Equity Research: Honey Well Flour Mills Plc

Transcription

1 Equity Research: Honey Well Flour Mills Plc Friday, June 12, 2015 Table 1: BUY Current Price 3.98 Fair Value 4.45 Q3 Ended December 31, 2014 Expanding to Deliver Good Returns 1.0 Q Performance Analysis: The unaudited accounts of (Honeywell) for the period ended December 31, 2014 shows that its Turnover (T/O) decreased by 8.28% to N37.64bn, compared with N41.03bn recorded in the corresponding period of The decline in T/O was due to the price drop in the company s turnover in Q as uncertainty The turnover in Q3 December 2014 decreased by 8.28% to N37.64bn. dominated the business environment and the recent challenges in the country during the period. The cost of sales decreased during the period under review by 7.77% to N30.69bn from N33.27bn recorded in Q The decline in the cost of sales was due to the decline in the price of wheat in the international market. The cost of sales as a percentage of T/O rose marginally to 81.53% in Q compared with 81.09% in Q The administrative, selling and distribution expenses increased by 11.03% to N4.80bn in Q from N4.33bn in Q These expenses as a percentage of T/O increased to 12.76% in Q from 10.54% in Q The Profit Before Tax (PBT) stood at N1.23bn, representing a decrease of 54.58% from N2.03bn recorded in the corresponding period of The decrease in the PBT was due to the exchange rate loss of about N903mn. The finance cost stood at N1.18bn as at Q3 2014, representing a decrease of 20.71%, compared to N1.49bn recorded in Q The tax provision decreased by 61.76% to N257mn from N672mn, leading to a Profit After Tax (PAT) of N968mn in Q from N2.03bn in the corresponding period of 2013, representing a decrease of 52.24%. The company recorded a loss in the 3months ended December 31st, 2014 (i.e. September December, 2014). Table 2: Financial Performance (N bn) Q Q FY 2014 T/O (8.30%) EBIT (56.30%) 5.44 PBT (54.60%) 4.24 PAT (52.24%) 3.35

2 Table 3: Profitability Margins Q Q FY 2014 (%) GP* Margin 18.47% 18.91% 18.98% EBIT Margin 4.22% 8.87% 9.87% PBT Margin 3.26% 6.58% 7.69% PAT Margin 2.57% 4.94% 6.08% *GP Gross Profit The company s profit margins fell in Q compared with Q This is as a The company s profit margins fell in Q3 2014, compared with Q result of economic challenges faced by the company in relation to the weakening foreign exchange rates and security challenges in the country which increased selling and distribution expenses. The PBT Margin in Q decreased over the Q and the Financial Year ended March (FY), 2013 figure. The PBT margin decreased to 3.26% in Q from 6.58% in Q3 2013, and also decreased from 7.69% as at FY Also, the PAT margin stands at 2.57% in Q3 2014, down from 4.94% in the corresponding period of 2013, and down from 6.08% as at FY This result also indicates that the percentage of T/O, PBT, and PAT in the Q to the Audited T/O, PBT and PAT for the period ended December 31, 2014 are: 68.32%, 28.93% and 28.88%, respectively. Given the run rate, the company is unlikely to meet its previous year s performance. However, we note that the company has expanded its operations to Honeywell is unlikely to meet its previous year s performance. record good performance and return to shareholders in the medium to long-term. The company paid a dividend of 17 kobo in the FY 2014, representing a 6.25% increase from 16 kobo paid in FY Table 4: Quarterly Result Highlights (N'bn) Q Q Q Q Q Turnover PBT (0.14) PAT (0.13) Our analysis of the historical performance trend shows that the company had maintained stable quarterly profitability in the last four (4) quarters, but experienced a significant dip in the latest quarter. 2

3 N'bn Equity Research Report Q3 Revenue Trend Q Q Q Q Revenue A cursory look at the balance sheet position as at Q compared with the position as at FY 2014 shows an increase in the company s fixed assets. The total fixed assets The company s total fixed assets increased by 20.40% to N43.45bn from N36.09bn in FY The total assets of the company which stood at N66.86bn as at Q was financed by a mix of equities and liabilities in the ratio of 30.25% and 69.75% respectively. increased by 20.40% to N43.45bn from N36.09bn in FY The stock increased to N11.86bn from N11.29bn in FY The cash and bank balances recorded a significant decrease of 50.68% from N10.57bn in FY 2014 to N5.21bn in Q The trade debtors and other receivables increased in Q by 7.57% to N6.32bn from N5.88bn in the FY The trade creditors and other payables increased by 82.96% to N2.40bn from N1.31bn as at FY The working capital decreased further to a negative N7.76bn from a negative position of N326mn recorded in FY 2014, while net assets for the period decreased by 1.83% to stand at N20.23bn from N20.60bn as at FY The total assets of the company which stood at N66.86bn as at Q was financed by a mix of equities and liabilities in the ratio of 30.25% and 69.75% respectively. Our analysis of the liabilities shows that the short-term liabilities stood at N31.16bn, accounting for 66.82% of the total liabilities, while the long-term liabilities stood at N15.47bn, accounting for 33.18% of the total liabilities. The long-term liabilities constituted mainly of financial liabilities (borrowings), representing 71.19% of the longterm liabilities as at Q

