Flour Mills of Nigeria Plc - Rights issue: Grist to the mill
- 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.
- 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.
- 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.
- 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.
- See attached for full report
ARM Securities Limited is a full-service brokerage house that offers best-in-class brokerage services to local as well as foreign private and institutional investors. Formerly known as Hamilton Hammer, the Company commenced operation in 1994 and was acquired by ARM Investment Managers in 2008--an acquisition which has successfully re-positioned the company as a recognized brokerage firm in Nigeria. The Company is a dealing member of the Nigerian Stock Exchange (NSE) and is regulated by Securities and Exchange Commission (SEC). ARM Securities research team provides insightful commentaries on the Nigerian economy and its equity and debt markets using an approach which incorporates a thorough understanding of the fundamentals of the industries and companies under coverage. The research therefore adopts an integrated methodology of top-down analysis and bottom-up stock selection, which focuses on publicly quoted companies on the Nigerian Stock Exchange that are judged to offer the highest potential for earnings growth. In addition, its analysts provide periodic commentaries on a range of topical global and local issues which provide investing clients with a holistic view of the opportunities and risks in today’s financial market landscape.
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