The food and beverage sector of the Nigerian economy, though making progress, still has room for improvement to be able to compete favourably with its foreign counterparts. With sixteen companies listed in that subsector of the Nigerian Stock exchange, four flour mills in particular have proved to be good investment for the shareholders.
Opeyemi Teller, of Greenwich Trust Limited said "The food and beverage sector of the Nigerian economy is a thriving one. The capacity utilization, which is the rate at which manufacturing companies are able to use their raw materials in the installed capacity for production in the food, beverage and tobacco sub-sector, is now peaked at 50 per cent. This make the sub-sector most developed in the manufacturing sector as at the last survey/research conducted".
According to her, taking into consideration the agrarian background of Nigeria, the food, beverage and tobacco sub-sector is perhaps the most developed in the manufacturing sector of the economy in terms of huge investment committed to it over the years.
The funding survival
Nigeria's food and beverage sector has been taking impressive steps in sourcing for funds, the latest being the recent N70 billion bond issuance by Flour Mills of Nigeria, the largest flour mill in the country.With this move which was executed late last month, the company stands as the first outside the banking sector to launch a bond in recent years with a book building for the five-year, fixed-rate unsecured bonds.
"The issue was overwhelmingly subscribed to, with a total of N49.8 billion in bids being received from a varied composition of investor types (banks, pension funds, asset managers and insurance companies)" a statement from the company said.
Although, Flour Mills targeted an initial issue amount of N35 billion, the company accepted bids up to 12 per cent, for a total amount of N37.5 billion.
The flour and pasta maker said it would use the proceeds for refinancing existing loans and funding new ventures in its foods business. Flour Mills, which has a production capacity of 6,000 tonnes of flour per day, said two weeks ago that its first-half pre-tax profit rose by more than a quarter to N8.9 billion.
The Group Treasury Director of the company, Vlassis Liakouris, said "With the advent of this bond issue and inclusion of long term debt in our capital structure, the working capital adequacy and financial flexibility of the company is greatly improved".
According to him, the benefits of the firm's expansion will also significantly enhance its cash flow generating capacity adding that the firm has successfully diversified its funding base to include non-bank institutional investors. The bond is also meant to refinance its existing term loans, expand its business operations and augment its working capital shortfall.
Even though it is the first of the lot to open its books to bonds, Dangote Flour Plc following closely at its heels recently released strong profit growth driven by improved operations in its nine months results.
Dangote mills reported a turnover up by 15.4 per cent to N54.3 billion (US$358.2m) from the N47.0 billion (US$310.4) recorded in the commensurate period of 2009. Profit before tax went up by 24.9 per cent to N7.1 billion from N5.7 billion in the 2009 quarter, while profit after tax grew by 24.5 per cent to N7.0 billion. Profit before tax margin increased slightly to 13 per cent from 12 per cent in the corresponding 2009 quarter.
Experts say the company's continuous focus on cost reduction has translated into improved operational efficiency. Its capacity expansion project is still on-going and is aimed at achieving 7,300 metric tons per day. Dangote Flour is at the final stage of commencing direct and indirect exports to Chad, Cameroon, Niger and Sudan which is expected to boost the company's performance.
Is bond it?
Even though Nigeria removed all taxes on corporate debt issues and cut transaction fees earlier this year, allowing firms to raise capital on the bond market at lower coupon rates and offer tax-free returns to investors, investors and stakeholders are still apprehensive if indeed bond is the way out.
With the firms seeking new means of financing, it is envisaged that more of the firms may divert to bonds, if it works for the pioneer.
Finance experts however say the bond issue is positive but it comes at a price.Tajudeen Ibrahim, a research analyst at Stanbic IBTC said bond issuing is a positive step and that investors' concerns can be regarded as excessive, especially in the short term.
"Although the timing of this issue is disappointingly late given that interest rates have climbed in the past two months, we believe it is still positive for Flour Mills of Nigeria for the following reasons: First, cost savings on lower interest rates relative to previous outstanding debt; and then, it will foster the focus and execution of long-term strategy aimed at improving net earnings. In view of Flour Mills's plan to refinance existing debt, net borrowings are N14 billion" he said.
"The issue comes at a price due to weaker earnings per share in the medium term owing to higher interest expenses; and covenants that limit Flour Mills ability to borrow beyond a certain threshold. We believe that investors' concerns over the increase in Flour Mills leverage in the short term is excessive, bearing in mind the company's ability to repay debt from future cash flow," he added.
Room for improvement
Despite the thriving strides, finance experts say a lot of opportunities still abound for the sector to take advantage of.
"Even at its present state, a lot of investment opportunities still exist in the sub-sector due to Nigerian's comparative advantage and potential for the production of all primary raw materials required in the sub-sector and the apparent shortage of capacity to meet the demands of existing industries" Ms Teller said.
The food, beverage and tobacco sector has consistently remained the sectoral leader on a year-to-date basis return on the Nigerian Stock Exchange, and it is currently second mostly capitalised sector with N2.29 trillion market capitalisation after the banking sector.
Nigeria is the 3rd largest importer of wheat in Africa, importing an estimated 3.7 million metric tons is 2009. A bulk of these wheat imports come from the US and Canada and account for 80 per cent of the Cost of goods sold (COGS) of flour production.
To promote the local milling industry, the Federal Government maintains a 35 per cent import duty on wheat flour, while raw wheat attracts a duty of 5 per cent. The Nigerian Flour Milling industry has a highly concentrated structure. It is made up of 11 millers, 4 of whom account for 88 per cent of industry's total production.
The total milling capacity in the industry is estimated at 6.5million tons per annum, with an average capacity utilisation of 50 per cent. This statistics include obsolete and inefficient mills, which are uneconomical to operate.
Flour Mills is the largest flour milling company in the industry. The Company has production capacity of 6,000 tonnes per day and has highly diversified income streams. The second largest company in the industry by capacity and market share is Dangote Flour Mills. Honeywell Flour Mills, which started operations in 1995 has carved a niche in the industry and grown the company's market share. Crown Flour Mills Nigeria is one of the oldest players in the industry with 85 years of experience.
Experts say government's import ban on packaged noodles has supported increased demand of pasta from local manufacturers.
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