Flour mill pulls 31.1% revenue spurt in 9 months to N555B

Revenue grew year on year to N555.3bn from N423.5bn

The recently released 9M-2020/21 result for Flourmills released last week has revealed that the company reported a 31.1 percent growth in revenue to N555.3 billion from N423.5 bn in 9M-2019/20.

According to the report, the growth in revenue was driven by broad-based growth across business units as Food (+31.2% y/y to N343.9bn), Agro-allied (+29.9% y/y to N105.6bn), Sugar (+33.4% y/y to N90.2bn) and Support Services (+24.8% y/y to N15.6bn) recorded solid y/y growths.

Furthermore, slower growth in Cost of Sales and Operating expenses drove margin expansion and consequently faster growth in Operating Profit. Operating margin expanded 50bps y/y to print at 6.3% in 9M-2020/21 while Operating Profit surged 42.7% y/y.

Also, Profit Before Tax (PBT) and Profit After Tax (PAT) grew 92.1% y/y and 90.9% y/y respectively.

Group Revenue sustains upward trend:

In Flourmills’ 9M-2020/21 results, the company reported growth of 31.1% y/y in Revenue to N555.3bn from N423.5bn in 9M-2019/20. The growth in Revenue was driven by broad-based growth across business units as Food (+31.2% y/y to N343.9bn), Agro-allied (+29.9% y/y to N105.6bn), Sugar (+33.4% y/y to N90.2bn) and Support Services (+24.8% y/y to N15.6bn) recorded solid y/y growths.

The stellar revenue performance was broadly driven by a confluence of factors including; introduction of new products at lower price points to target price-sensitive consumers, resizing popular products to lower SKUs and lower price points, and sustained investment in route to market.

Notably, in the Support business, the subdued influx of imported packaging alternatives and the introduction of smaller SKU bags for Flour, Detergent & Cement supported BAGCO’s Revenue. That said, we note that price increases on select products in the Food & Sugar businesses further supported Revenue.

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Operational efficiency, better pricing, improved volume mix drove margin expansion: Cost of Sales grew, albeit at a slower pace to Revenue, climbing higher by 28.5% y/y to N482.9bn in 9M-2020/21 from N375.7bn in 9M-2019/20. As a result, Gross Profit accelerated, up 51.5% y/y to N72.4bn in 9M-2020/21.

Furthermore, the slower growth in Cost of Sales supported an expansion in Gross margin (+170bps y/y to 13.0%).

The improvement in margins was majorly supported by price increment across some key product categories which we estimate at an average of 23.6% given the single digit 6.0% growth in volumes across all business segments.

In addition, improved operational efficiency in the Agro-allied business provided further support for cost management. Lastly, we note the company benefitted from improved volume mix in Flour, Sugar and Oils, where demand was skewed to high margin products.

Operating expenses grew at a sub-inflationary rate of 6.1% y/y to N25.1bn in 9M-2020/21 from N23.7bn in 9M-2019/20. The growth in OPEX was driven by upticks in Selling & Distribution expenses (+5.5% y/y) and Administrative expenses (+6.3% y/y).

However, the company reported Other Operating Loss of N12.6bn in 9M-2020/21 (Compared to N0.5bn Other Operating Gain in 9M-2019/20).

The Other Operating Loss was driven by FX loss of N14.6bn recorded during the period. The FX losses incurred was due to IFRS 16 accounting revaluation of the USD denominated long term port concession contract which largely impacts the Support business.

Nevertheless, Operating Profit grew by a sturdy 42.7% y/y to print at N35.2bn in 9M-2020/21 from N24.7bn in 9M-2019/20. In addition, Operating margin expanded 50bps y/y to 6.3% in 9M-2020/21.

Balance sheet optimization strategies paid off: In 9M-2020/21, Flourmills sustained efforts at restructuring and optimizing its balance sheet following the depressed yield environment.

As a result, the company raised long-term finance via bond issuances at cheaper rates while paying down some of its short-term debt in form of Commercial Papers.

In addition, proper working capital management strategies helped drive a surge in cash generation.

Consequently, the company recorded a 30.8% y/y decline in Net debt to N66.2bn in 9M –2020/21.

Against this backdrop, Net Finance Cost fell 6.4% y/y to N11.6bn in 9M-2020/21 on the back of higher Finance Income (+356.7% y/y to N3.3bn) despite the increase in Finance cost (+13.8% y/y to N14.9bn). 

As a result, Profit Before Tax galloped by 92.1% y/y to N23.6bn in 9M-2020/21 from N12.3bn in 9M-2019/20.

While Effective Tax Rate edged higher by 4bps, it had minimal impact on Net Income which surged 90.9% y/y to print at N15.6bn in 9M-2020/21 from N8.2bn in 9M-2019/20.

Strong outing expected in Q4:

Looking ahead, we hold an optimistic view on the performance of Flourmills for the end of the 2020/21 financial year. We expect volume growth to remain decent in Q4-2020/21 as market sentiments indicate demand for the company’s brands remains strong despite recent price increases implemented,” wrote analysts at United Capital.