Saturday, November 09, 2019 /07.00PM / Proshare Research/ Header Image Credit: EcoGraphics
The sale of Dangote Flour Mills ("DFM") to the Olams Group has not significantly affected the direction or value of the Proshare Dangote ("Gote") Index, the Index which was adjusted on Friday November 1, 2019, for the change in ownership of the flour company predominantly saw negative Index growth in the course of the week.
The Index fell from a marginal growth of +0.06% on Friday November 1, 2019 to a negative growth of -3.99% on Monday November 4, 2019 when the dropped from the previous trading session value of 82.38 to 79.09 on Monday. Tuesday November 5, 2019 saw the market confirm the mark down of the Index on Monday by staying flat at 79.09, by Wednesday traders had made up their mind that the sell-off of the Flour business was significant to certainty of the Group's business as the Index fell to 78.30 or by a further-1.01%. Thursday November 7, 2019 was no different than the previous day as trader's sentiment dragged the Index lower by another -0.18% bringing its value to 78.16. The market closed for the week with the Dangote Index taking another bearish hit as the Index fell to 77.11 or by an additional -1.34%.
Dangote Group's decision to sell off its Flour business was not surprising. As a rule, the Group's Chairman is philosophically and strategically committed to only businesses that the conglomerate remains the number one or at worse number two company in terms of market share and gross earnings.
Nigeria's Flour business has become commoditized in the last decade with lean margins, high fixed cost and difficult breakeven margins. The Group with its heavy new investments in Oil refining, Fertilizer production and likely commitments to private energy supply, could do without the distraction of making its flour business more profitable and less demanding of cash.
With heavy fixed assets tied in the cement business (which itself has seen margins slide from about 60% five years ago to a more recent 30-35%) and its new energy sector and Oil & Gas Investments not yet completed, and therefore not yielding much needed cash flows, the choice to sell of Dangote flour was intelligent.
Chart 1 Dangote Index 01-08 November 2019
Source: Proshare Research
The Dangote Index has generally moved in a manner similar to the Nigeria Stock Exchange's All Shares Index (ASI) and its value of less than 100 demonstrates a broad bearish trend which, over the last fortnight, has witnessed a bullish pushback with the Dangote Index not yet mirroring the efforts of investors to sift for hidden value market opportunities.
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