HONEYWELL FLOUR:WHEN CAPACITY BUILDING AND AGGRESSIVE MARKETING DRIVES GROWTH

The manufacturer and marketer of wheat based products like flour, semolina, whole wheat meal, noodles and pasta recently released its earnings report for six months ended September 30, 2017,in line with its post-listing requirements, which would allow investors assess its state of health, while planning their investments.

The result which came slightly earlier, when compared to that of 2016, was impressive, beating market and analysts estimates, despite the challenges that militated against the country’s manufacturing sector under review and continues to negatively impact operating costs. Noteworthy among these costs are: poor power supply, among other infrastructure problems bad roads continue to threaten bottom line of operators in the system. 

The impact of these factors may however have been mitigated in the period under review as reflected in the average improvements in productivity with the Purchasing Management Index (PMI)rising continuously above 50 points for the seven consecutive months in October, when it stood at 55 points. This is therefore expected to translate into an improvement in the Q3 GDP data to be published by the National Bureau of Statistics (NBS) on Monday morning, from the0.55% improvement recorded in Q2, helped by the improvement in supply of foreign exchange by the Central Bank of Nigeria (CBN) through its investors and exporters window of the of the FX market that has so far helped to stabilize the exchange rate of the Naira, unlike in the past when many where plunged into losses as a result of foreign exchange differential. 

As shown in its second quarter score-card under review, Honeywell Flour’s sales revenue grew by 60.22%, reflecting its aggressive marketing drive and improved market share through penetration into new segments, rising to N39.13bn, from N24.42bn. Earnings rose by a significant 469.15% from N389m in the corresponding period of 2016, to N2.21bn, despite the 68% increase in cost of sales, which largely contributed to the low Q2’17profit margin, despite the turnover growth rate. Also, on a quarterly basis, profit margin remains small albeit modestly by 5bps, also driven by high operational and production costs. The company continues to benefit from easier access to foreign exchange (for its imported inputs) and the relative improvement in demand for its products as purchasing power among consumers gradually improves, keeping the company products off the shelves. 

Net Assets increased by a marginally 3.31% to N54.03bn from N52.34bn, while Earnings Per Share climbed to 28 kobo from 5 kobo in the 2016 half-year.

Based on its intrinsic value, Honeywell shares are fairly price at N6.20 each,helped by the recent improvement in its earnings power and fundamentals.

The growth in its numbers shows that the company has capacity to meet market demand and service the new markets as reflected on the top line, which is responsible for the increased cost of sales, which has nonetheless put serious pressure on operating cost, just like others.  The company ’net profit margin is still below investor-expectation and the 15% international standards, despite moving from 1.59% in 2016 to 5.66%. 

The strong earnings and improved balance sheet have however offered investors a high margin of safety, considering its price in a recovering stock market and economy, following which the stock is grossly undervalued, when benchmarked against its book value of N6.82

Judged by contributions of the various business segments, food recorded over 80% of total revenue, given a significant boost to the company’s bottom-line.

HONEYWELL FLOUR  PLC
SECOND QUARTER  EARNINGS REPORT  FOR SEPTEMBER  30, 2017
COY	2016	2017	% Chg
	(N)	(N)
Date Released	October,31 2016	October, 30 2017
Price at Released Date	1.23	2.01	63.41
Revenue	24,423,000,000	39,131,000,000	60.22
Profit After Tax	389,,000,000	2,214,000,000	469.15
Shareholders' Fund	52335,000,000	54,073,000,000	3.31
ESTIMATED RATIOS
Earnings Per Share	0.05	0.28	460.00
PE Ratio	6.27	1.80	-71.20
Earnings Yield	3.99	13.89	248.12
Book Value	6.60	6.82	3.33
P/B	0.19	0.29	52.63
ROE (%)	0.74	4.09	452.74
Profit Margin	1.59	5.66	255.97
Year End	March	March

  Source: NSE, Company Report &Investdata Research 

We expect the earnings growth to be sustained in Q3 and the rest of the financial year, driven by gross margin expansion in the near term, particularly in Q4, as we foresee further increase in the pace of revenue growth owing to market expansion, especially with the festive period around the corner. This will also be supported by management's cost cutting efforts which would impact on bottom-line, judging by the improvement in profit margin for the period.The continued turnaround in Honeywell Flour’s operation, if sustained,can give shareholders the confidence to expect a better dividend payout at the end ofthe ongoing 2018 financial year in March.

Valuation/Recommendations

The company’s price to earnings ratio stood at 1.80x, down from 6.27x, thereby shortening investors’waiting period on the strength of its improved earnings. Price-to-Book for the period stood at 0.29x,reflecting the inherent value and high margin of safety.

