Fidson Healthcare Plc is a leading pharmaceutical manufacturing company in Nigeria. Founded in 1995, the brand has relentlessly pursued its goal of becoming a leading player in the pharmaceutical landscape in Nigeria.
The Rights Issue of Fidson is ongoing and investors are already taking position. The Proposed Rights Issue of 750,000,000 Ordinary Shares of 0.50K each at N4.00 per share on the basis of 1 New Ordinary Share for Every 2 Ordinary Shares held commenced on Wednesday, 6 March 2019 and it is scheduled to close on Tuesday, 9 April 2019.
Kunle Ajayi, Head of Accounting and Reporting, Fidson Healthcare Plc, in a chat with stockswatch gave a deep insight about the ongoing Rights Issue. Excerpts:
Fidson’s right issue is ongoing, when is it going to be rounding off?
That will be April 9
How much are we expecting at the end of this exercise?
We are expecting N3bn from the Rights Issue and of course we have plans on how that will be utilize.
Let us know this plans
The N3bn we are bringing in, we are going to use N1.8bn, that is about 60% of the proceed to pay off some of our expensive loans. One of the challenges we have as an organization is that our finance cost is rising because of some of the expensive loans we have in our books. And we have looked at it, in order for us to be able to fund our expansion, and also return something substantial to the shareholders, we look at it that it is better for us as an organization to go the way of rights issue. Some of the little principle we are taught in financial management is that when an organization is looking for working capital, it is always better for you to look for equities, calm loan that is very cheap.
By the time we use 60% of the proceeds to pay off some of our expensive loans, the implication of that is that our finance cost will be reducing up to 25%. And if that happens, the implication is that the company can now seat back and say okay, we have gained so much from savings and at that the management can decide if the time comes that we are going to pay this amount of dividend to the shareholders. So it is a step in the right direction for us to actually utilize some of the fund to pay off some of those expensive loans and the balance is used to augment our working capital.
I know that pharmaceutical is a credit business whereby you are always looking for money, you will manufacture and give to your distributors, to now pay you back; and Nigerians for who we are, including you, me and everyone, it is easier, to access loan or to pay someone, payment is always an issue. That is why many banks ended up folding up because Nigerians will go and buy cars, some will marry new wife, some will have multiple girlfriends, travel overseas with borrowed funds. Is there going to come a time that expensive loan will be totally eradicated from the book of fidson? even if this is successful? And I know it will be successful, seeing the nature of the business.
From the way things are going in the industry. The industry basically is a credit based industry. Anyone in the manufacturing of pharmaceutical product, the major people for the off take of the product in terms of distributors and the institutions, all of them will expect you to extend credit to them before they will be able to transact business. Some of the categories of customers we have issues with have to do with the institutions, general hospital, private hospital and the likes of them. This people always ask for credit and because you also need them as a business to survive, so credit of 60 days, 90 days is extended to them especially the government. The government’s own is most times more difficult because, 3 months they are on strike and nothing is happening. It is very very difficult and that is the reason why you need to be financially buoyant to have adequate funds for your working capital. Because by the time you bring in funds to produce and you have supplied this people and its taking them 90, 120 days to return your fund. If you look at your working capital cycles, that is just stock in the receivables; and if you are not able to convert your receivables to cash so as to be able to start another production, it becomes difficult and that is the major challenge. And that is why for us as an organization, the only way to be able to put ourselves in a best position to manage this is for us to have sufficient working capital to cushion the effect of people who will not pay as at when due especially when there are challenges. So it is something that we are working on, and I believe that at some point as an organization and also in the industry, we will be like others in other industries that if you don’t bring money, you won’t be able to access their products. And that is best; because I can imagine, if what I have in our receivables becomes cash, this exercise will not be necessary. You may not even need anybody to say “I need additional fund”. That may not be necessary because it means that you will be able to plan, you will be able to project knowing fully that money is going to come in as at when due. Until that happens, it’s going to be very difficult and at some point you have to bringing funds to augment working capital and working capital is eroded by devaluation. A lot of things happen making doing business in Nigeria very difficult, but Fidson survived all these.
I believe that this rights issue is going to be very successful, you could even get more than the N3bn we are talking about. When you decide to pay off expensive loans, and you also have enhanced working capital. The topline is a measure of your market share, but the bottom line is where the dividend can come from. So what is the projection, how much are you foreseeing that if this exercise, eventually when it is completed, this is what investors should expect from the second quarter or third quarter of this company going forward?
From our projections for 2019 for instance, we as an organization, the turnover last year was N16 billion and we are looking at this year to do N20 billion. In doing that we have also projected our PBT.
The projected PBT will lead to earnings per share in the neighbourhood of N1.20k if that is achieved.
We have also liked at it that in order for is to be able to achieve that, there is need for us to bring in funds to pay expensive loans and also add the balance to the working capital.
The impact of that will be that, we will be having some savings from the finance cost which is the major cost that is really dragging the profit down.
Finance cost is standing like how much?
It used to be 5%, but now it’s going up to about 10% to 11%. That technically means that what should be part of our bottom line is been taken up by finance cost.
And you need this finance cost yo remain in business as a leader?
It is very important because at times some decisions must be taken which means bringing in some funds and those short term loans are are bringing in to augment working capital are very expensive. But if you have your own funds in form of rights issue that is ongoing, I can categorically tell you that we will be fine.
So if I heard you well, at the completion of the rights issue; let’s say audited account for 2019 which will be released in March of 2020, we are expecting the earnings per share of fidson healthcare plc to be within the range of N1.20. This is where equity analysis comes in and this is where long term valuation comes into consideration.
Now what you are investing in as far as right issue of Fidson is concerned is not the current EPS that might be stated. The EPS might be 71kobo. So what you are investing in is a future EPS of N1.20.
What you will do now is to consider whether EPS of N1.20 will justify the price at which you are buying which is just N4.
Now let me tell you what the earnings per share (EPS) will do. When you relate it with the price that you are buying, the future PE ratio will actually be in the region of 3.3 to 3.5 (plus or minus). And that means that if in earnings alone, you can get your investment back let’s say in three and half years, take the stock at this projected earnings to any market in the world, such equity will be underpriced. That is why I am the Oracle. I have spoken. It is left in your court. Whether you will take it or not.
What I have seen as problems in Nigeria is that until the reality becomes true, people don’t look for stocks. And what you should do is that you invest against expectation, not against reality. Those who invest against expectation are the real investors. They are the ones that do get best of returns. If you take opportunity now, when it becomes reality, when those late starters begin to rush in, you just sell a portion of what you’ve got to them. That’s the way it works in the Nigerian capital market that I have seen.
We hear that the federal government is granting fidson tax holiday on some products that will be coming out from Ota factory. True or false?
That’s very correct.
In naira and Kobo, this tax holiday will come in as profit. How much is the company expecting?
The tax holiday to my best knowledge cuts across all our operations over there at the factory. The implication is that we may be having a tax holiday as an organisation.
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For about 3 years?
Yes for 3 years as an entire business of the organisation. That started in 2017. The implication is that we are going to have tax refund for 2017. And if that is completed, the refund of about N400 million is coming back to us as an organisation.
Then for 2019, the tax projection is in the neighbourhood of N800 million to N1 billion. That is also savings for us.
To look at the projection we have done interns of PBT and if you just take a straight line 22% from it, that is in the neighbourhood of N900 million to N1 billion coming back to us as an organisation.
This amount you just mentioned now should be more than half of the N3 billion you’re expecting in the rights?
That is it. I can tell people authoritatively that good days are ahead of us as an organisation. And if there is any time to invest in fidson, I think this is the right time.