April 24, 2019/InvestmentOne Report
Early yesterday, Dangote Flour Mills announced that it has received a binding offer from Olam International through its subsidiary Crown flour Mills Limited, we believe the offer is quite attractive considering the premium of 123% above the closing price as at yesterday (N11.75 per share). By our calculation, using the company’s FY 2018 results, we estimate an implied per share value of N26.2 having adjusted for the net debt (N26.8billion) and net working capital (N28.0billion). However, this may change significantly if there are material variations in the company’s net debt and net working capital at the effective date of the deal (yet to be determined).
We opine that the challenges faced by the companies in the agro allied space such as higher input cost pressure (higher wheat prices), influx of cheap smuggled products and perennial Apapa gridlock have continued to weigh on Dangote Flour Mills’ performance especially its turnover . We highlight that the company’s ability to increase price as a way to transfer cost has been limited given its relatively low market size and weak consumer demand. Overall, we see this as a positive for shareholders of Dangote Flour and for the industry at large. As such, we expect the shareholders of Dangote Flour Mills to accept the offer.
We believe this is part of Olam International’s strategic plan to invest US$3.5 billion between 2019-2024 in several key business areas — including grains and animal feed — while divesting four businesses. Other aspects of Olam’s 2019-2024 strategic plan include driving margin improvement, generating additional revenue streams by offering differentiated products and services, and exploring partnerships and investments in new engines for growth.
Olam acquired Crown Flour Mills in January 2010 and it has grown to become the second largest miller in Nigeria after Flour Mills of Nigeria (c. 8,000 tonnes per day). With this potential acquisition, Olam Flour milling capacity through Crown Flour Mill may increase from 6,140 tonnes per day to 11,140 tonnes per day making the company the largest miller in Nigeria. Olam currently operates wheat milling, flour and pasta manufacturing in Nigeria and Sub-Saharan Africa.
DANGOTE FLOUR MILLS PLC (YE: DEC) (N millions) | ||
FY 2018
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Net Assets | 34 ,666
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Working Capital | 28 ,005
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Current Asset (excl cash) | 45 ,928
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Current Liabilities (excl debt) | 17 ,923
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Net Debt | 26 ,809
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Cash and Cash equivalent | 38 ,214
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Interest Bearing Liabilities | 65 ,023
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Total Liabilities | 86 ,078
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Total Asset | 120 ,744
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Total Consideration | 130,000
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Net consideration | 131,196
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Outstanding Shares (units) | 5,000
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Estimated Consideration per share (After adjusting for net debt and working capital) | 26.24
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Upside potential | 123%
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Source: Company financials, Investment One Financial Services Research
