Flourmills Nigeria Plc is one of Nigeria’s largest companies. The company is quoted on the Nigerian stock exchange and is also one the largest in terms of market capitalization, revenues and scale of operations.
ARM, one of Nigeria’s leading Fund Managers carried out a ‘buy sell or hold” analysis on Flourmills and we thought to also share with our readers. As usual, we include explainers to water down some of the financial jargons.
They project that Flourmills share price is valued at N38 as against the current price of N27. This represents a 42% upside for the stock. Reason is that they believe the company’s results will be good this year and expect it to reflect on its share price.
We issue a BUY recommendation on Flourmill based on a FVE of N38.33, representing 24% and 42% upside from market and Rights Issue price of N30.80 and N27.00 respectively. Our positive sentiment is supported by the recovery in earnings (FH1 18: +44.6% YoY) with FY 18 PAT estimated at N16.3 billion (+84.7% YoY). Considering the impact of capital raising on Flour Mills’ finance expense, we remain optimistic on the stock going into FY 19 with a projected PAT of N23.9 billion. However, owing to the dilution from the Rights Issue, FY 19 EPS of N5.83 represents a 6% decline when compared to FY 18 estimate of N6.22.
Flourmills right issue opened on the 15th of January 2018 and is priced at N30.80. Interesting to note that the price is lower than the current market price of N27 which suggest that you are probably better of buying the stock in the market than exercising your right (at least if you are a retail investor).
Flourmill is seeking to raise N39 billion ($127 million) by way of Rights Issue. The company is offering 1.47 billion ordinary shares of 50 kobo each at a rights price of N27.00/share to existing shareholders based on 9 new ordinary shares for every 16 ordinary shares held as at 8th December 2017. The Rights issue opened on the 15th of January 2018 and closes on the 21st of February 2018.
The money raised from the rights issue will be used to pay down their loans. They want to repay loans of a combined N29.4 billion and then use some of the funds raised for working capital.
Proceeds from the Rights Issue will be used to pay down some of its overdrafts and short-term borrowings with the intent of deleveraging the balance sheet and strengthening the capital base of the company. Precisely, 45% of the proceeds will be used for the repayment of short term loans (N17.5 billion), 30% will be used for the repayment of overdraft facilities (N11.9 billion) while the balance (25%) will be applied towards working capital for strengthening and achieving efficiency in the company’s operations.
Despite spending N29 billion repaying loans, Flourmills will still own debts of about N143 billion, one of the biggest in corporate Nigeria. The debt repayment will however help reduce the company’s interest payments which should translate to higher profits for investors.
Consequently, following the repayment of N29.4 billion, we expect its debt position to dip by 15.4% YoY to N143 billion over FY 19. Overlaying the lower debt position with our interest rate expectations, we estimate a 26% YoY decline in interest expense to N23 billion and estimate FY 19 EPS to print at N5.83 post dilution. Underlying our view of a recovery in earnings is a successful rights issue where the intended amount is fully raised. Given our expectation of earnings recovery going forward, we recommend that qualified investors take up their rights.
As usual, this is not an investment advice or recommendation. It is simply the opinion of the writers.
