Dangote Flourmills, recently acquired by Tiger Brands south Africa has been recording major losses since 2012. The company is undergoing serious surgical operations as the new owners struggle to grapple with the huge mess they took over. The company has in the last two and a half years posted over N11billion in losses with the latest being N4.3billion for the 9 month ending June 2014.
Despite this fact, the market prices Dangote Flourmills at N7.5!! Why is this so? Currently, the company has a negative retained earnings of N8.7billion meaning it cannot pay dividends until it makes well over N10billion in profits thus reversing the N4billion in loses today. How that is possible I would not know. The flour mill market has been under serious intense completion lately with margins shrinking by the day.
The price is also about 5x its Net Book value of N2.2 (as at June 2014). That is the market is pricing share of a loss making company at 5x what its equity. This suggest the market believes it probably has assets which is worth more than its balance sheet classification. That is it probably has properties and investments worth more than the value recorded in their balance sheet. Total assets per share is currently about N11.27.
Is this a right metric? I honestly do not think so. Its PP&E value has also been dropping lately indicating they have been selling. Even at that the cash remains in the business. I believe the reason why the share price is holding out is due to the following;
Liquidity – The volume of shares being traded will have to be high to cause price volatility. Dangote Flour Mills has a 30 day average trading volume of 311,000 units which is probably within a range that will not cause any significant price volatility
Risk Taking – It could also be a result of investors looking for another miracle appreciation. Rather than sell they hold on to the stock hoping it will not fall below its current one year low. There could also be an sentimental inertia that could increase the share price. A decision to delist the company for example may just push the share price up. Dangote Flourmills launched a takeover bid earlier in the year at a price of N9.5
Turnaround – Some may also hold on the stock or even buy in the hope that the new investors will turn the company around sooner rather than later. Tiger Brand has been successful in South Africa so they probably will be successful in Africa’s biggest economy. It is just a matter of time.
Finally – None of these assumptions is enough to justify the current valuation in my opinion. Dangote Flour should not cost more than N3 at the most based on its recent results.