Flourmills Nigeria Plc is one of largest Nigerian business by operations. I have analysed their operating results severally on this blog so I won’t want to go in-depth into the company’s operations again. However, I am interested in identifying if to a modest extent what the intrinsic value of their share price is. For the records Flourmills is not stock on my radar and I also do not think their business model is one set up to maximise shareholder returns.
Flourmills Plc 5 year financial history show a company that has consistently posted profits after tax. However, PAT has been uneven and when annualised indicates a CAGR of 4%. The company’s size of operations and uneven profitability in my opinion suggest profitability growth will remain very modest at under 5%. Flourmills also carry a sizeable debt which will continue to eat into profitability for years to come.
Flourmills Plc has also shown some consistency with a 5 year average payout ratio of 33%. This year they plan to payout about 61% of profits as dividends. However, a shareholder need not look at dividends as a function of payouts but rather in terms of yield. The current dividend is a yield of just 2.4% (based on current price). I am assuming dividends will continue to be paid.
Return on Equity
FM Plc posted an ROE of 9% in the most recent 12months results. It has averaged 16% in the last 5 years but the reality is that ROE will mostly likely remain at single digits.
- Valuation is done based on DCF of future adjusted earnings per share. This is added to the terminal value and the current Book Value per share.
- Buyer of the share is only a minor shareholder with no influence that can be liken to any form of control
- Expected yield is based on the most recent ROAE of the company
- Inflation rate is projected at 9% average for the next 5 years
- Shares bought will be held for a minimum of 5years
- A margin of error of 8% is apportioned to make up for its uneven PAT
The above assumptions and resultant valuations suggest the intrinsic price for a stock in Flourmills Plc is N66 compared to its current market price of N83. But that in no way suggest a bargain price. Even at N66 the price is still 1.9x Book Value per share and as indicated in the chart still produces a projected Earnings Yiled of between 5.1% to 5.9% for the next 5 years. Not much difference from the current earnings yield of between 4.1% and 4.7% using the current market price. Why is this so?
I believe the problem here is growth. Flourmills Plc has gotten to a stage in its productive cycle where double digit growth now seems unattainable. For the company to grow earnings at a double digit rate it will have to create a new product that is not only popular but posses an inelastic trait. It has to be something groundbreaking that its competitors can’t beat. Whilst that is quite possible considering the huge upside in the agricultural sector the company’s current management will find it hard creating a cost structure that will ensure higher margins.
For an investor seeking good growth dividends Flourmills current price is likely not where you want to put your money unless off course a dividend yield of under 3% is appealing to you. You would have to hope for a price of under N30 which in this clime is nearly impossible except something calamitous happens to the company or economy. The last time FMN was that low was about 5 years ago (2009).
In terms of Capital appreciation, that too is tied to EPS growth. Will the market be willing to push P.E ratios above the current 25x? Is there any underpinning growth somewhere that justifies such push? At the current price you may want to ask yourself what the potential upside is for you? Surely, if you are looking at Capital Appreciation as a possible major source of returns then the valuation N66 does provide a better upside right?
You can download the Flour Mills Valuation Spreadsheet I used to adjust and make your own valuations should you disagree with some of my assumptions.
NB: No one has the monopoly of prediction when it comes to determining the future value of stocks. Follow your instincts.