Economy
Stock Analysis: Flour Mills Gets Sell Rating

By Christian Orajekwe
Following the conclusion of the N38 billion Rights Issue (RI) and recent discussions with management, we revise our TP and earnings estimates for FLOURMILL. Feedback is that the RI was successful (oversubscribed).
On net, we increase the post-rights shares outstanding by 56% to 4.1 billion and WACC by 158 bps to 15.2% and consequently, (2) lower our TP for the stock by 21% to NGN30.56.
Although we revised our net earnings estimates slightly higher, however, overlaid on the post-rights shares, we now look for 2019E and 2020E EPS of N4.80k (N7.5 ex new shares) and N6.40k (N10 ex new shares) respectively.
FLOURMILL’s share price has accumulated 31% YtD and we revise rating to SELL (HOLD previously) on our new TP.
On our estimates, FLOURMILL is trading on forward (FY18E) P/E and EV/EBITDA multiples of 6.1x and 3.7x respectively, at material discounts to the (1) peer average forward P/E of 11.5x and EV/EBITDA of 7.8x and (2) its five-year historical average of 14x and 8.1x respectively.
Notwithstanding the impact of the RI on valuation and EPS, we have a fairly strong view of FLOURMILL over the medium term. From 1% average between 2014-2016 (2017 was an outlier, in our view) and 5% in 2018E, we forecast sales revenue growth to increase to 9% average over 2019-2020E.
Management has continued to reiterate that its emphasis going forward is on driving returns from the investments of the recent years. And it is our view that the group’s focus on food-based and agro-allied products, whilst favoured by Nigeria’s demographic potential and spending patterns, also provides a good hedge against cyclicality effects in the FMCG industry.
We also forecast EBITDA to grow steadily to N81 billion by 2020E, from N57 billion in 2017FY, and the margin to stabilize at 12% average, 300 bps above the rate achieved in the last five years. With a robust top-line, we view the sustenance of the opex margins of 4.5% achieved in 2017FY and 4% as at 9M-18, compared to 8% historical average, as positive for EBITDA formation going forward.
Management said it does not expect opex-to-revenue ratio to change materially to the upside going forward, given its emphasis of growing revenue, while focusing strongly on containing costs.
On the highly leveraged balance sheet, we are not totally convinced that there will be a material reduction in the amount of FLOURMILL’s borrowings (N201 billion as at 9M-18) over the near term.
That said, we also do not expect borrowings will be higher.
On net, it is our view that savings from the refinancing of expensive borrowings will be positive – in the short term especially – for cash and earnings. Over the medium term, it is our view that faster growth in EBITDA over fixed financing costs will be positive for earnings.
We held discussions with management on the recently commissioned Sunti backward integration project in sugar, and also to understand the current market dynamics and outlook.
Sunti and Golden Penny Sugar in general
We understand that the Sunti project, at commissioning, cost the group about N50 billion, funded with N30 billion of subsidized loans from the Central Bank of Nigeria (CBN) and the balance being own capital. The CBN loan is for twelve years, at 9% average interest rate. The land size is 15,000 hectares, to be utilized solely for planting and refining sugar. Thus far, 3,000 hectares have been developed, but not fully cultivated.
The refinery capacity is currently 100,000 tonnes of sugar per annum. Further expansion of capacity, according to management, is dependent on profitability. Management said it expects to achieve the first farm-to-factory output in the next 2-3 years. The refinery will be fed with own-grown sugarcane at the early stage but will subsequently be supported with supplies from outgrowers. We understand that sales will be largely to industrial consumers.
Management said the 750,000 tonnes per annum sugar refinery in Lagos will be retained and fed with imported raw sugar. It does not consider the movement of raw sugar from the North for refining in Lagos efficient. And it also does not consider the mandatory backward integration policy in the sector sufficient a threat – in the near term at least – to the continuity of the import-to-refinery model.
Capacity utilization on the 750,000 tonnes refinery is currently 45%. We were informed that the sugar business is profitable, accounting for about 15% of both group revenue and net profit. Although DANGSUGAR, the market leader, sets sugar prices, FLOURMILL management said it is able to derive about the same margin on its sugar, on average, as with DANGSUGAR (five-year average of 20% and 25.4% as at 9M-17). We were curious about the potential margin benefits derivable from Sunti, but management’s response, however, did not convince us enough to conclude that there will be material improvement.
Currently, the group’s sugar sales mix is 80% industrial and 20% retail (both cubes and refined 100g bags). Management said the margin on retail sugar sales is about 300 bps more, and that its mix is expected to improve only slightly above 20%.
