Rating: Hold
Current Market Price: N6.15

Year High: N9.68
Year Low: N4.90
Fair Value: N6.74
Equity Analyst: Tunde Segun Jeariogbe

Introduction/Key Financials

• This report observes the first quarter financials recently released by the Northern Nigerian Flour Mills for the period ended 30^th June, 2021. The same is placed side-by-side similar numbers released at the end of the corresponding quarter in 2020.
• Our valuation analysis explored ratios generated from the full-year financial statistics, to arrive at a conservative intrinsic value for the company. This is an approach we maintained, considering the spontaneous changes in the country’s economic policies due to attempts by the government to balance the nation’s growth indices and improve the standard of living among its citizens.
• Generally, this report can be rated fair, although we expected a better and higher performance from the firm. It should be noted that the rapid growth in prices of food items around the country, as reflected by the headline inflation numbers, should be a plus to manufacturing companies. We therefore advise that the management of should introduce aggressive marketing and continuous building of the product portfolio for better results in subsequent quarters.
• See below for other financial numbers/ratios

Company figures

• The Turnover reported for the first three months is N3.56 billion; this is 87.02% above the N1.90 billion reported in the corresponding quarter of 2020.
• Cost of sales remains high for the two periods compared. The total direct cost of running the business for the current quarter is N3.25 billion, versus N1.72 billion in the corresponding quarter.
• Operating Profit is estimated at N147.88 million, up from the previously estimated N118.26 million in the similar quarter of 2020.
• Operating Expenses equally grew by 97.02% to N199.33 million versus N97.02 million in the corresponding quarter.
• A total of N66.12 million was used as finance cost through the quarter, higher than the N55.20 million in the comparable quarter by 43.09%.
• Profit before Tax improved by 20.96% at N82.85 million, as against N68.50 million in the corresponding quarter in 2020.
• Reporting a Nil tax for the period, it posted N82.85 million as profit for the quarter, versus N68.50 million in the comparable quarter.

• Current Assets amounted to N7.23 billion at the end of the quarter, as against N5.04 billion in the corresponding quarter.
• Non-Current Assets stood at N3.60 billion as against N3.68 billion in a similar quarter.
• Thus, Total Assets improved by 24.13% between the two periods compared to N10.84 billion from N8.73 billion in the similar period of last year.
• Current Liabilities is currently estimated at N7.14 billion, the same is 43.15% higher than the previous N4.99 billion.
• Non-Current Liabilities stood at N823.81 million, the same as 13.63% below that of last year.
• Thus Total Liabilities is valued at N7.96 billion versus N5.94 billion in the corresponding quarter.
• The company achieved Net Assets of N2.87 billion as against N2.83 billion in the similar quarter of 2020.
• Retained Earnings grew by a marginal 3.03% to N1.12 billion, versus N1.09 billion in the corresponding quarter of 2020.

Financial Strength/Solvency Ratios

• The debt Ratio is currently estimated at 73.52%. That is, the Total Liabilities at the end of the period is 73.52% of the Total Assets value, a growing position when compared to 68.08% achieved in the preceding Q1.
• Total Debt is the same as 277.64% of the Equity at the end of the period, implying that more debt was used to service assets through the period. It is noteworthy that this is a higher debt regime, compared to what was used in the comparable period of last year.
• Equity Ratio stood at 26.48%, as against 32.49% in the comparable period. In other words, Net Assets is same as 26.48% of the company’s Total Assets Value.
• Judging by the 0.50x beta value estimated on the share price trend of Northern Nigerian Flour Mills as at the time this analysis was undertaken, one can conclude that its share price is less liquid when compared to both industry peers and the market beta

Profitability Ratios

• EBITDA Margin is estimated at 4.15% as against 6.21% in the corresponding quarter, lower profitability when compared to the previous first quarter’s ratio.
• Pre-Tax Margin stood below the comparable quarter by 35.32% at N2.33%, as against 3.60% in the corresponding quarter. Note that the improvement observed in the Pre-Tax margin was due to the zero tax position reported
• Cost of Sales remained outstandingly high at 91.28% of the Turnover Value, 0.66% above the 90.68% estimated in the corresponding quarter.
• Kindly see the table below for other profitability ratios:

Efficiency Ratios

• Measuring management’s efficiency in the period under review, we have tested few efficiency ratios as shown below.
• Operating Expenses was estimated at 5.59% of the Turnover Value, a lower efficiency when compared to the 5.31% achieved at the end of the corresponding period.
• The turnover figure reported is 32.87% of the Total Assets Value, which is equally a lower efficiency measurement when compared to 21.82% in the comparable period.
• Going by the estimated Working Capital Turnover of 38.89x, we can safely conclude that the company is currently running smoothly and will not have the need for additional funding. Conversely, it further established the effect of lower efficiency confirming the fact that more cash is always available and not fully utilized, should the management be satisfied with its current business coverage, it is recommended that the interest yielding liabilities be reduced appropriately.
• Based on general standards, Working Capital Ratio is fair at 1.01x, the same as the estimate in the comparable year.

Investment/Valuation Ratios

• Within the two periods compared, the share price of Northern Nigerian Flour Mills on the exchange was re-valued up by 58.91% at N6.15 from N3.87 in the corresponding period. Note that the price used to estimate ratios were as of the date the result was released to the investing public.
• In line with the improved profit status, the amount earned per unit at the end of the quarter stood at N0.46 compared to N0.38 in the comparable quarter.
• Our adjusted first-quarter Price-Earnings Ratio grew to 13.23x, compared to the estimated 10.07x in the corresponding quarter
• The said earnings per share is a yield of 7.56% over the current market price of the milling firm as of when the result was released. Note that this is far above the 0.84% yield in the corresponding quarter.
• Due to the improvement in Net Assets Valuation, even when share outstanding remained constant, Estimated Book Value stood at N16.11, up from N15.92 in the corresponding quarter.
• Confirming the under-priced position of each unit on the exchange is the estimated Price to Book Value at far below unity.
• Kindly see below for detailed investment ratios

Valuation

Having considered the improvements noted above, the share price was carefully valued. It is important to note that we do not anticipate a rapid growth rate judging by few lower ratios identified from its released numbers. We have, therefore, valued units of Northern Nigerian Flour Mills at N6.74 each. Thus, comparing this with the current market price, we have Rated it a Hold.