4 Financing Mix HoneyWell VS NSE Rebased (Jun'14-Jun'15) Equity 30% Debt 70% Honeywell NSE Rebased Honeywell s performance in Q was driven mainly by devaluation of the Naira. 2.0 Drivers of Performance: Honeywell s performance in Q was affected by the following factors: The current challenges with regards to the disruption in gas supply during the year. High import costs of key raw materials. Instability in the foreign exchange market and the devaluation of the Naira. The security challenges in the Northern States. The company intends to increase the production of all its products in order to meet the growing demand. 2.1 Strategic Focus: The Honeywell Foods and Agro-Allied Industrial Complex under construction along Lagos-Ibadan Expressway, Sagamu, Ogun State for the production and processing of several food and agro-allied products with an emphasis on manufacturing valueadded human and animal feed products that utilize significant quantities of locallysourced raw materials including but not limited to Maize, Sorghum, Cassava, Soybeans and Palm oil. With this project, the company aims to efficiently compete with its competitors. The plant is intended to increase the production of all its products in order for the company to meet the growing demand in the Nigerian food market in the next few years. 4

5 The company s Enterprise Resource Planning (ERP) software is expected to help the company achieve full integration of all the operations and processes of the business on a single online platform. Furthermore, the company believes that with its ongoing expansion and advertisement it should be able to capture additional market share from its major competitors. 3.0 Business: The Honeywell Group is an indigenous Nigerian conglomerate engaged in select businesses in key sectors of the Nigerian economy and has also positioned itself as a strong player in the fast moving consumer goods market. currently has a wheat storage capacity of 42,500MT, while its monthly usage varies from 32,000MT to 40,000MT. The company s wholly owned subsidiary, (HFMP), is a major flour milling company in Nigeria, which in turn owns Honeywell Superfine Foods Limited (HSFL) that specialises in the production, distribution, sales and marketing of superior quality food products within the country as its major business lines, while the group also engages in agro allied business, energy, real estate, services and infrastructure businesses, within the country. Honeywell has a combined installed production capacity for wheat of 2,610mt/pd (Metric Tonnes per day) within the country with a capacity utilisation of about 70%. It currently has a wheat storage capacity of 42,500MT, while its monthly usage varies from 32,000MT to 40,000MT. Honeywell conducts its operations from two factory locations at Apapa and Ikeja in Lagos state. In Apapa, the factory is located on four hectares of land in the Tin Can Island Port Industrial Estate, a strategic location with good accessibility to international waters necessary for the importation of its raw materials. Table 5: Shareholding Structure as at June 30, 2014 Shareholders No of Shares Held % of Shareholding Siloam Global Services Limited 5,939,363, First Bank of Nigeria Limited 400,967, Others 1,589,867, Total 7,930,198,

6 Table 6: Directors As At June 30, 2014 Name Direct Indirect Total Position Shareholding Shareholding Shareholding Dr. Oba Otudeko* Nil 1,247,264,003 1,247,264,003 Chairman Mr. Olanrewaju Bamidele Jaiyeola 100,000 Nil 100,000 MD/CEO Mr. Obafemi Otudeko* Nil 567,951, ,951,925 Executive Director Dr. Nino Albert Ozara 250,000 Nil 250,000 MD/Div Lt. General GarbaDuba (Rtd) 2,558,800 Nil 2,558,800 Non Ex-Director Mr. David William Obray 200,000 Nil 200,000 Non Ex-Director Mr. Akinsoji Akintayo 200,000 Nil 200,000 Non Ex-Director Mr. Oluranti Sokunbi 208,000 Nil 208,000 Non Ex-Director Mr. Rotimi Gbenga Fadipe 115,000 Nil 115,000 Executive Director Mr. Benson Evbuowan 20,000 Nil 20,000 Executive Director *Dr. Oba Otudeko and Mr.ObafemiOtudeko have indirect holdings amounting to 1,247,264,003 and 567,951,925 respectively through Siloam Global Services Limited which is a 75% equity holder in the Company. Table 7: Company Summary Ticker Sector Sub-Sector Honeywell Consumer Goods Food Products Date of Incorporation January 04, 2005 Date of Listing March 08, 2007 Financial Year End March Number of Fully Paid Share 7,930,197,658 Current Capitalization(NGN) 30,214,053, NSE Capitalization (NGN) 11,454,385,203, % of NSE Capitalisation 0.26% 52 Week High NGN Week Low NGN 2.65 YTD Return 17.63% 52 Weeks Average Volume Traded 935,092 Trailing EPS NGN 0.29 Trailing P/E Ratio (X)

