Northern Nigeria Flour Mills Plc


Ticker:                       NNFMNature of Business:    Food ProductsLocation :                            Nigeria
Recent Price:              NGN5.60   52-Week High/Low: NGN9.68/3.87Estimated Fair Value:    NGN8.00-NGN12.69
Expected Return:      51.9%Consider Buy:                   Below NGN10.35Business Risk:            Average
Financial Risk:    MediumEconomic Moat:             WeakCorporate Governance:  Average

Company Overview
Northern Nigeria Flour Mills Plc (NNFM) commenced operations as a private limited liability company in October 1971; it was quoted on the Nigerian Stock Exchange in 1978, the same year it was converted to a public limited liability company. Flour Mills of Nigeria Plc (FMN) controls 53.1% of the outstanding shares of NNFM. The other two major shareholders are Northern Nigeria Investment Limited (7.3%) and Dantata Investment and Securities Limited (6.5%). Excelsior Shipping Company Limited is the ultimate holding company of NNFM as it has a major stake in FMN, a direct parent of NNFM. NNFM’s core business is the milling of wheat, sorghum, maize and other associated grains. It also renders contract milling services to third parties.

Mr. Gert Kriek holds sway as the managing director of the company while Alhaji (Dr.) Aminu Dantata chairs the board of directors. Mr. Richard Hedges and Mallam Mahmud Ahmed resigned from the board on July 28, 2020; they were replaced by Mr. Jack Joseph Cwach and Mallam Abdul Ganiyu Sani.

Investment Thesis
NNFM is based in Kano, a state in the northern part of Nigeria. The company and, by extension, the Nigerian manufacturing sector have been blighted by the high cost of operations. Expectedly, NNFM’s  profitability has deteriorated.

It is struggling to produce positive free cash flow and returns for shareholders on a consistent basis. Management should attempt to penetrate the market and grow the sale of its products such as cornmeal, masavita and masaflour to improve its earnings growth. We believe NNFM would benefit when security challenges in the northern part of Nigeria are addressed.

NNFM enjoys the financial support of its parent company and the Federal Government of Nigeria for working capital management and capacity upgrade.  As a matter of fact, it has benefitted from low-interest loans disbursed by the government through the Bank of Industry (BOI) and the Central bank of Nigeria (CBN). This is in line with the government’s policy of supporting the real sector of the economy.

The company’s indebtedness started getting worse in 2017 due to the accumulation of debts in an attempt to boost working capital and invest in capital such as its Sorghum mill. This has put the company under financial pressure as profits hardly cover its debt obligations. However, there were improvements in the fiscal year that ended on 31st March 2020. We expect these improvements to be sustained by the management of the company.

Dividend payment has resumed and returns have become positive. The last time NNFM recorded positive returns was in 2014. The results released for Quarter 3 which ended on 31st December 2021 showed that revenue increased by 28.9% over the corresponding quarter of the previous year as more products were sold. Gross profit leapt to NGN470.7 million from a gross loss of NGN299.2 million declared a year ago. Operating profit jumped to NGN162.2 million from NGN77.1 million. The company is undervalued in our opinion. We recommend a buy in the light of the recent developments.

NNFM currently trades at 0.1 times sales and 0.6 times book value. Its adjusted Book Value Per Share is estimated at NGN8.70 and Earnings Power Value is NGN7.20. We have valued NNFM between NGN8.00 and NGN12.69 per share. A share of NNFM currently trades below our fair value estimate.

Financial Overview
Though earnings growth has been unstable, gross earnings of NGN8.8 billion announced in 2020 were more than double the prior year’s figure.  The sale of goods swelled by 128.9% while contract milling fees expanded by 43.4%. Contract milling accounted for 12.5% of revenue while the remaining 87.5% was produced by product sales.  Operating profit added 6.5% from NGN527.9 million in 2019 to NGN562.2 million in 2020. Profit Before Tax (PBT) was NGN120.7 million as against losses of the last five years.  Debt obligations have wiped out operating profit since 2017 except in 2020. Profit After Tax (PAT) was NGN64.6 million in the year under review as against a Loss After Tax of NGN31.7 million in the preceding year. NGN1.7 billion income from revaluation of property, plant and equipment was responsible for a total comprehensive income of NGN1.6 billion in contrast to the previous period’s total comprehensive loss of NGN24 million.

Sales are made at a very high cost with the resultant effect on profit margins. The cost of sales closed at 90.1% of revenue for the year; this was a little less than the 9-year average of 90.8% of sales. A gross profit margin of 9.9% was more than the average of 9.2% by 69 basis points. Operating profit margin worsened. Shareholders’ fund gained 140.6% or NGN1.6 billion in a year. However, shareholders’ fund shed 2% in the earlier year. Book Value Per Share was NGN15.54 compared to NGN6.46 of a year ago. Moreover, the dividend yield was 3.5%; there was no dividend paid in 2019.

Total debt accumulated stood at NGN2 billion at the end of the 2020 fiscal year. The bulk of the total debt was short-term in nature and has to be paid within a year. But looking at the financial performance of NNFM over the past few years, it has failed to generate adequate operating profit to offset its loans. Debts amounted to 73.3% of shareholders’ fund in comparison to the year before when debts were 247.5% of shareholders’ fund. Moreover, debt as a percentage of total assets was 23.9%, down from 57% of the earlier fiscal year.  In fact, meeting up with interest payments has been a herculean task for NNFM. The CBN has, however, slashed the interest rates on its intervention facilities from 9% to 5% in a bid to mitigate the impact of the endemic COVID-19. In addition, the CBN has prolonged the moratorium on repayment of principal for an additional year. Therefore, payment of debt obligations was made easier and profitability should improve in the coming year. Both current and acid test ratios rose; the current ratio stood at 1 while the acid test ratio was 0.7.

Business Risk
There is no stable growth of its net income and high operating costs bode ill for NNFM. The economic impasse caused by COVID-19 could impact the top-line negatively. Besides, the restiveness in the northern part of Nigeria is a great hurdle to surmount and this clearly disadvantages NNFM.

Recommendation: Buy

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