Analysts optimistic on Flour Mills application for N39.9b rights issue


Flour Mills of Nigeria Last week January 15, 2018 open application list for its N39.9 billion rights issue, paving the way for shareholders to pick up their rights, or trade such rights at the stock market.

The company in its prospectus stated that it is poised to raise N39.85 billion through a rights issue of 1.476 billion ordinary shares of 50 kobo each at N27 per share. The rights have been pre-allotted to shareholders on the basis of nine new ordinary shares of 50 kobo each for every 16 ordinary shares of 50 kobo each held. Application list for the rights opened January 15th, 2018 and will run till the close of business on Wednesday February 21, 2018.

Group Managing Director, Flour Mills of Nigeria Plc, Mr. Paul Gbedebo, speaking on the rights issue said it will enable the company to raise funds to support its long-term strategic plan with a view to ensuring sustainable growth for the company.

“The rights issue is part of our strategy to grow and build long-term value for all stakeholders. The proceeds from the rights issue will be used to strengthen the company’s capital base by deleveraging our balance sheet, supporting our working capital needs and positioning the company to exploit value-accretive opportunities, whilst giving greater operational and financial flexibility to ensure business growth and continuity,” Gbedebo said.

Chairman, Flour Mills of Nigeria (FMN) Plc, Mr. John Coumantaros, in a recent review, noted that though the operating environment has been tough and challenging, the group can look to the future with confidence that its prospects are promising and bright while the fundamentals are strong.

According to him, the group sees opportunities in the challenges and it is determined to explore them in the most profitable but sustainable manner.

“FMN is determined to continue to feed the nation every day. We shall keep maintaining our wide portfolio of high quality consumer food options and step up our input of locally sourced raw materials thereby supporting the livelihood of Nigerian farmers and Nigerian businesses,” Coumantaros said.

Rights Issue to the Rescue

Analysts say the decision by Flour Mills of Nigeria to undertake a N40 billion rights issue will lead to a reduction in its financing cost and boost the bottom-line for the benefit of shareholders.

Although FMN Plc record a robust top-line, the bottom-line, which is what matters most to investors and shareholders, has not been satisfactory enough. The major reason for the low bottom-line is the huge cost of finance the company expends on bank borrowings.

Although FMN has been a regular dividend paying company, it is believed that if the finance cost is reduced through equity capital injection, shareholders will receive more dividends. An analysis of the company’s results in the last two years showed that 53 per cent of its gross profit has gone into finance cost.

For instance, while FMN Plc recorded gross profit of N104.313 billion in 2016 and N54.927 billion in 2017 it went into finance cost, which is 53 per cent. Selling and distribution expenses accounted for 9.9 per cent or N10.344 billion, while administrative expenses accounted for 33 per cent or N34.267 billion.

Even in its half year results ended September 30, released last week, out of the N35.5 billion gross profit, N16.27 billion or 46 per cent went into cost of finance. This implies that if the high cost of finance is reduced, the company will be more profitable going forward. This is why stakeholders are excited that the company has revived its plan to inject N40billion equity into its operations through Rights Issue.

Half year performance

The company grew its revenue by 17 per cent from N255.30 billion in 2016 to N298.44 billion in 2017. It reduced its administrative and distribution expenses from N2.936billion to N2.766 billion, while it posted a net operating gain of N5.076 billion, compared with a loss of N8.082 billion in the corresponding period of 2016.

Finance costs increased from N10.925 billion to N16.267 billion due to high interest rates. FMN Plc ended the half year with a profit before tax of N13.38 billion, up from N8.80 billion in 2016, just as profit after tax improved from N6.46 billion in 2016 to N9.36 billion in 2017.

A further analysis of the performance indicators showed that gross margin reduced from 15.5 per cent in 2016 to 12.2 per cent in 2017. Also, operations expenses (Opex) margin stood at 3.89 per cent compared with 3.79 per cent in 2016.

However, earnings before interest and taxes (EBIT) margin improved from 6.04 per cent to 9.6 per cent in 2017. Similarly, PAT margin grew from 1.5 per cent to 3.2 per cent.

Analysts’ assessment

Looking at the company’s results, analysts bared their mind on FMN decision to go for the rights issue. Mr Kola Amzat, an authorized dealer from Quaintest Capital Limited has this to say on FMN rights issues and state of the economy:

“The plan by FMN to come to the market is very strategic. It is strategic in the sense that since the beginning of the New Year, activities at the capital market has been bullish over the last couple of days. A lot of investors are coming back into the market, especially with reference to drop in the prices of securities.

“The attention now is focused on the equity market. There are no securities in the market today that will not sell. I believe that Flour Mills coming to the market will do well. Although, one does not know why the company is coming to the market, but it is not in doubt that Flour mill will do well in their rights issues. Flour Mills is one of the top companies doing well at the Nigerian bourse.”

Will the rights issues succeed?

“Those who do not know how the market works might have the fear that the right issues might not succeed. But you must have to know that once there is a rally in the market, it affects all the stocks. The market is currently very bullish. There are no stocks that will not do well right now, especially now that investors’ confidence is very strong”.

 Economic outlook

“The outlook for this year is prosperous. I see the market performance for this year going to be much better than last year. If you look at the micro-economic variables from the government side, I think the signal is quite encouraging. Also, the inflation rate has dropped and this is another indicator that things will be well this year.

“The foreign reserve is about $43bn which is also another big deal. The foreign exchange market has stabilized. This is also another big deal. The driver of the economy, the oil price is now more than N70 per barrel. All things being equal, with the upward trends of oil price, there is a tremendous expectation for us this year.

“This year, we can see that the fiscal policies and monetary policies are sinking together. And again, this is the first time that Nigeria’s national budget has exceeded N7 trillion which is also a big deal”.

Solomon Kugbe of Nigeria Stock Brokers Agribusiness Group spoke to stocks watch on the FMN right issues in the market as well as expectations in the New Year: “You know that for the better part of last year, the primary arm of the market has been comatose.  But now, things are improving; a few foreign investors have come on board.

‘’Unilever has come on board, Union bank has come on board and a few other companies have come on board for right issues. I think it is not out of tune for Flour Mills to come to the market at this point in time”

Another stockbroking firm, Cordros Capital Limited said, “Overall, we expect the right issue will do well. Beside, declining revenue growth and weaker gross margin, amidst still high fixed financing and operating costs, in the absence of FX revaluation gains, portend risks to FMN Plc.’s earnings. That said, we expect upward revision for the FMN in 2018 estimates on higher annualized net profit of N17 billion, compared to N11.7 billion in 207,” the analyst said.


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