7 4.0 Product Analysis Honeywell is a strong player in the industry. Honeywell has positioned itself as a strong player in the milling, processing & packaging of flour and other wheat based products. The company produces a wide range of superior quality products namely: Flour (Honeywell Superfine Flour and Honeywell Brown Flour), Honeywell Semolina, Honeywell Wheat Meal, Honeywell Pasta, and Honeywell Noodles. 4.1 Honeywell Superfine Flour: Honeywell Superfine Flour is mainly produced for baking. The company provides efficient customer service, superior baking training and support for bakers. The product s revenue increased by 18% in FY The company also believes that the product absorbs more water than other flour brands and therefore gives higher yield to bakers. Its main competitor, Flourmills has its own wide array of products which include: Golden Penny, Prime flour, Confectionary flour, Soft Biscuit flour and Noodle flour. 4.2 Honeywell Brown Flour: Honeywell semolina and wheat is the market leader. Honeywell Brown Flour products are used in the baking of brown bread, which is slowly gaining popularity among consumers seeking a healthier option to white bread. Brown Flour revenue grew by 32% in FY 2014 and is expected to continue its current growth pattern in subsequent years. 4.3 Honeywell Semolina and Wheat: Honeywell Semolina and Honeywell Wheat meal are wheat-based ball foods that are easy to prepare, smooth to eat and enjoyed with any kind of soup. The brand has set new quality standards for semolina and wheat in the industry. The strong and increasing demand for the products attest to this. It is the market leader in this segment of the market. 7

8 4.4 Honeywell Noodles Honeywell Noodles sales grew by 37% in 2014, with the company actively competing with a number of brands including, Golden Penny noodles, Dangote noodles and Tummy Tummy noodles, with Indomie noodles and Chicken noodles being keen competitors. The company believes that with the ongoing expansion and advertisement it should be able to capture additional markets. 4.5 Honeywell Pasta Honeywell Pasta is made from the finest quality wheat semolina and is well accepted by consumers for its excellent quality and comes in very attractive packaging which stands it out on the shelves. It exists in two major types namely; Macaroni and Spaghetti. The Macaroni has three different cuts Cavatto, Fusilli and Cornetti competing with other brands such as Penny Pasta Spaghetti, Twist, Spaghettini, Piccollini, Macaroni, Fideo, Eliche, Couscous, Bucattini and Bambini, and Dangote Pasta (Spaghetti and Macaroni). 8

9 5.0: SWOT Analysis: 5.1 Strengths: o Strong brand name. o Technical and financial relationship with parent company. o Strategically located plant by the ports. o Use of high grade state of the art machinery in flour milling. o Strong acceptability of its products in the market. o Strong relationship with the bakers. 5.2 Weaknesses: o Declining sales revenue. o Has key man risk. 5.3 Opportunities: o Large market size in Nigeria and neighbouring countries. o The CBN efforts to improve funding to the agriculture sector. o Drop in the price of wheat in the international market. 5.4 Threats: o Security challenges in the Northern region. o Restricted gas supply. o Foreign exchange risk. o Fragmented supply of some products. o Stiff competition in the market. 9

10 6.0 Forecast: Our Forecast Drivers We considered the following factors in arriving at our 5-year forecasts: Positive Drivers: The company s wide array of food products. The expansion strategies of the company (Sagamu Plant). The increasing demand for food products in Nigeria The short-to-medium term drop in the price of wheat. Equity Research Report Negative Drivers: The impact of foreign exchange fluctuations on costs. The shortage in gas supply in the short-term. The security challenges in the country in the short-term. We estimate a dividend per share of N0.16 for the FY Taking the foregoing factors into consideration we estimate a Turnover of N50.62bn, N54.12bn, N61.91bn, N72.37bn and N84.24bn for the periods ending December 2015, 2016, 2017, 2018 and 2019 respectively. We estimate EBIT of N4.77bn, N6.15bn, N7.17bn, N8.57bn and N10.14bn, and EBITDA of N6.47bn, N7.97bn, N9.11bn, N10.67bn and N12.41bn for the same period using EBIT margins of 9.42%, 11.36%, 11.57%, 11.84% and 12.03% respectively. Our PBT forecasts for the periods are: N2.59bn, N5.65bn, N6.85bn, N8.28bn and N9.85bn. Adjusting for tax, our PAT forecasts are N1.93bn, N4.21bn, N5.11bn, N6.17bn and N7.34bn. PAT Margin for the period are 3.82%, 7.77%, 8.25%, 8.53% and 8.72%. Our forecast final dividend for the FY 2015 is N0.16 per share. 10

