When May & Baker decided in 2006 to deviate from its norm (pharmaceuticals) and venture into food processing, it seemed like the perfect move. At the time, the fast moving consumer goods (FMCG) market was full of opportunities and every player wanted in on it. Companies already in the FMCG expanded their product lines to accommodate more products while others like May & Baker, a Pharma company explored this as a new vertical.
Tiger Brands, a South African consumer giant had just taken over Dangote Flour as it seeks opportunities in Africa’s largest market. Honeywell also expanded its food division, opening up new lines that it hopes will compete.
Apparently, some of these companies had seen the billions raked in annually by Dufil, the makers of the popular Indomie Noodles. Surely, it is a market that could accommodate more players, well, so they thought.
For May & Baker, there was a model they could follow. After all, the likes of GlaxoSmithKline (GSK) was successfully combining its booming beverages lines with an equally successful pharmaceutical production outfit.
But the business clime has changed a lot since then. The fall in oil prices and the ensuing recession that hit Nigeria ravaged the economy in ways not seen since the eighties. Consumers, whom consumer food players had targeted, reduced their consumption expenditures.
Everyone started to feel the pinch. From Cadbury, to Unilever to Nigeria Breweries, they all reported massive declines in revenues and margins. Some had the balance sheet that could survive while also having a clear understanding of how to dig their way out of it. Some didn’t!
GSK, the big pharmaceutical that May & Baker modelled after, decided on a massive restructuring in line with orders from its Europe-based parent company. Its beverages arm, makers of the popular Lucozade and Ribena was sold off to Japanese maker Suntory in 2016.
Dangote Group bought back Dangote Flour for $1 while Honeywell scales back its investments in its food division. In light of the changing business environment, and also considering the fact that May & Baker’s Mimee Noodles was struggling to compete in a saturated market, it became imperative for the company to either do more to manage the brand, or sell it off completely.
We were thus not Surprised when May & Baker decided to sell off its food line to Dufil Nigeria Limited for ₦775m. The 100% acquisition was finalised on April 26th following the fulfilment of all necessary conditions, which include gaining the approval of both companies’ Boards of Directors, their respective shareholders, and the Nigerian Stock Exchange.
Why did it become necessary that the company take this decision? Let us consider that shortly.
Why the divestment?
Without a doubt, the noodles market in Nigeria has immense opportunities. This is considering the fact that lots of Nigerians enjoy eating the easy-to-cook meal. For instance, in 2016 the World Instant Noodles Association ranked Nigeria as the eleventh country in the whole world with the highest consumption rate of instant noodles. Now considering the facts that most Nigerians consume a lot of carbohydrates and also that the country’s population keeps expanding every year, it is safe to say that the demand for noodles can only keep rising. So if this is the case, why did May & Baker sell Mimee Noodles to Dufil?
The simple truth is that the Mimee Noodles brand could not compete. It literarily struggled to survive in a market dominated by the likes of Indomie, Chikki, Cherie, Supreme Noodles, etc. Indomie alone (which is owned by Dufil Nigeria Limited), controls more than 50% market share.
There are also about twenty different instant noodles brands that are readily available across Nigeria today, and the majority of them are struggling with about 50% market share. What this means is that Mimee Noodles had a lot of competition to contend with and it surely had no chances to win.
The competition affected the brand’s ability to generate enough revenue in order to supplement the parent company’s annual profits. This is despite the billions of naira that had been invested into it. While commenting on the reasons behind the recent divestment, May & Baker’s Head of Corporate Communications, Sandra Aduba, noted that the company ran at a loss for years due to poor sales of the product.
In the company’s 2017 financial year report, the food arm contributed ₦1,295,675,000 to a full year revenue of ₦9,352,636,000. This is less than the ₦2,111,738,000 that was realised in 2016. Prior to that, the company generated ₦2,032,042,000 from the subsidiary in 2015, and ₦1,951,444,000 in 2014.
But why was the food arm sold at such cheap price?
May & Baker plans to raise capital through the divestment to help with the actualisation of its refocused business model. In other words, the company is in need of funds, which explains why it readily sold the subsidiary to Dufil at ₦520 million less than the amount the subsidiary generated last year. As a matter of fact, the company is so cash-strapped that it is also planning to raise capital through the stock market later this year.
In conclusion, it is interesting to see how May & Baker’s Mimee Noodles finally came to an end. However, in spite of the circumstances, this is a better ending compared to the unprofitability that has characterised its existence over the years. Hopefully, now, May & Baker will focus on the production of pharmaceuticals, something that it has successfully done for many decades now.
Merger, Tax incentive boosts BUA Cement FY 2019 result
BUA Cement Plc recently released financials reveal a 47.5% increase in revenues of N175.52 billion up from N119 billion in 2018.
One of the industries set to experience the downsides of the Covid-19 pandemic is the construction industry. Given the slowdown in construction activities as a result of the lockdowns and constrained economic activities, the reasons are not farfetched.
