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Equity Report on Flour Mills of Nigeria - 040311






Flour Mills is involved in flour milling; pasta production; operation of the bulk cement handling facility; sale of bulk and bagged cement; manufacturing and marketing of woven polypropylene sacks; blending, sale and distribution of fertilizer; and haulage of products.


It raised about N37bn through corporate bond recently at a coupon rate of 12% to re-finance its existing short-term loans; provide funds for its future investments in capital projects aimed at enhancing its existing milling capacity over the next two years; undertake new investments in food and cement sectors; and, augment working capital. Flour Mills recently embarked on a number of expansion projects some of which are: the improvement of its cassava flour processing plant, cement and sugar plants. This will contribute to its growth both in top line and bottom line in the next two years



The rising prices of food globally, especially wheat, may affect the earnings of the company going forward but the addition of cassava flour may mitigate this risk. Also, there are growing efforts to increase production in the wheat producing countries.



Using Discounted Free Cash Flow Method (DCF) and Discounted Future Earnings Method (DFE) we arrived at a fair value of N87.60 per share.


Buying the stock at the current market price of N83.99, holding to our fair value of N87.60 and adding the present value of the 5-year forecast dividend, investors will record a total return of 24.11%.


Relating this return to the WACC at 16.38%, investment in Flour Mills shares at the current market price will record alpha return of 7.73%.


The 2010 forward earnings yield based on our fair value generates 10.15%, while the 2011 forward dividend yield based on our fair value generates 3.25%. We therefore place a BUY on the share price of Flour Mills at the current market price.



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