TUE, June 19 2018-theG&BJournal- Renaissance Capital said today in Lagos in their first review of the shares of Nigeria’s staple food producers, that they believe the long-term prospects of the Nigerian consumer market and staple food producers sector are supported by favourable demographics and see a short-term boost to margins and growth driven by a stable FX environment, moderating inflation and higher selling prices post-currency devaluation.
Flour Mills of Nigeria (FMN: BUY; TP:NGN51.30/share, Dangote Sugar Refinery (DSR:BUY;TPNGN26.72/share), Dangote Flour Flour Mills (DFM:BUY;TPNGN27.88/share) and NASCON Allied Industries (NASCON: BUY;TP:NGN 32.02/share) were the focus of the first review.
The top picks RenCap says are NASCON and DFM. ”We believe these stocks offer greater upside potential than their peers and stronger fundamentals through the cycle. We view NASCON as a growth company. It has invested in expanding its core salt business and diversifying into new businesses with capex financed with internally generated cash.”
RenCap said despite this pressure, its FCF margin has remained positive and this has been supportive of cash dividend payments.
”We forecast that it will achieve EPS CAGR of 15.5% in FY17-22. There is potential upside to our estimates and valuation from a possible restart of its mothballed edible oil business from FY18.”
It noted that DFM recently emerged from a difficult operating period of sluggish sales growth and depressed cash margins but that the firm’s management is now confident in the outlook for the business after disposing of its noodle business to the market leader and focusing on its core flour and pasta/macaroni business.
”With our forecast of moderate capex and EBITDA CAGR of 16.0% in FY17-22, we expect FCF to be boosted and FCF margins to average 11.0% in FY18-22.”
FMN’s inability to generate healthy cash margins and leverage its balance sheet following an ambitious expansion programme have hurt its earnings performance in recent years and left it seeking capital more often than investors would like, RenCap said.
”With the recent completion of the NGN40.0bn rights issue in 4Q18 (March year-end), higher flour
selling prices in 2017, a potential bond listing to retire its expensive short-term debt and 4) moderate capex outlook from FY19, we forecast stronger earnings growth in FY19-23.”
They believe an expansion in cash margins from the sugar business in FY19 and an improvement in the agri-business’s margin contribution will drive stronger FCF generation and aid its drive to deleverage its balance sheet.
”However, FMN has historically disappointed with its inability to boost margins and its consistent need for external financing. While this could drive a discount rating to peers, we estimate that on a forward P/E and EV/EBITDA of 4.4x and 2.8x, the stock represents a long-term BUYing opportunity. DSR has repeatedly posted strong EBITDA margins, generated healthy FCF and paid out dividends.”
According to RenCap, notwithstanding the exposure to commodity prices and FX risks, we believe the stock is being steeply discounted despite raw sugar prices being lower than in 2017.
”We estimate that DSR is trading on a forward P/E and EV/EBITDA of 4.5x and 2.5x. However, we highlight that DSR plans a material capex programme in the next six years which will depress FCF from FY20. The timing of the capex and size of the investment also raise the business’s risk profile, in our view.”
According to RenCap this coverage aims to provide investors with the in-depth analysis necessary to make informed investment decisions.
