October 10, 2017/Cordros Research
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Yesterday, the management of FLOURMILL notified the NSE of its Board Approval in principle to commence with activities to raise additional funds through Rights Issue and Medium Term notes (Commercial Papers). Both announcements have been in the public place for a while.
A shelf programme was registered in H2 2016 to raise N40 billion in equity but was placed on hold. Perhaps the seeming improvement in the macroeconomic environment, a condition the management had said was necessary for the RI, may have prompted the need to commence the exercise. That said, market condition, in our view, remains unfavourable for the RI, as the price of FLOURMILL’s stock has barely moved since the fund raising was first announced in August 2015 (charts 1 below). As such, while the stock price rallied yesterday, perhaps indicating the RI announcement appealed to investors, we would treat the latest display of intent by the management to progress with the fund raising, with caution.
Plan remains to raise the N40 billion in tranches, but there are no further communication on the time, and the amount to be raised in each tranche. At FLOURMILL’s current market price, and applying the discounts on the recent RIs of the below highlighted companies (table 1), we assume the proposed rights will be offered between N19.04 and N24.85. This should result to the formation of additional 2 billion or 1.6 billion shares, potentially increasing FLOURMILL’s gross outstanding shares to 4.7 billion or 4.2 billion.
At the analysts call following release of Q1-18 result, management disclosed that it was in the process of refinancing some short term facilities (we estimate N72 billion) which matured during the period, hence the upcoming CP (N70 billion proposed, but tenors are yet to be disclosed). Consequentially, from N190 billion as at June ending, gross debt should increase to N260 billion upon completion of the CP programme, and assuming existing overdraft facilities (N49 billion) are not repaid. We had revised estimate for financing cost higher to N32 billion (from N20 billion) following a quarterly record finance charge of N8.9 billion reported by the group in Q1-18 (due to high interest rate, according to management).
Whilst we await the outcome of the CP, we think it is unlikely to be a cheaper alternative funding, as expected by management. Notwithstanding the (1) recent softening of the naira yield curve and (2) improvement in FLOURMILL’s cashflow, investors are unlikely to price the proposed offering at a rate below the cost of the matured loans (between 13-15%), given (1) concerns about the frequency of the group’s participation in the debt market, (2) deteriorated solvency and liquidity ratios (see charts 2 and 3 below), yet, (3) lack of either a coherent strategy or the will on the part of management to address the group’s debt overhang condition. Moreso, government treasury bills maturing between 90, 182, and 270 day currently yield 18.45%, 19.75%, and 18.75% respectively.
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