Performance A review of the share price movement in comparison with the All-Share Price Index rebased RESEARCH REPORT. Year End

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1 1 RESEARCH REPORT FLOUR MILLS OF NIGERIA PLC Year End 31 st March Price as at 28 th April 2006: N31.60 P/E Ratio Projected P/E Ratio Price Target: N37.40 Country: Nigeria Sector: Food/Bev./Tobacco Rating / Opinion: Buy Timeframe: 69 months Reason for Report: Market Review Trading data Year range (HighLow) N32.98N25.00 Market Cap N38.42bn Free Float 47.60% Avg daily volume 672,900 units Avg daily value N21.63m Balance Sheet data Shares Analysis; Authorized Share Capital: N1b PaidUp Share Capital N582.4m Shares in Issue: 1.16b units Shares held by Parent Coy m units Shares held by other Shareholders m units EPS: 1.29k Forecast EPS: 2.34k DPS: 0.70k Forecast DPS: 0.80k Forecast returns Forecast price appreciation 18.35% Forecast dividend yield 2.67% Forecast stock return 21.02% Market return assumption (TB rate) 9.80% Forecast excess return 11.22% COM PARATIVE PRICE M OVEM ENT FLOURM ILLS & ALLSHARE PRICE INDEX REBASED ( ) Company Profile Flour Mills Nigeria Plc ( Flour Mills or The Company ) was incorporated as a private limited liability company in 1960 and later converted to a public liability company in 1978 and was listed on the Nigerian Stock Exchange in The company is owned by Excelsior Shipping Company Plc (51.59%), and Other Nigerians (48.41%). The company has a couple of subsidiaries and associated companies; Its subsidiaries are Nigerian Bag Manufacturing Company Limited (BAGCO) (100%), Southern Star Shipping Company Nigerian Ltd (100%), Golden Shipping Company Nigeria Ltd (100%), Golden Pasta Company Ltd (100%) and Niger Mills Company Plc (51%). Its associated companies are United Cement Company of Nigeria Ltd (50%), Northern Nigeria Flour Mills Plc (45%) and Maiduguri Flour Mills Ltd (17%). The company is primarily engaged in flour milling, pasta production, operation of the bulk cement handling facility at Apapa, sale of bulk and bagged cement, and the management of Maiduguri Flour Mills Limited. The company controls a large chunk of the market in flour milling, pasta production and cements production and sale and strives consistently to improve on this. Flour Mills has maintained a stable, committed, disciplined and focused board and management that have incessantly pursued the company s aims and target of being the market leader. The company leverages on financial backing of financial institutions from within and outside the country and strong and unwavering support of the parent company. PRICES FLOUR_REB Figure 1 Share / Price Index Movement ( ) Jan01 Jul01 Jan02 Jul02 Jan03 Jul03 Jan04 Jul04 Jan05 Jul05 INDEX_REB Jan06 DATE The company s brands has maintained their leadership position in spite the strong competition in the industry and low quality and substandard imports competing for the same market. Flour Mills has benefited from the parent company s investment in the company, the expatriate s entrepreneurial knowhow and technological transfer. Performance A review of the share price movement in comparison with the AllShare Price Index rebased

