GCR Affirms Flour Mills of Nigeria Plc’s rating of BBB+(NG); Outlook Stable.

29 Sep 2017 In Rating Notifications

GCR Affirms Flour Mills of Nigeria Plc’s rating of BBB+(NG); Outlook Stable.

Lagos Nigeria, 29 September 2017 — Global Credit Ratings has affirmed the national scale ratings assigned to Flour Mills of Nigeria Plc of BBB+(NG) and A2(NG) in the long term and short term respectively, with the outlook accorded as Stable. The ratings are valid until September 2018.

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 remains a market leader in the Nigerian flour milling industry, underpinned by a substantial multi-product milling capacity, wide distribution network, and business diversification. More significantly, its backward integration initiatives are beginning to underpin a more sustainable supply chain and strong Group synergies, as well as hedging against market volatility.

Revenue expanded by 53% in FY17, driven by rising demand within the food division (particularly sugar products) and an increase in selling prices across various products. Accordingly, the gross margin widened to a review high of 12.7%. This, combined with the curtailed operating expenses, also saw EBITDA and operating margin widen to 12% and 9% respectively. Furthermore, results as at end June 2017 (“1Q FY18”) indicate an improvement, with strong operating margin of 10.1%, and pre-tax profit of N6.2bn, against full year 2017 position of N10.5bn.

Although net finance cost spiked to a review period high of N31bn during FY17, the higher growth in operating income saw net interest coverage rise to 1.5x (FY16: 0.7x). Improving interest coverage to more sustainable levels above 2x has been highlighted by GCR as core to positive ratings progression.

Positive cash flow from operations have been evidenced in all years under review, barring FY17 where a large working capital absorption (impacted by forex movements) saw an outflow of N41.4bn (albeit reversed in 1Q FY18). This, combined with the capex undertaken during the period, necessitated the increase in debt.

Gross debt rose to N241.6bn at FY17 (FY16: 165.3bn) driven by the translation on the Group’s dollar denominated loans, together with higher bank overdrafts utilised for working capital funding. This, combined with the moderate growth in equity saw gross gearing rise to 246% (FY16: 182%), while gross debt to EBITDA fell to 385% (FY16: 542%) on the back of the improved earnings. The suspended capital raise does not place immediate funding pressure on FMN, but would help improve funding capacity for future expansion/acquisitions.

While funding has largely been for long term assets, 79% of debt was short term at FY17 (FY16: 71%). This mismatch in duration does expose FMN to liquidity pressure, although GCR notes that the Group has evidenced a similar debt composition since FY14.

Positive rating progression could derived from continued earnings growth and margin enhancement despite the challenging and volatile environment. A substantial reduction in debt would also support improved credit protection metrics. Conversely, as FMN’s gearing is already relatively high, any increase could trigger a negative rating action. Similarly, the ratings are susceptible to a deterioration in financial performance, whether due to internal or external factors, as this would impact the Group’s ability to honour principal and interest obligations.

 

NATIONAL SCALE RATINGS HISTORY

Initial/last rating (May 2016)

Long-term: BBB+(NG)

Short-term: A2(NG)

Rating outlook:  Stable

 

ANALYTICAL CONTACTS

Primary Analyst

Femi Atere

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 2017

FMN rating report (2016)

Glossary of Terms/Ratios, February 2017

 

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 September 2018.

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 information received from Flour Mills of Nigeria Plc and other reliable third parties to accord the credit rating included:

- 2017 audited annual financial statements, and four years audited annual financial statements;

- 3-months unaudited management accounts to 30 June 2017;

- Internal and/or external management reports;

- Information specific to the rated entity and/or industry was also received.

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.

 

 

 

 

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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