FrieslandCampina WAMCO Nigeria Plc


Ticker:                       SDFCWAMCONature of Business:    Consumer GoodsLocation :                            Nigeria
Recent Price:              NGN121.5052-Week High/Low: NGN184.99/110.00Estimated Fair Value: NGN168.19-NGN197.87
Expected Return:      38.5%Consider Buy:                   Below NGN183.03Business Risk:            Average
Financial Risk:        HighEconomic Moat:             WeakCorporate Governance: Average

Company Overview
FrieslandCampina WAMCO Nigeria Plc (FCWAMCO) is a  dairy products producer and distributor with manufacturing sites in Ikeja and Ikorodu in  Lagos, Nigeria.  FCWAMCO was formed in April 1973 but did not start operations until September 1975. The company went public in 1978. FCWAMCO distributes evaporated milk, instant milk powder, ready-to-drink beverages and other dairy-based products.

FCWAMCO uses a combination of organic and inorganic strategies to grow its business. The purchase of the dairy business of Nutricima in the 2020 fiscal year has added Olympic, Coast and Nunu to its portfolio of milk products. The acquisition has also increased the milk productive capacity of the company. Friesland’s Dairy Development Programme (DDP) was launched in 2010 to help develop dairy farming and make fresh milk available to the company. The program enjoys the support of institutions such as the Federal Ministry of Agriculture and Rural Development, the Central Bank of Nigeria and Wageningen University. 

Mr.Jacobs Moyo Ajekigbe is the chairman, board of directors of FCWAMCO. Mr. Bernard Cheruiyot Langat occupies the position of managing director. Mr. Dirk van Breen, an executive director who joined the board in 2019, resigned and was replaced by Mr. Marc Galjaard in the 2020 fiscal year. 

Investment Thesis 
Peak and Three Crowns are popular brands of FCWAMCO. The company relies on FrieslandCampina Nederland B.V. for assistance with research and development, and professional services. It embarked on backward integration by building milk collection points through which it sources fresh milk locally from dairy farmers. Its dairy farms are presently in Oyo, Ogun, Osun, Kwara and Niger States. A concessional loan of NGN2.3 billion was procured from the Central Bank of Nigeria in 2020 to aid its DDP. The DDP is aimed at improving fresh milk supply, reducing costs and strengthening profit margins.

FCWAMCO has grown its sales revenue by 12.5% over the past three years. Though it declined by 3.2% year-over-year, Earnings Before Interest, Taxes, Depreciation and Amortisation (EBITDA) has gained 6.6% on a 3-year Compound Annual Growth Rate (CAGR) basis. However, net income has lost 10.1% over the past three years. Both Return on Average Equity (RoAE) and Return on Average Assets (RoAA) averaged out to 83.2% and 19% respectively over the past ten years. 

FCWAMCO’s indebtedness increased due to spending on additional milk collection points, heat extraction in its factories and an independent power plant. The company received financial support from a related company, FrieslandCampina B.V. Netherlands, during the year under review. FrieslandCampina B.V. Netherlands is a leading dairy company with a presence in over thirty countries. We expect the increased productivity and cost savings to continue in the foreseeable future. Export revenue, which accounted for less than 1% of total revenue in the past six years, should also increase.

FCWAMCO is a leading player in the dairy sector of the Nigerian economy. There is an opportunity to continue to grow its revenue due to the strong demand for milk and dairy-based products in Nigeria. Many dairy products are brought in from abroad. The company has intensified its effort to beef up its productive capacity by increasing its capital expenditure by 26.4% over the past three years. Free cash flow per share generated for the shareholders has risen to NGN31.71 in 2020 from NGN7.76 in 2019 notwithstanding the growth in capital spending. FCWAMCO had a net cash position of NGN15.2 billion or NGN15.60 per share at 2020 year-end even though total debt rose to NGN73.5 billion. FCWAMCO regularly pays the bulk of its net profits as dividends to the shareholders.

The company currently trades at 7.6 times average Earnings Per Share (EPS) and 5.7 average Book Value Per Share (BVPS). The fair value of FCWAMCO ranges from NGN168.19 to NGN197.87 per share from our valuation.

Financial Overview
Turnover rose by 23.3% to NGN199.5 billion in 2020 compared to the previous year when an 8.5% revenue growth was announced. However, gross profit was more or less flat at NGN40 billion owing to a 30.6% jump in the cost of sales to NGN159.2 billion in 2020. Consequently, the cost of sales to turnover rose to 79.8% resulting in the gross profit margin shedding 4.5 percentage points year-over-year. 

The profitability of FCWAMCO worsened in the year under review. The operating profit of NGN19.4 billion in 2020 amounted to a year-over-year decline of 6.6%; Profit Before Tax (PBT) dipped by 20.3% to close at NGN14.9 billion; Profit After Tax (PAT) dropped NGN3.6 billion or 29%. Operating profit and PBT margins declined by 3.1% and 4.1% respectively to close at 9.7% and 7.5% at the end of the 2020 fiscal year. 

FCWAMCO’s debt has risen considerably. The company owed FrieslandCampina B.V. Netherlands NGN61.9 billion as at 31st December 2020. The total debt of FCWAMCO  was NGN73.5 billion at the end of the year 2020 (2019:NGN2.1 billion). Debt has been an important source of finance for the company; the debt to shareholders’ fund ratio averaged 93% over the past seven years. The company’s debt to shareholders’ fund in the 2020 fiscal year was 279.4% (2019: 8.61%). However, creditors could only lay claim to 35.6% of total assets at the end of 2020. Though it produces ample operating profit to offset its finance cost, the huge short-term debt may exert liquidity pressure on the company.  FCWAMCO has short-term debt of about NGN63 billion in 2020 compared to NGN2.1 billion in the preceding year. Despite its rising indebtedness, we do not have any reason to believe that the company’s long-term solvency has been impaired.

Business Risk
The dwindling purchasing power of consumers poses a threat to the ability of the company to grow its sales revenue consistently. The company imports components and finished goods from suppliers overseas; it may incur losses from foreign exchange fluctuations. Imported goods worth NGN15.8 billion were sold by FCWAMCO  in the 2020 fiscal year. A NGN3.1 billion foreign exchange loss was declared in the year.  The competition from cheap imported dairy products poses a threat to the company’s earnings.

Recommendation: Buy

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