2 (figure 1 above) between 2001 to date shows that between 2001 and 2002, Flour Mills share price outperformed the AllShare Price Index. This scenario was however reversed in between 2003 and early 2006 where the Index outperformed the stock, this is as a result of the fierce competition the stock had to face in its industry. This dismal performance made the management to go back to the drawing board to map out a more proactive strategy to move the company forward, hence the decision to access the capital market in December 2004 via a right issue which was a huge success. The company has since efficiently utilized the proceeds. The chart above shows that the since the third quarter of 2005, the stock has maintained a steady rise and outperformed the AllShare Price Index since the first quarter of Everything points to the fact that the stock is set to maintain a steady rise. Due to the company s quest to increase their market share, it s been embarking on projects to create value for its stakeholders and so has been living on and hungry for debt financing. In the last quarter of 2004, it went to the market to raise additional capital through a right issue. The main goals of the offer were; To replace, refurbish and modernize milling plants (25% of the offer proceeds to be committed to this) Provision of depot infrastructures (3.6%) Funding of investment in power generation to convert from diesel to natural gaspowered generators (5% of offer proceeds). Repayment of facilities (65.4% of offer proceeds) The proceeds of the offer have since been judiciously and efficiently utilized. The company has had substantial cost savings in refurbishing its old mills and putting in place new mills. The old mills occupied so much space, required at least eighteen persons to man per shift, but with the refurbished and modernized mills, just six staff can man a mill comfortably and output from the mills has also been increased. This no doubt has reduced labor cost by seventy percent and has contributed substantially to the company s bottomline. The company operates round the clock and so relies heavily on energy. It generates its power since it 2 can t rely on electricity from Power Holding Company of Nigeria. The company uses three trucks of A.G.O. (diesel) on daily basis which is bought at an average price of N72.50 per liter. This no doubt mounts so much pressure on cost of sales. To permanently resolve this problem therefore, the company has invested heavily to convert there power generating set from diesel to gaspowered generator which no doubt is far cheaper (about N15N20 per liter). This project is expected to be commissioned by the second quarter of this year. The company has also channeled substantial part of the right issue proceeds to pay down on its facilities and generates from its activities funds to keep the facility down. This implies that net interest expense has been greatly reduced and thus have a positive impact on the profit. Financials Third Quarter Comparative Results qtr 3qtr Change Change N'b N'b N'b % Turnover PBT Taxation PAT Table 1 Third Quarter Result The company s third quarter interim result (table 1 above) ended December 31, 2005, shows that turnover was up 29% from N37.6b in 2004 to N48.5b, Profit Before Tax (PBT) grew by 147% from N1.17b to N2.9b and Profit After Tax (PAT) grew by 140% from N0.82b to N2.03b. Above result shows a massive improvement in efficiency in utilizing the company s resources as Turnover grew only by 29% and the other parameters grew by about 150%. Going by this result, the company will sure surpass its projections. Table 2 presents our three years projection of Flour Mills results going by its recent results and the projects the company has lined up to commence from the second quarter of 2006.

3 3 Forecast Finanacials N b N b N b Turnover PBT Taxation PAT Dividend Retained Earnings Forecast EPS Forecast DPS (kobo) Table 2 Forecast Financials As detailed above, we expect that the company s result will grow by minimum of 10% in 2007 when most of the reform agenda would have been implemented. We also expect the results to grow by minimum of 20% in 2008 as a result of the income the greenfield cement factory the company is building in Mfamosing, near Calabar in conjunction with Holchim Trading SA of Spain. Above forecast is therefore a benchmark we have set for the company. Based on the above, its projected EPS is 2.34k while its projected P/E ratio would be In our view the share price would continue to appreciate owing to the impressive performance expected at the end of the financial year, given that the proceed from the right issue would go a long way in augmenting the company s working capital in the short run and the other factors already discussed above. We would equally want to state at this point that the company s retained earnings would be very heavy at the end of the financial year if they keep to their forecast, we therefore expect the company to declare bonus issue. Five Years Financial Summary N b N b N b N b N b Turnover PBT Taxation PAT Minority Interest Dividend Retained Earnings EPS (kobo) DPS (kobo) Table 3 Five Years Financial Summary FINANCIAL RATIO ANALYSIS The Group PROFITABILITY RATIOS Yrs Average Gross Profit Margin Operating Profit Margin PBIT Margin Distribution Cost Margin Administrative Cost Margin Interest Expense Margin Overhead Cost Margin RATE OF RETURN RATIOS ROCE ROTA ROFA ROWC WORKING CAPITAL MANAGEMENT LIQUIDITY RATIOS Current Ratio Acid Test Ratio ASSET USAGE RATIOS Total Assets Turnover Fixed Assets Turnover Current Asset Turnover Capital Employed Turnover Working Capital Turnover Stock/Debtors/Creditors Control Stock Turnover Stock Control Debtors' Turnover Creditors' Turnover GEARING Gearing Gearing INVESTORS RATIO EPS DPS Dividend Cover Dividend Yield P/E Ratio P/B Ratio Interest Cover

