January 15, 2011, Meristem Securities
The management of Flour Mills Nigeria Plc will on June 22, 2011 at an extra-ordinary meeting seek shareholders’ approval to increase the company’s authorised share capital from NGN1billion to NGN2billion thereby increasing its authorised units from 2billion ordinary shares of 50kobo each to 4 billion units at 50kobo each.
In addition, approval will also be sought to issue by way of rights to existing shareholders and by way of offer for subscription to the public the unissued units at a price and terms deemed appropriate by the directors.
L Likely impact on shareholder’s return
Presently Flour Mills has 1.879billion units of ordinary shares in issue and the company’s 2010 return on equity (ROE) of 40% was commendable for a company operating substantially in the matured food industry. If the increase in authorized share capital alongside the right and public offer is approved, it should expectedly lead to a reduction in the per share earnings and returns to shareholders in the interim if earnings does not increase concomitantly with increase in outstanding units.
Though we are yet to access the details to which the funds will be applied, we x-ray 2 possible options below;
1. If it is applied towards capacity expansion and improving operational efficiency- the fund might likely flow into the ongoing USD200 million Golden Sugar Company project which is expected to commence operation in 2013. Though earnings flow from such expansion might not be immediate but given that sugar sale is a cash-cow investment, we expect value accretion to shareholders in the long run.
2. The company might decide to refinance its recently issued NGN37.5billion first tranche unsecured bond priced at 12% translating to an annual coupon payment of NGN4.5billion. Recall that the company issued the said debt instrument in order to exit its c.NGN33billion term loan over which it paid interest of NGN9.14billion in 2010FY.
Hence, refinancing the bond with equity capital should bode well for the company’s cashflow in terms of increasing both Earnings Per Share (EPS) and Dividend Per Share (DPS), premised on the assumption that the part of the value hitherto paid as coupon now comes back to swell earnings.
Source: Research Team, MERISTEM SECURITIES LTD., 124 Norman Williams Street, South West, Ikoyi, Lagos. P.O Box 51585 Falomo, Ikoyi, Lagos. Phone:234-1-2717350-5; Fax: 234-1-2717356, 2690118.