Notore: It’s beginning to add up

Nigerian-based fertilizer company, Notore released its 2022 half-year result posting revenue of N26.2 8 billion and a pre-tax profit of N2.6 billion. These numbers are remarkable when you compare them to the same period last year. For revenues, it is 178.7% higher and for profits, it is a massive reversal from the loss of N15.8 billion recorded a year earlier. This begets the question; what happened within one year that has resulted in so much success?

Notore is engaged in the business of producing and selling premium fertilizer products. The company has a 500,000 Metric Tonne Urea Plant and a 600,000 Metric Tonne of NPK Blending Plant in Onne, Rivers State, Nigeria. Over the last 5 years, it has wallowed in debts and suffered severe revenue declines as it is unable to produce at full capacity. In 2019 it decided to embark on major turnaround maintenance of its plant which was completed in 2021 after Covid-19 induced delays.

Since then its Plants are more reliable and production output has massively improved delivering the numbers we highlighted earlier. The company has also stepped-up efforts to diversify its revenue base with its installed 2,000 metric tons per day NPK blending capacity. They are also ramping up their seeds business producing about 5,000 50KG bags of rice in 2021. Demand for fertilizer is also high even as Russia/Ukraine war cast a dark cloud over its outlook.

Despite all these positives, the company’s biggest challenge is its external debt obligations which we addressed in this article. According to the information contained in its latest results, Notore’s debt burden is currently about N130 billion. The company explains that the USD Portion of the loans increased slightly by 0.81% from 2021FY majorly from the impact of the Naira devaluation on USD-denominated loans while the proportion of long-term loans to total loans increased to 85% from 62% in 2021FY, resulting from the restructuring of short-term loans to long term as part of the financial initiatives taken by the company.

Compared to net equity of about N55.6 billion, the company is in substance owned by the banks and not the shareholders. This is why out of the operating profit of N10.2 billion declared in the first half of this year over 80% of it went towards servicing debts. Until Notore pays off its debts, any money it makes from its fertilizer plants will go towards meeting its debt obligations to the bank of industry, Afexim, and its external creditors. The company’s dollar-denominated loans are currently over $100 million.

This brings us back to why this latest result is a huge step in the right direction for the company. A breakdown of its revenues of N26.2 billion reveals, that N14.7 billion of it (more than half) was from sales outside Nigeria. It needs the forex to keep defraying its loans and paying for factors of production that require imports. No surprise it incurred zero exchange rate losses this year so far, compared to N268.2 million in the first 6 months of 2021.

With revenues climbing and debt restructuring, the next phase of its plans is to raise a significant amount of equity to at least pay down half the current debt. The company’s share price has not moved since last year mainly due to the limited float of its shares. Out of its 688 shareholders, 672 of them own just 0.01% of the shares of the company. Over 76.5% of the share is owned by a Mauritius Registered company while the likes of TY Holdings, Afrexim, and FBN Capital owned about 17% between them.

If Notore decides to raise equity it will have to increase its floats and that will more likely than not increase its share price. This will be a percussor for a possible rights issue or public offer at a price surely much higher (if not double) the current share price of N62.5 per share. It will probably need to raise at least N65 billion in equity to pay up to half its debt.

Existing shareholders will be diluted by over 50% but they will still have control of the company. Better to own half of something compared to 99% of nothing. This is probably one to two years away, but it is inevitable if this company is to remain listed. For now, it has to focus on growing revenues and posting sustainable operating profits to keep meeting operating expenses and servicing debts respectively.