March 26, 2012

Company:       Honeywell Flour Mills of Nigeria Plc

Summary:
Honeywell Flour Mills is part of the Honeywell Group, a foremost indigenous Nigerian conglomerate, engaged in select businesses in key sectors of the Nigerian economy, namely: foods & agro allied; energy; real estate; services and infrastructure. Honeywell Flour Mills Plc produces and markets four major product brands: Honeywell Superfine Flour, Honeywell Brown Flour, Honeywell Wheat Meal and Honeywell Semolina. Honeywell Flour Mills Plc has 100% ownership of Honeywell Superfine Foods Limited (HSFL) which commenced operations in December 2006 as a vertical integration of the company’s operations to develop, produce, market and sell flour-based semi-processed food products in the fast moving consumer goods sector. HSFL produces Honeywell brands of spaghetti, macaroni and instant noodles. The company was incorporated in 1994 but initial operations did not commence until 2004. The company commenced commercial production and sales of noodles (O! Noodles) in December, 2006. A new brand (called Honeywell Noodles) was introduced in November, 2010.

The Company is currently planning to increase its milling capacity by 1,000MT to 2,600MT per day with additional investment in high-technology milling plant and machinery, power generation, storage and packaging facilities. The additional capacity will come from twin mills with 500MT/day capacity each. The first of the mills is expected to be completed and commissioned by May 2012 and the second by September 2012. The expanded production capacity will afford the company the opportunity to increase volumes with bias towards more profitable products such as Semolina and Wheat meal and in turn lead to increase in revenues and profit. In the absence of a reliable public power system, the company has to generate its own power. Recently, it installed 2 operating power supply systems of 4 and 5 megawatts capacity respectively, using diesel as an alternative source of fuel. It has recently completed a third power supply system which runs on gas with a total installed capacity of 12 megawatts. With the gas power plant as an alternative, production bottlenecks caused by shortages in diesel supply and associated quality problems will be minimized.

Threats:
Honeywell Flour Mills is a manufacturing company, and thus is susceptible to the challenges facing the manufacturing businesses in Nigeria. These includes: epileptic power supply; the country’s deficient infrastructure; credit squeeze; low purchasing power; high financing cost in the financial market, among others.

Valuation:
Our fair value for the ordinary shares of Honeywell Flour Mills is N4.98 per share. Buying the stock at the current market price of N2.15, holding it to our fair value of N4.98 and adding the present value of the 5-year forecast dividend, investors will earn a total return of 166.63%. Relating this return to the Cost of Equity (Ke), which is our discount rate, estimated at 18.13%, investment in Honeywell Flour Mills shares will earn an excess return (alpha return) of 148.50%. The 2011 forward earnings yield based on our fair value generate 7.48%. We therefore place a BUY on the shares of Honeywell Flour Mills Plc at the current market price for both dividend payment and capital appreciation.
 

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Source: FSDH