Prior to the outbreak of the pandemic, Globe Newswire had predicted an accelerated growth pace of the global construction industry from 2.6% in 2019 to 3.1% in 2020. This growth has now been revised to 0.5%. What is even more daunting is that the revised growth rate is based on the assumption that the outbreak will be contained across all major markets by the end of the second quarter of 2020.
It is only after that (including freedom of movement in H2 2020) that events could facilitate reverting to the normal course of activities to foster businesses in the industry like BUA Cement or those that depend on it to restart activities.
Nigeria’s third-largest cement company, BUA Cement Plc, however, still has its 2019 victories in order. Involved in the manufacturing and sales of cement, BUA Cement has 3 major subsidiaries and plants in Northern and Southern Nigeria.
With a market capitalisation of N1.18 trillion ($3.3 billion), BUA is the third most capitalised company on the NSE. Its recently released financials reveal a 47.5% increase in revenues of N175.52 billion up from N119 billion in 2018.
The company’s profits also increased by 69.1% from N39.17 billion in 2018 to N66.24 billion in 2019. Core operating performance was strong, and this was supported by strong cement sales in the domestic market, impairment writes back, and other income.
The main reason for the company’s increased earnings is from the cost synergy and increased revenue as a result of the merger that took place between CCNN Plc and Obu Cement Company Limited.
There was also a striking jump in its income statement on its tax for the year. For FY 2019, it incurred a tax expense of N5.6 billion, in comparison to the N24.9 billion tax credit it received in FY 2018.
This was as a result of a reversal of previous tax provision made on Obu Line 1; it received approvals for an extension of the company’s pioneer status on Obu line-1 and Kalambaina line-2 in February 2020, to leave effective tax rate at just over 8% in 2019. The pioneer status will help the company save funds that will otherwise have been spent on higher taxes.
(READ MORE:Dangote Cement to access more debt funding)
BUA reported an impressive FY’19 result. Its performance shows the growing strength of the company and its increasing market share. On the back of the strong performance, management declared an N1.75 dividend per share that translates to a dividend yield of 5.5% on current prices.
Cash flow position was also robust with a strong closing cash balance – from N2.8 billion in 2018 to N15.6 billion as at year ended 2019. The company’s growth, as well as the impact of its merger, present a great buy opportunity of the highly capitalized, low-cost stock. As of today when the market closed (21st May) its share price stood at N35.60 from a 52-week range of N27.6 and N41.
What we see is a great growth stock further heightened by the population expansion and increased urbanization. However, we expect the impact of the Covid-19 pandemic to be felt from the Q1 results of the company.
The industry could slow down for the year as the level of commercial construction also slows down. Yet the best part of holding stocks like this is that even with stalled operations for a period, a resurgence will always emerge.
Analysis: Airtel Nigeria is winning where it matters
Airtel has left no stones unturned in ensuring that its provisions are top-shelf – subscribers to the network, of course will have their own ideas.
Airtel might have won our hearts over with internet-war adverts starring our favourite tribal in-laws, but its fundamentals are what will make us the bucks that keep us happy. Airtel Africa Ltd is a subsidiary of Indian telecoms group, Bharti Airtel Ltd; the group has left no stones unturned in ensuring that its provision of prepaid plans, credit transfers, mobile internet services, messaging, roaming facilities and more, are top-shelf – subscribers to the network, of course, will have their own ideas.
Since last year when Airtel Nigeria became the second telecommunication company in Nigeria listed on the NSE, the company has experienced a steady level of growth. With a presence in 14 African countries, the group’s strength lies in its diversity with stronger companies mitigating the poor performances of others.
Performance Overview: Airtel Africa
Airtel Africa’s report for the year ended March 2020, revenue jumped by 10.9% from $3.1 billion at the year ended 2019 to $3.4 billion in 2020. The consolidated profit before tax also jumped by 71.8% from $348 million in 2019 to $598 million in 2020. However, profit for the period dropped by 4.23% with earnings of $408 million in 2020 from the $426 million it had earned in 2019. A reason for this is the tax figure that moved from a credit of $78 million in 2019 to tax payments as high as $190 million in 2020. Total assets also jumped by 2.41% from 2019’s value of $9.1 billion to $9.3 billion in 2020 primarily as a result of their acquisition of more property, plant, and equipment (PPE). The total customer base grew by 9.3% to 99.7 million for the year ended.
Full Report here.
Revenue growth of 10.9% was driven by double-digit growth in Nigeria and East Africa. However, the rest of its African operations experienced a decline in revenue. Its success in Nigeria is especially commendable, considering the fact that the company lost more than 100,000 subscribers in Nigeria between December 2019 and January 2020. Raghunath Mandava, Chief Executive Officer, remarked that the results which were in line with the group’s expectations, “are clear evidence of the effectiveness of our strategy across Voice, Data and Mobile Money.”