With the 65 kobo earnings per share projection for full year 2018, Investors with short, medium and long-term horizon should look the way of this stock, while traders cantake advantage of the current pullback price to position for share price appreciation.

We have therefore revalued Honeywell and upgraded it to a BUY for all investment purposes. 

Technical View

Honeywell’s price action has recently formed cup and handle to trade above it 50-day moving average, a chart pattern that supports uptrend. The stock began trending up from March 17, 2017, but pulled back in July as a result of profit taking, and rebounded before this pulling back that is finding support at N1.94. But now that the stock is again trending down with year-end seasonal changes and the improved numbers, reversal is imminent. Traders should watch for the first support level at N1.94 and second support level at N1.90 as the market and analysts look forward to its Q3 earnings report.

Honeywell Flour Mill PLC
Share Holding Structure
Siloam Global Services Ltd	75%
First Bank Nigeria Plc	5%
Other Nigerians/ Institutional Investors	20%
Other Statistics
Shares Outstanding (MN)	7,930,197,658
Opening Price (2017)	1.46
Closing Price (2017)	1.05
Closing Price as at Nov  17, 2017	1.94
Date Listed	20th Oct., 2009
Year End	31st March

Five-Year Earnings Performance 

Honeywell Flour's mixed performance for the past five years has reflected in its sales revenue and profit level that resulted in an unstable dividend payout for the period under review. Sales revenue for the period has been on the rise, helped by its penetration into new markets, which as stated earlier has reflected in the bottom line, despite the fluctuating cost centres that continue to influence profit.

With the economic recovery and improving output from the manufacturing sector as reflected in Honeywell Flour’s performance to place a fair value that matches the current market price,investor confidence and sentiments for the equity’s price has helped it to retain strength.

Nevertheless,when all other ratios such as the low Price to Earnings (P/E) and Book Value, are compared to current market price, it will be appropriate to place the equity at an intrinsic value of N6 to reflect the recent numbers posted for 2017.

Over the past five years specifically, the company’s turnover grew by 16.45% to N53.23bn from N45.71bn in 2013 after touching a high of N55.08bn in 2014, while within the same period, profit after tax has oscillated to a negative position of N3.02bn in 2016 and low of N1.12bn 2015 from N2.84bn in 2013, representing 51.41% growth to N4.5bn.

The company’s profit level has been unstable in the five-year period and at the beginning of the financial year 2017, while dividend payout has been irregular to indicate its earnings power that may result in investors retaining their shares, while the company's current shareholding structure and float are expected to support the share price.

HONEYWELL FLOUR  PLC  FIVE-YEAR FINANCIAL POSITIONS
	2013	2014	2015	2016	2017
Date Released	July  20,2013	July 30, 2014	June 29, 2015	June, 30, 2016	June 30, 2017
Price @ Released	2.01	4.25	3.50	1.77	1.76
Turnover	45,709,382,000	55,054,365,000	49,057,511,000	50,883,780,000	53,227,891,000
Profit After Tax	2,843,520,000	3,351,564,000	1,120,267,000	-3,023,854,000	4,304,955,000
Net Assets	18,553,083,000	20,605248,000	20,315,834,000	16,362,599,000	52,334,665,000
Dividend	0.16	0.17	0.05	nil	0.06
Bonus	Nil	Nil	Nil	NIL	NIL

  Source: NSE, Company Report &Investdata Research 

Profitability Ratios

The company’s rebounding earning power and low full year P/E ratio of 3.24x as against the 5.61x in 2013, has reduced the waiting period investors have to recoup their investment as at 2017 release date.  Also important is the high estimated Earnings Yield of 30.84% of the price.

Please note that the fluctuations recorded year-on-year in P/E ratio and Earnings Yield in the table below were due to the company’s unstable earnings and price movement. Estimated ratios show that the Book Value has not been stable in the last five years, just as profit margin has been low significantly, due to the increasing cost of operations from a low of 2.28% in 2015 to 8.09% in 2017. Return on Equity for investors have been mixed also for five years as depicted in the table below.

HONEYWELL FOLUR PLC- ESTIAMATED RATIOS
	2013	2014	2015	2016	2017
Earnings Per Share	0.36	0.42	0.14	-0.38	0.54
PE Ratio	5.61	10.06	24.78	-4.64	3.24
Earnings Yield	17.84	9.94	4.04	--21.54	30.84
Book Value	2.34	2.60	2.56	2.06	6.60
Price To Book	0.86	1.64	1.37	0.86	0.27
ROE (%)	15.33	16.27	5.51	-18.48	8.23
Profit Margin (%)	6.22	6.08	2.23	-5.94	8.09
Year End	March	March	March	March	March

Source: Company Financial &Investdata Research