Only small quantity of sugar is currently exported, and to neighbouring ECOWAS countries. Given the local excess sugar capacity, management sees good opportunity in exports, but – as with DANGSUGAR – we are not convinced that this aspiration will be pursued aggressively.
On Debt
Gross debt as at 9M-18 was N201 billion, from N234 billon at the beginning of the year. As with previous guidance, management said it plans to reduce outstanding debt by 2019 (1) using the proceeds of the N38 billion Rights Issue and (2) via reduction of capex spending, by limiting them to only strategic investments (N20 billion capex guidance provided for 2019E, vs. N10 billion in 9M-18).
We are not convinced that FLOURMILL’s outstanding debt in the next 2-3 years will be materially lower from what it is now. Management said its target is to achieve debt-to-EBITDA ratio of 1.5x, from c.6x average in the last five years. But this, in our view, can also be achieved by growing EBITDA (as we expect), and not necessarily by cutting down borrowings. Management said it is keen about being adequately capitalized/liquid.
Management confirmed that it has been quite busy in the debt market, refinancing its borrowings at lower interest rates. Gross outstanding debt, we understand, currently consists of about N25 billion of commercial papers (CPs), some of which were recently issued at 15% average interest rate (average rate on CPs was 21% as at 9M-18).
Overall, target is to achieve 15-16% average interest rate on gross short term borrowings by 2019E (from 19.8% average as at 9M-18), should local inflationary condition continue to improve.
Business Segments
Food – Feedback is that this segment remains resilient. Performance is driven by volume and mix, led by flour, semovita, and pasta. Target is to achieve 10% volume growth in 2019E.
Agro-Allied – As a result of losses associated with Sunti start-up costs as well as ROM Oil (edible oil), this segment is expected to close 2018 with negative PBT. However, remedial actions going into 2019 include (1) to reduce capex in Sunti and (2) for edible oil, to control costs and improve both pricing and RTM, with the target to achieve break-even, at minimum.
Also, on agro-allied, we were informed that (1) the export of garri commenced recently, (2) a second aqua feed will be commissioned in Q2-Q3 this year, and (3) the fertilizer business is performing well, notwithstanding the threat of government supplying the product at subsidized prices. Overall, for this segment, target is to achieve 7-10% volume growth in 2019E.
Packaging – Thus far, the performance of this segment is consistent with the trend seen over 9M-18 (150% PBT growth). Management said the revenue growth of 3% achieved in 9M-18 was strictly from third-party sales, guiding that inter-company sales cancel out at the group level. Emphasis remains on controlling costs.
Prices: In the absence of the 2016-type of cost pressure, prices are expected to remain stable. There was a very marginal cut in the prices of sugar and flour late in 2017. On gross margin outlook, management said it is comfortable with the 13% it achieved in 9M-18.
Withheld products – Daily Delight (breakfast cereal) and Kool 2-Go (instant powdered drink) were recently withheld. Management said Daily Delight could not compete in the breakfast cereal market while Kool 2-Go was affected by the naira devaluation. We understand plan is ongoing to reposition and relaunch the breakfast cereal this year.
Power – Gas supply has improved significantly across the various plants (Ibadan, Iganmu, and Calabar), but excluding Apapa, wherein supply (we understand is currently in the 60-70s) is limited by high demand.
Forex – Less than 50% of FX requirement is met via the CBN’s bi-monthly sales, at slightly above N325/USD. All demands can be met at the Investors and Exporters window. Management’s view of the FX market is positive in the short term, suggesting losses linked to the outstanding USD borrowings (USD20 million) and trade payables are unlikely.
Christian Orajekwe is analysts at CORDROS CAPITAL and can be reached via christian.orajekwe@cordros.com.
Economy
Trump’s Tariffs: US Faults Nigeria’s Import Ban on Beef, Poultry, Juice, Others

By Adedapo Adesanya
The United States has lamented Nigeria’s import ban on 25 different products, particularly in agriculture, pharmaceuticals, beverages, and consumer goods, as it rationalised the recent decision to slap a 14 per cent retaliatory tariff.
The United States Trade Representative, in a statement on Monday posted on its X platform, said Nigeria’s restrictions on items like beef, pork, poultry, fruit juices, medicaments, and spirits limit US market access and reduce export opportunities.
“These policies create significant trade barriers that lead to lost revenue for US businesses looking to expand in the Nigerian market,” it wrote.
Last week, the administration of President Donald Trump imposed various tariffs ranging between 10 per cent and 65 per cent on different countries across the world, including Nigeria which got a 14 per cent tariff on its exports to the US.
In response, the Nigerian Minister of Trade, Industry, and Investment, Mrs Jumoke Oduwole, said Nigeria would take a pragmatic approach and will boost non-oil exports to deal with the drawbacks from the US move.
