McNichols Consolidated Plc


Company Overview
MCNICHOLS was established in April 2004 but commenced  business in 2005. It produces food products such as cube sugar, granulated sugar, baking sugar, icing sugar, chocolate food drink and custard powder. The company packages its products into pack sizes that make them affordable and reach more customers. The company was listed on the Nigerian Stock Exchange in December, 2009.

Chimaraoke Ekpe is the managing director while Mr Olusegun Layode is the chairman of the board of MCNICHOLS.

Investment Thesis
MCNICHOLS has grown revenue by 21.5% over the past nine years. shareholders' fund and total assets are growing. Shareholders' fund increased by 13.7% while total assets gained 12.5% in the past three years. The company's long-term debt increased from NGN8.6 million to NGN48 million in a year. But we do not believe that MCNICHOLS is overburdened by debt as debt forms 14.7% of shareholders' fund and 8.9% of total assets. Again, it has been generating enough  operating profit and operating cash flow to pay off  its debts.Earnings chart of McNichols

Efforts should be geared towards aggressive marketing  in order to improve brand visibility and customer loyalty for its products.

Cost of sales depressed profit margins; gross profit margin shrank by 12.5% in three years as cost to turnover ratio rose by the same amount in three years. Both operating profit margin and Profit Before Tax (PBT) margin shed 5.3% and 4.5% respectively between 2014 and 2017.

The company produced a negative free cash flow for the shareholders owing to a rise in capital spending. This, in our opinion, could impact earnings going forward. In addition, we believe that if efforts to explore markets outside Nigeria is intensified, earnings growth could be sustained.

MCNICHOLS trades at 3.6 times average earnings and 5.2 times average book value. We have valued a share of the company at a value ranging from NGN0.80 to NGN1.10. A share of the company should produce a return of 57.6% in three years' time.

Financial Overview
Though revenue dipped 11.6% year-on-year, it has grown by 23% on a 3-Year Compound Annual Growth Rate (CAGR) basis. Cost to turnover ratio rose to 84.9% from 82.6% of the previous year, 2016. Consequently, gross profit margin of 15.1% represents a 2.3% decline.  Despite an 18% decrease in operating expenses, operating profit dropped to NGN47.1 million from NGN69.8 million, losing 32.4% in a year. Both PBT and Profit After Tax (PAT) shed 3% and 5.7% respectively over the last three years.Graph of returns of McNichols

Operating profit margin of 4.9% was worse than 6.4% of a year before. PBT margin of 4.3% trails the six-year average of 5.9% and was tantamount to a  year-to-year drop of  2.1%. Net profit margin shed 1.6 percentage points to close at 3.5%. Both Return on Equity (RoE) and Return on Assets (RoA) stood at 10.5% and 6.3% respectively compared to 18.6% and 11.8% of 2016. Earnings Per Share (EPS) was depressed by 41.2%  to NGN0.10; however, Book Value Per Share (BVPS) gained 8.7% to close at NGN1.00.

MCNICHOLS has grown shareholders' fund by 8% and total assets by 13.5%. Though it jumped from NGN8.6 million to NGN48 million,  long-term debt is covered by operating profit 5.1 times. In addition operating cash flow can pay the debt 9.1 times.  Consequently, the company is not insolvent.

Business Risk
Exchange rate fluctuation occasioned by  importation of  materials impacts earnings and margins. Cost of sales to turnover ratio  exceeded the six-year average of 78.7% by 6.2 percentage points. Rising cost of sale has adverse effect on gross profit; gross profit dipped by 23.3% while revenue decreased by 11.6% in the year under consideration. In the previous year, gross profit declined by 4.1% in spite of revenue growth of 8.3%.

Recommendation: Hold

Vital Statistics of McNichols

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