neighbouring countries and improved local demand for its fertilizer business, which grew 30 percent.
Turnover moved to N389.94 billion from N263.68 billion but an equally fast paced cost of sales figure of N336.45 billion from the former position of N236 billion, another 43 percent rise. The unwieldy rise is due mainly to FX glitches especially from payables account.
Despite the unwieldy cost of sales, gross profit grew 93 percent to N53.49billion from N35.4 billion. It also led N27.68 billion; this helped jerk up gross profit margin to 13.7 percent to 10.5 percent.
Rising operating costs in the period resulted in operating losses of N11.76 billion compared to losses of N3.13 billion made earlier. But Earnings before Interest and taxes (EBIT) vaulted 134 percent to N27.3 billion from N11.63 billion.
Despite rising operating costs pre-tax profits firmed, N10.3 billion from a loss position of N3.95 billion incurred earlier. A better pre-tax position helped firm pre-tax profit margin to 2.64 percent from a negative position slipped into in the equivalent quarter in 2015.
Net profits had a 61 percent setback, dropping to N7.4 billion from N19 billion, resulting in a shrunken net profit margin of 1.9 percent compared to 7.2 percent. Falling net profit, according analysts at Vetiva were due to exchange rate differentials and rising finance cost.
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