Behind The Numbers – Nigeria
Airtel Nigeria’s performance indicates the company is making the right calls in a very competitive industry. Nigerians are fickle when it comes to data and voice but will spend if the service is right. The company grew its data revenue by a whopping 58% to $435 million a sign that its strategy to focus on data is working. Voice Revenues for the year was up 15% to $850 million. In total, Airtel Nigeria’s revenue was up 24.4% to $1.37 billion. Ebitda margin, a number closely watched by foreign investors 54.2% from 49% a year earlier. Operating profit for the year ended also jumped by 52.6% for the year from 2019 and 32.4% from Q1 2019. Total customer base in Nigeria also grew by 12.5%.
Nigeria is surely critical to Airtel Africa’s future seeing that it contributes about one-third of its revenue. Recent results thus indicate it is winning where it matters most and it must continue to stay this way if it desires to survive a brutal post-COVID-19 2020. Telcos are expected to be among the winners as Nigerians rely more on data to work remotely but there are other players in this game. Concerning the impact of the pandemic, he explained that at the time of the approval of the Group Financial Statements, the group has not experienced any material impact arising from the impact of COVID-19 on its business.
On cash flows…
The group has also taken measures to enhance its liquidity. The CEO explained that it is moving its focus to enhance liquidity towards meeting possible contingencies.
“Having considered business performance, free cash flows, liquidity expectation for the next 12 months together with its other existing drawn and undrawn facilities, the group cancelled the remaining USD 1.2 billion New Airtel Africa Facility. As part of this evaluation, the group has further considered committed facilities of USD 814 million as of date authorisation of financial statements, which should take care of the group’s cash flow requirement under both base and reasonable worst-case scenarios.”
To this end, they have put in the required strategies to preserve its cash as its cash and cash equivalents, consequently, jumped by 19.1%.
Investors looking at this impressive result will be wondering if this portends a buying opportunity. Airtel Nigeria closed at N298 on Friday and has remained at this price for about a month. The stock is quite illiquid and is not readily available to buy.
It’s the price to earnings ratio of 4.56x makes it quite attractive. Further highlighting this opportunity is its price-to-book ratio which is as low as 0.5273, suggesting that the stock could be undervalued. Whether it is available to be bought, is anyone’s guess.
Analysis: Nestlé strong but exposed.
Being a market leader is great, but in times of economic despair, it can quickly turn you into prey.
With about six decades of being the choice companion for families within Nigeria and the diaspora, Nestlé Nigeria Plc has positioned itself as one of the largest food and beverage companies on the continent. Owing to the expansive growth of Nigeria’s population – one projected to reach 300 million by the year 2030, as well as the growing middle class, the FMCG sector has a very positive outlook.
Consequently, Nestle’s leadership in the industry and its huge market size expectedly gives it a huge advantage. However, with the global economy barely racing against the impact of the Covid-19 pandemic, even the brimming FMCG sector will experience its own level of disruption.
Nestle’s recently released Q1 2020 financials reveal a revenue decline of 0.9%, as it dropped to a marginal ₦70.33 billion from the ₦70.97 billion turnover it garnered in Q1 2019. The profit before tax also experienced an 8.7% drop while the profit after tax had a 12.84% drop, both yielding ₦17.5 billion and ₦11.2 billion respectively, for the first quarter of this year. This is predominantly owing to its increased losses from its overseas activities.
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The company procures all of its raw materials on a commercial basis from overseas and local suppliers; consequently, the percentage of its supplies dependent on international suppliers had a negative impact on its Q1 2020 financials. Its profits were plagued by a foreign exchange loss of ₦154.7 million from ₦18.9 million, an even higher loss of 720.6%. While the company did not disclose the value of its export revenue, we believe it too might have suffered from reduced exportation in the latter part of the quarter.
The group has since been taking on expansionary projects, such as its launch of a second beverage production plant in Ogun State in February of 2018. The company, on a continuous basis, explores the use of local raw materials in its production processes, contributing its own quota to the Nigerian economy.
Just last week, Nestlé’s stocks went up 2.56% to close at ₦1000, a price it still currently holds today after markets closed. Its price to earnings ratio is 18 and its earnings per share (EPS) of 55.54, signal an investor sentiment of confidence. However, its high price to book ratio of 13.9865 reveals that the company is slightly overvalued and its price of ₦1000 makes it attractive primarily to institutional investors that can afford to purchase large volumes of the stock enough to benefit from its steady growth in value. The company had proposed a dividend payout of ₦45 per share. This also comes after paying ₦25 per share interim dividends earlier. Its dividend yield at the time of writing this is 7%, further heightening the possibilities for the income investor.
While the company has strong fundamentals governed predominantly by its position as a market leader, its years of experience, and its existence in the FMCG sector, it too might not have a smooth sail in the coming quarter. Its overseas business from both the supply and the demand sides are expected to experience a further decline, ultimately resulting in an even lower relative turnover and lower earnings.
We also expect the decline in average disposable income of Nigerians from loss of jobs and an overall wariness of the economic impact of the pandemic, to further drive down turnover; however, sound operational efficiencies and cost control/ profit strategies by the group could ease the burden. The company fundamentals remain strong but its exposure to consumer disposable income remains a major concern. There is always a cheaper alternative and when your pocket empties your choice for cheaper substitutes swells.