Northern Nigeria Flour Mills Plc

NORTHERN NIGERIA FLOUR MILLS PLC

Company Overview
NNFM, a comp commenced operations as a private company in October 1971; it was quoted on the Nigerian Stock Exchange in 1978, the same year it was converted to a public company.

Flour Mills of Nigeria Plc has a controlling equity stake in NNFM (53.1%). The other two major shareholders are Northern Nigeria Investment Limited (7.3%) and Dantata Investment and Securities Limited (5.6%).

NNFM’s core business is milling of wheat, maize and other associated grains. The company also engages in the sale of Golden Penny products of its parent company, Flour Mills of Nigeria Plc.

Mr. Gert Kriek holds sway as the managing director while Alhaji(Dr.) Aminu Dantata chairs the board of the company.

Investment Thesis
The company’s fundamentals have deteriorated. Earnings are not stable. Low margins and high cost of materials are the bane of the company. NNFM is struggling to produce positive free cash flow and returns for shareholders. Management should attempt to penetrate the market and grow the sale of cornmeal, masavita and masaflour to improve its earnings growth. We believe NNFM would benefit from the restoration of calmness to the northern part of Nigeria.

The company is not bogged down by debts. It has been paying dividends to shareholders. However, we do not recommend a buy owing to the company’s unappealing performance. We would keep close tabs on the company to see how things pan out.

Valuation
NNFM currently trades at 1.2 times sales and 1 times book value. Its adjusted Book Value Per Share is estimated at NGN8.5 and Earnings Power Value is NGN11.8.

We have valued NNFM between NGN4.9 and NGN7 per share. A share of NNFM currently trades around our fair value estimate. We expect a dividend yield of 2.4% from a share of NNFM.

Financial Overview
Gross and net earnings have lost 56.3% and 188.6% over the past three years. The sale of wheat flour and semovita has witnessed a dramatic decline. Masaflour, germ flour, masavita and cornmeal have achieved a tremendous sales growth. Consequently, the management has suspended the milling of wheat in order to focus on milling of maize products.

NNFM made a lost after tax of NGN 197.2 million compared to a NGN199.6 million loss of 2015. There was an operating loss of NGN436.7 million. Sales are made at a very high cost with the resultant effect on profit margins. Cost of sales closed at 110.3% of revenue for the year; this is more than the 5-year average of 98.2% of sales. Gross margin of -10.3% is lower than the average of 4.8% by 15.1%. Both operating margin and PAT margin worsened.

Shareholders have only lost 24.2% over the past five years. Book Value Per Share was NGN7 compared to NGN8.1 of a year ago. Dividend yield was 7.5% (2015: 1.7%).

NNFM is a low-geared company; it has no debt obligations and is not insolvent. Both current and acid test ratios have improved; current ratio stood at 2.9 times while acid test ratio is 1.8 times. Total liabilities form less than 50% of shareholders’ fund.

Business Risk
There is no earnings stability. Competitive pressures bode ill for NNFM. Declining sales of its products are impacting top line negatively. The economic impasse and the restiveness in the Northern part of Nigeria are great hurdles to surmount for NNFM.

Recommendation: Hold

Vital statistics of Northern Nigeria Flour Mills