7 Facts To Consider Before Picking That ‘Flourmills’ Rights Issue

Are you an investor in capital market, particularly in stocks – company shares? Then, you may find this helpful in deciding whether to invest in the Flour Mills of Nigeria Plc or not.

Flour Mills of Nigeria Plc, Nigeria’s largest flour-milling company on the Nigerian Stock Exchange with market capitalization of N63.27 billion(about $316 million) as at end of August 2015, is currently facing capital adequacy challenges which has forced the management to continue borrowing to finance the company.

fmnThe company’s debt of N149 billion (about $745) represents 68 per cent of Fixed Assets as at March 31, 2015. The burden of debts is currently eating deep into the company’s bottom line as it paid over N18 billion as interest expenses in the financial year ended March 31, 2015.

The decision of the company’s management to raise funds from shareholders by Rights Issue is no doubt due to funding pressure. Flour Mills of Nigeria has asked the Securities and Exchange Commission (SEC) to approve its proposal to raise N40 billion from shareholders through a Rights issue.

Mr. John Coumantaros, Chairman of Flour mills of Nigeria Plc said “proceeds of the Right issue will be used majorly to reduce debt burden, lower interest charge and augment working capital”.

Coumantaros has linked the current financial stress to the sudden slump in global crude oil prices which resulted in major devaluation of the Naira, leading to increase in import cost and financial charges. For the financial year ended March 2015 Flourmills Nigeria exchange loss stood at N5.1 billion.

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Value for Investors

FMN distributed N5.51 billion (as cash dividends to shareholders for the immediate past financial year ended March 31, 2015. The figure represents about 65.13 per cent of the company’s net profit. Each shareholder is entitled to N2.10 per share. The company recorded –(5.24 percent) drop in revenue in 2015 compared to N325.8 billion in 2014.  The company gave shareholders a dividend of N2.10 alongside a bonus of one for 10 shares in 2014.

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New Development

The management of Flour Mills of Nigeria (FMN) has gotten both shareholders and the Securities and Exchange Commission (SEC) approval to merge five of its subsidiaries with its holding company, FMN, under a scheme of external restructuring.

This followed earlier announcement to merge Golden Noodles Nigeria Limited, Golden Transport Company Limited, FMN Cement Industries (Nigeria) Limited, New Horizon Flour Mills Limited and Quilvest Properties Limited with the holding company.

Mr. Paul Gbededo, Group Managing Director, FMN, disclosed that the planned merger was part of the firm’s process of restructuring the company to streamline operations, reduce administrative costs, improve operating efficiency and derive full benefits of synergy in line with the company’s long term strategic thrust.

“The enlarged FMN, upon completion of the restructuring would be able to eliminate transfer costs of materials and operate at a higher level of efficiency which will drive down costs, make product pricing more competitive, improve profitability and enhance the bottom line for the benefit of all stakeholders” he said.

Capital Sufficiency

The paid up equity capital of the company has continuously being inadequate for its current level of business activities. As at March 31, 2015, Flour Mills Nigeria had N149.2 billion total loan in its books representing 120 percent of its Current Assets and 68 percent of Fixed Assets. Also in the review period, the company paid about N18.7 billion out as interest expenses, representing 16.16 percent increase from N16.1 billion paid in the previous year.

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The company increased borrowings from N96.25 billion in 2014 to N149.2 billion in 2015, representing 55 percent jump. However, working capital was negative as the company depends heavily on loans for survival.

Current and Quick ratios as at March 31, 2015 stood at 0.69:1 and 0.31:1 respectively. It implies the company is not liquid enough to pay its debt as at when due.

Debt Structure

The capital structure of FMN shows the company gets a higher proportion of its funding from debt rather than equity.

Analysis of the relationship between its shareholders fund and borrowing shows a debt to equity ratio of 177 percent, making debt 1.8 times the shareholders fund, an indication that the company has not been able to handle its debt efficiently.

Liquidity
The Company’s current assets grew by 19.5 percent to N123.6 billion while current liabilities grew by 39 per cent to close at N179.2 billion.

The major contributors to the increase in the last two years are: Stocks (up to N68.4 billion from N63.7 billion) and other cash balances (up to N31.1 billion from N16.8 billion).

In another development, the major cause of increase in the company’s liabilities is borrowing which grew by 55 percent to N149.2 billion in 2015.

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Profitability

Returns on Equity (ROE) increase to 10.05 percent from 6.72 percent, implying that risk of generating inadequate cash flow to meet interest expenses is minimized. Similarly, Return on Assets (RoA) increased to 2.47 percent from 1.79 percent recorded in 2014.

But Gross Profit Margin remained flat in the review period at 11.45 percent. This could indicate that management’s effort to cut costs yielded no results.

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Future
FMN has embarked on major expansion programmes and acquisitions in the last five years. Most of these projects are now operational and are expected to make buoy FMN’s top and bottom lines in the foreseeable future.

Coumantaros has re-assured shareholders that the company’s prospects are bright and promising.

“We shall continue to explore opportunities to streamline, re-focus and take our fast moving consumer food and agro allied business to a higher platform within and outside Nigeria,” he said.

 

SOURCE: Businesswise

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