GCR Accords Flour Mills of Nigeria Plc An Initial Rating of BBB+(NG); Outlook Stable.

21 Jun 2016 In Rating Notifications

GCR Accords Flour Mills of Nigeria Plc An Initial Rating of BBB+(NG); Outlook Stable.

Lagos Nigeria, 21 June 2016 — Global Credit Ratings has accorded national scale ratings of BBB+(NG) and A2(NG) in the long term and short term respectively to Flour Mills of Nigeria Plc; with the outlook accorded as Stable. The ratings are valid until May 2017.


RATING RATIONALE

Global Credit Ratings (“GCR”) has accorded the above credit ratings to Flour Mills of Nigeria Plc (“FMN” or “the Group”) based on the following key criteria:

FMN is the market leader in the Nigerian flour milling industry, with over eighteen (18) subsidiaries in several businesses (including food and agro-allied). Its long history of operations, substantial flour milling capacity, wide distribution network, and business diversification give the Group a competitive advantage. More significantly, its backwards integration initiatives have underpinned a more sustainable supply chain and strong Group’s synergies, as well as hedging against market volatility.

Margin pressure was evidenced in recent years largely due to the increasingly challenging operating environment, coupled with the prevalent foreign exchange shortage. FMN reported N309bn in revenue in FY15 (5.2% decline), with the gross margin declining steadily to a review low of 11.5% and 10.5% in FY15 and 3Q F16 (9-month period to December 2015) respectively (from 16.8% in FY11). The aforementioned low margin, combined with rising administrative expenses saw the EBITDA margin narrow to 8.8% in FY15, and also narrowed operating margin to its lowest level (of 4.9%) over the last five years.

Given the rising debt, the interest charge increased to N16.4bn in FY15 from N3.8bn in FY11. Accordingly, the net interest coverage ratio deteriorated to a review low of 0.9% in FY15 from 6.7% in FY11. Such low interest coverage is not consistent with highly rated entities as it suggests debt servicing may not be timeously met.

Driven by the on-going capex, gross debt rose from N63bn at FYE11 to N188bn at FYE15.  However, while the funding has been primarily for long term assets, the proportion of the short term debt climbed from 27% at FYE11 to 71% at FYE15 (FYE14: 57%). This mismatch in duration could expose FMN to liquidity pressure. This is also reflected in the current ratio which has remained below 1% since FYE14. Debt fell to N165bn at 3Q F16 as FMN offset the outstanding amount on bond with the proceeds from the sale of its cement subsidiary.

Gearing metrics remain elevated, with gross gearing peaking at 227.7% at FYE15, and gross debt to EBITDA rising to 693%. However, improved earnings in 3Q F16 saw these metrics narrow to 171% and 440% respectively. While additional debt is not expected in the short term, FMN is at an advanced stage of raising N40bn through a right Issue which will help reduce gearing and support working capital.

Upward rating movement is dependent on the successful completion of the Right Issue, which will be utilised to pay-down debt and support working capital. This should stimulate sustainable earnings and improve credit protection metrics. However, a deterioration in financial performance and gearing metrics will likely trigger a negative rating action, as this would adversely impact interest coverage and the Group’s ability to honour principal and interest obligations on its debt.


NATIONAL SCALE RATINGS HISTORY

Initial/last rating (not applicable)
Long-term: first time/new rating
Short-term: first time/new rating
Rating outlook:  first time/new rating


ANALYTICAL CONTACTS

Primary Analysts
Femi Atere/Adekemi Adebambo
Credit Analyst/Senior Credit Analyst
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Committee Chairperson
Dave King
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APPLICABLE METHODOLOGIES AND RELATED RESEARCH

Global Master Criteria for Rating Corporate Entities, updated February 2016
Glossary of Terms/Ratios, February 2016


RATING LIMITATIONS AND DISCLAIMERS

ALL GCR CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS, TERMS OF USE OF SUCH RATINGS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS, TERMS OF USE AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://GLOBALRATINGS.COM.NG/UNDERSTANDING-RATINGS. IN ADDITION, RATING SCALES AND DEFINITIONS ARE AVAILABLE ON GCR’S PUBLIC WEB SITE AT HTTP://GLOBALRATINGS.COM.NG/RATINGS-INFO/RATINGS-SCALES-DEFINITIONS. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. GCR’S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE AT WWW.GLOBALRATINGS.COM.NG


SALIENT FEATURES OF ACCORDED RATINGS

GCR affirms that a.) no part of the rating was influenced by any other business activities of the credit rating agency; b.) the rating was based solely on the merits of the rated entity, security or financial instrument being rated; c.) such rating was an independent evaluation of the risks and merits of the rated entity, security or financial instrument; and d.) the rating is valid till May 2017.

Flour Mills of Nigeria Plc participated in the rating process via face-to-face management meetings, teleconferences and other written correspondence. Furthermore, the quality of information received was considered adequate and has been independently verified where possible.

The credit rating/s has been disclosed to Flour Mills of Nigeria Plc with no contestation of the rating.

The ratings above were solicited by, or on behalf of, the rated client, and therefore, GCR has been compensated for the provision of the ratings.

The information received from Flour Mills of Nigeria Plc and other reliable third parties to accord the credit rating included:
- 2015 audited annual financial statements, and four years audited annual financial statements;
- 9-month unaudited management accounts to December 2015;
- Internal and/or external management reports;
- Industry comparative data and regulatory framework, and a breakdown of facilities available and related counterparties;
- Information specific to the rated entity and/or industry was also received.

 

 

 

 

 

 

 

 

ALL GCR CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS, TERMS OF USE OF SUCH RATINGS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS, TERMS OF USE AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://GLOBALRATINGS.COM.NG/UNDERSTANDING-RATINGS. IN ADDITION, RATING SCALES AND DEFINITIONS ARE AVAILABLE ON GCR’S PUBLIC WEB SITE AT HTTP://GLOBALRATINGS.COM.NG/RATINGS-INFO/RATINGS-SCALES-DEFINITIONS. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. GCR’S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE UNDERSTANDING RATINGS SECTION OF THIS SITE.

 

ALL GCR CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS, TERMS OF USE OF SUCH RATINGS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS, TERMS OF USE AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://GLOBALRATINGS.COM.NG/UNDERSTANDING-RATINGS. IN ADDITION, RATING SCALES AND DEFINITIONS ARE AVAILABLE ON GCR’S PUBLIC WEB SITE AT HTTP://GLOBALRATINGS.COM.NG/RATINGS-INFO/RATING-SCALES-DEFINITIONS. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. GCR'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE UNDERSTANDING RATINGS SECTION OF THIS SITE.

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