4 4 RATIO ANALYSIS The Company PROFITABILITY RATIOS Gross Profit Margin Operating Profit Margin PBIT Margin Distribution Cost Margin Administrative Cost Margin Interest Expense Margin Overhead Cost Margin RATE OF RETURN RATIOS ROCE ROTA ROFA ROWC WORKING CAPITAL MANAGEMENT LIQUIDITY RATIOS Current Ratio Acid Test Ratio ASSET USAGE RATIOS Total Assets Turnover Fixed Assets Turnover Current Asset Turnover Capital Employed Turnover Working Capital Turnover Stock/Debtors/Creditors Control Stock Turnover Stock Control Debtors' Turnover Creditors' Turnover GEARING Gearing Gearing INVESTORS RATIO Interest Cover Table 4 Financial Ratio Analysis Key Ratio Analysis From table 4 above, the Profitability Ratios shows that the gross profit margin dropped by 10 basis point from that of the preceding year and increased by 4 basis point from its five years average. Its distribution cost margin rose by 16 basis points from the preceding year and by 35 basis points from its five years average as a result of the increase in the level activity. While the Administrative cost margin rose by 72 basis points from the preceding year, it marginally dropped by 11 basis points from the five years average. From the same table, the Rate of Returns ratios shows that the company s Return on Capital employed (ROCE) dropped by basis points from that of the preceding year and by basis points from its five years average. While Return on Total Assets (ROTA) dropped by 2.22 basis points from the preceding year and by 2.40 from the five years average. Its Working Capital Management Ratios shows that the company maintained its five year s average current ratio which is 6 basis points up that of the preceding year. While the Acid Test Ration dropped by 2 basis points from that of the preceding year and by 3 basis points from its five years average. The company s gearing ratio shows that it has appetite for debt financing. Though, this dropped by 20 basis points from that of the preceding year and rose by 6 basis points from its five years average. With the funds at the company s disposal, its appetite for debt financing has been greatly reduced. Outlook The company is well positioned to face the stiff competition in the major industries it is currently playing. In the flour milling industry, demand for flour is almost perfectly elastic and it there are so many close substitutes to Flour Mills brand, therefore the market forces determines the price and so the margin that may be realized from this would be very minimal. On the other hand in the cement industry where the company plays very active role, since demand for the product is almost perfectly inelastic (as a large chunk of the market is controlled by the company and Dangote Cement), and it has no close substitutes and the country is at its developmental stage, so the demand for cement would continue to increase and would continue to grow geometrically. The

5 company would therefore make very high margin from this sector since it controls a large proportion of the market. The future is bright for the company given the aforementioned, the company is therefore well positioned to take advantage of the opportunities in the industry. The company no doubt would better manage its liquidity in this financial year as huge part of its debt has been settled leaving the company with less pressure on its resources and more funds being available as working capital as a result of the downward trend of cost of capital owing to the decline in interest rates and the proceeds from the right issue. The government s policy of encouraging local production is also expected to boost earnings. The share price indicates a steady rise over the long term, thereby outperforming its peers and all indicators points to the trend persisting into the future. 5 Rating/Opinion Going by the above information and the results released, we are of the opinion that the stock is still undervalued. The EPS at the price of N31.60 translates to a PE ratio of 24.50x but a projected PE ratio of 13.62x using the current Q3 results. Given this position, we expect a target price of N We are therefore of the view that if the company pays N0.80k dividend as proposed, it would most likely give bonus as its retained earnings would be very heavy. In our view, the stock is a strong buy as the price is expected to rise significantly as we await its final result. The stock is expected to appreciate by 18.35% which implies 11.22% excess return over the riskfree rate of return. Investors should be mindful of usual fluctuation in share prices driven by speculation, psychology and market sentiments which would only last for a short while to allow the true target price prevail. Investors should see the content of this report as part of the factors to consider in making their investment decision. Zenith Securities Limited and its employees accept no liability for any loss arising from the use of this information. Enquiries here from should be directed to Hafford Udochukwu on