11 Table 8: Income Forecast for Honeywell Nigeria Plc ( ) Profit and Loss =N='bn Mar-15 Mar-16 Mar-17 Mar-18 Mar-19 Turnover (Net Sales) Cost of Sales (40.35) (42.86) (49.03) (57.30) (66.70) Gross Profit Admin, Selling & Distribution Expenses (3.99) (3.48) (3.98) (4.66) (5.42) Depreciation (1.70) (1.82) (1.95) (2.10) (2.28) Other Operating Income EBIT EBITDA Net Finance Cost (2.17) (0.50) (0.31) (0.29) (0.28) PBT Taxation (0.66) (1.44) (1.75) (2.11) (2.51) PAT Table 9: Earnings Forecast for Honeywell Nigeria Plc ( ) Mar-15 Mar-16 Mar-17 Mar-18 Mar-19 EBITDA Margin 12.78% 14.72% 14.72% 14.74% 14.74% EBIT Margin 9.42% 11.36% 11.57% 11.84% 12.03% PBT Margin 5.12% 10.43% 11.07% 11.44% 11.70% PAT Margin 3.82% 7.77% 8.25% 8.53% 8.72% EPS(N) DPS(N) Dividend Payout 67.59% 42.59% 42.59% 42.59% 42.59% Earnings Yield * 5.47% 11.92% 14.46% 17.48% 20.80% Dividend Yield * 3.70% 5.07% 6.16% 7.44% 8.86% P/E Ratio* 18.27x 8.39x 6.92x 5.72x 4.81x Number of Shares ( bn) ROE 9.12% 17.54% 21.34% 25.08% 29.01% Collection Days Payment Days Inventory Turnover 4.58x 4.58x 4.58x 4.58x 4.58x Interest Cover *At Our Fair Value of N

12 Table 10 : Comparable Analysis (Nbn) Company March 2014 Honeywell March 2014 Flour Mills Turnover (Net Sales) Gross Profit EBIT PBT PAT GP Margin 18.98% 13.14% EBIT Margin 9.87% 4.67% PBT Margin 7.69% 2.48% PAT Margin 6.08% 1.62% ROE 16.27% 5.77% Net Assets Net Assets Per Share (N) PE Ratio 13.49x 33.64x Earnings Yield 7.41% 2.97% 12

13 The fair value for Honey Well Flour Mills Plc is N Valuation In arriving at a fair value for the ordinary shares of the company, we used two valuation methods, which are Discounted Future Earnings Method (DFE) and Discounted Free Cash Flow Method (DCF). We applied a terminal growth rate of 5.99%, which is the average rate for the real GDP growth rate for the Nigerian economy in Q1 in the last four years. We used a beta value of 0.2x based on the 5- year daily historical returns on the company share price and the Nigerian Stock Exchange All Share Index (NSE ASI). We used the yield of 13.98% on the approximately 5 year tenor-to-maturity of the 7% FGN Bond October 2019 as our risk free rate, and market premium of 10.40, which is the equity market premium used for Nigeria. Applying the foregoing parameters on the Capital Asset Pricing Model (CAPM), the cost of equity generates 16.06%. The company has long term debt, with the weighted after tax cost of the debt estimated at 7.65% using a tax rate of 32%. The Weighted Average Cost of Capital (WACC), which is our discount rate, was estimated at 13.87%. Using 7.93bn shares in issue the DFE Model generates N5.19 per share and the DCF Model generates N4.14 per share. Applying a weight of 30% to the DFE and 70% to the DCF, we arrive at a value of N4.45 per share, which is our fair value. The current market price of Honeywell Flour Mills shares is N3.98. The highest and the lowest closing price in the last 52 weeks are N4.50 and N2.65 respectively. The 2015 forward earnings yield and dividend yield based on our fair value are: 5.47% and 3.70% respectively. The total return, a combination of the capital appreciation and the dividend, generates 16.44%. This is higher than the current yields on the FGN Bond of 13.83%. We therefore place a BUY on the shares of at the current price of N3.98 as of June 12, 2015 for capital appreciation. 13

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