She also said Nigeria will be willing to negotiate and will be speaking with the World Trade Organisation (WTO) on the way forward.
On his part, the Minister of Finance, Mr Wale Edun, said that the Economic Management Team (EMT) would meet to assess the likely impact of the 14 per cent tariff on goods exported from Nigeria to the US.
He said the EMT will afterwards, make recommendations to cushion its impact on the nation’s economy.
The Minister also said the federal government will boost non-revenue as a means of cushioning the adverse effects to trade tariffs imposed on countries by President Trump.
Mr Edun also assured that while the adverse effect on Nigeria will be through an oil price plunge, the government is intensifying efforts to ramp up oil production and boost non-oil revenues.
Economy
Nigeria, Japan Launch Naira-based Venture Fund for Startups

By Adedapo Adesanya
Nigeria and Japan have launched a strategic venture capital initiative that will channel Naira-denominated investments into high-growth startups, shielding them from currency risks while unlocking access to long-term concessional financing.
The Minister of Finance and Coordinating Minister of the Economy, Mr Wale Edun, met with officials from the Nigeria Sovereign Investment Authority (NSIA) and the Japan International Cooperation Agency (JICA) to finalise the framework of the fund, which has now received formal approval from the Japanese government.
Speaking on the development, Mr Edun welcomed the development, calling it a timely response to Nigeria’s youthful demography.
He said this fund provides critical financial backing across the capital structure—from equity to debt—and is aligned with President Bola Tinubu’s Renewed Hope Agenda for inclusive economic growth, he stated.
On his part, NSIA CEO, Mr Aminu Umar-Sadiq confirmed that the initiative satisfies two key conditions set by the Minister: mitigating foreign exchange volatility by investing in Naira and securing first-loss or grant capital to de-risk private investment.
“With JICA’s support, this is not just a proposed solution—it’s a fully approved, ready-to-launch initiative,” Mr Umar-Sadiq said.
By combining international concessional financing with domestic currency stability, the fund marks a new model for venture capital in Africa, aimed squarely at empowering the next generation of Nigerian innovators.
Economy
Nigeria’s Economic Management Team to Assess Impact of Trump’s Tariffs

By Adedapo Adesanya
The Minister of Finance, Mr Wale Edun, has said the country’s Economic Management Team (EMT) would meet to assess the likely impact of the 14 per cent tariff on goods exported from Nigeria to the United States.
Mr Edun made the disclosure while speaking at an event organised by the Ministry of Finance Incorporated (MOFI) on Monday.
The Trump administration recently imposed various tariffs ranging between 10 per cent and 65 per cent on different countries across the world, including Nigeria which got a 14 per cent tariff on its exports to the United States.
He said the EMT will afterwards make recommendations to cushion its impact on the nation’s economy, noting that the federal government will boost non-revenue as a means of cushioning the adverse effects to trade tariffs imposed on countries by President Trump.
Mr Edun stated that while the adverse effect on Nigeria will result in an oil price plunge, the government is intensifying efforts to ramp up oil production and boost non-oil revenues.
The Finance Minister noted that the US, which is at the centre of the tariff war had on April 2, announced that it would exempt mineral exports, including oil.
“Therefore, it’s the price effect, the oil price effect that may affect Nigeria. And it is the job and responsibility of the economic management team of President Bola Ahmed Tinubu, amongst others, to look at the various scenarios that might play out.
“There’s global uncertainty at a huge level, so nobody knows exactly what will happen- the announcement that has been made. We’re not sure what will be delayed, what will be reversed, or what will be implemented.
“So, it is not an announcement that the budget is being reviewed. It’s an announcement that it is our responsibility to look at the various scenarios and options and advise government accordingly.”
Mr Edun also highlighted plans to look at budget adjustment, expenditure prioritisation as well as innovative non-debt financing strategies.
According to him, Nigeria had recorded a trade surplus in the last three years (2022-2024) with the US.
“Nigeria-US Trade has been in surplus in the last 3 years (2022-2024). Nigeria’s exports to the US were N1.8 trillion, N2.6 trillion and N5.5 trillion in 2022-2024, respectively.
“Fortunately, oil and mineral exports accounted for 92 per cent. Implying oil and minerals exports amounted to N5.08 trillion in value while non-oil was just N0.44 trillion.
“Consequently, the tariff effect on exports is negligible if we sustain our oil and minerals export volume.
“The adverse effect on Nigeria will be through oil price plunge. We are intensifying efforts to ramp up crude oil production to curtail any price effect
“We are also focusing on non-oil revenue mobilisation by FIRS and Customs, budget adjustment and prioritisation where possible, and also and innovative non-debt financing strategies,” the Minister said.
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