Announcements Corporate Rating Alerts

GCR upgrades Flour Mills of Nigeria Plc’s national scale long-term Issuer rating on criteria review, Outlook Stable.

Lagos, Nigeria, 11 October 2021 – GCR Ratings (“GCR”) has upgraded Flour Mills of Nigeria Plc’s national scale long term Issuer rating to A-(NG) and affirmed the national scale short-term rating of A2(NG), with the Outlook accorded as Stable.

Rated Entity / Issue Rating class Rating scale Rating Outlook / Watch
Flour Mills of Nigeria Plc Long Term Issuer National A-(NG) Stable
Short Term Issuer A2(NG)

Rating Rationale

The ratings accorded to Flour Mills of Nigeria Plc (“FMN” or “the Group”) reflect its dominant position in the Fast Moving Consumer Goods (“FMCG”) manufacturing subsector and significant control of its value chain, underpinning its large market share and sound revenue generation. These are, however, balanced against weak earnings margins due to rising cost of production (amid tight competition) and consequently volatile net profit.

GCR has adopted a group analytical approach to the above ratings, as FMN owns, consolidates, and facilitates credit facilities on behalf of its subsidiaries, which implies the potential for tangible risk transfers, positively or negatively, into the rated entity. Should there be material changes to this position, GCR will reconsider the approach.

The Group’s strong competitive position is a key rating strength. This is underpinned by the substantial flour milling capacity (30% of Nigeria’s installed capacity), wide distribution network, large customer base, as well as a well-diversified and recognised product portfolio. This is complemented by the strong integration along the value chain (including agriculture, processing, and logistics), which helps to mitigate foreign exchange exposure somewhat, and enhance operational efficiency.

In light of its business mix, FMN’s is viewed primarily as a FMCG manufacturer, but GCR has also incorporated the contribution and exposure to the agricultural business. The resulting blend of agro-FMCG sector scores balances FMCG’s strong sectorial fundamentals of low cyclicality and relatively stable demand against the overall higher risks associated with the agricultural sector due to the inherent cyclicality, volatile earnings and exposure to insecurity.

GCR takes cognisance of the significant revenue growth for the year ended 31 March 2021 (FY21), supported by demand-led volumes growth and inflation-induced price increases across the various product lines amid the COVID-19 pandemic. However, adverse foreign exchange (“forex”) movements have eroded reported net profit. That said, the narrowing EBITDA margins, despite an improved operating profit, is also concerning. Thus, while GCR expects sound revenue generation over the rating horizon, with the EBITDA margin anticipated to remain around the historical average of 10.9%, further earnings pressure could emanate from further imported inflation and forex volatility.

GCR considers FMN to be moderately geared. Despite the spike in gross debt by N26.5bn to c.N150bn at FY21, net debt to EBITDA improved to 1.3x (FY20: 1.8x) on the back of higher quantum of earnings and substantial cash holding. GCR anticipates that debt will remain at a moderate level in FY22-23, with further repayments and higher earnings expected to reduce net debt to EBITDA to the 90%-120% band. Net interest coverage also strengthened to 6x in FY21 (review average: 3.1x) on the back of improved earnings and a better priced debt book, and is expected to be sustained at the 4x-5x range in the medium term. While operating cash flow coverage of debt has trended at the intermediate level (average of 36% pre-FY20), this deteriorated to 10% in FY21 due to high inventory holdings, to mitigate against supply chain disruptions during the pandemic. GCR expects strong cash generation and moderate working capital release (as the substantial inventory holding unwinds) to support OCF coverage of around 40% in FY22-23.

Liquidity is deemed sufficient, as coverage is estimated to be around 1.3x over the next 18-month period. This is underpinned by the substantial cash holding of N32.7bn at FY21 and the expectation that operating cash flows will remain strong in FY22. However, the liquidity assessment is balanced against high level of short-term debt, capex spending and dividend payment. While there are no committed facilities, GCR positively views the Company’s access to diverse funding sources and the revolving credit facilities.

Outlook Statement

The Stable Outlook reflects GCR’s view that FMN will maintain a leading market share, which will support stronger revenue and earnings growth, thereby facilitating further moderation in leverage metrics over the medium term.

Rating Triggers

Positive rating action is dependent on significant ramp up of earnings margins and stable net profits. Operating cash flow coverage of debt improving to above 50% and interest coverage widening to over 10x in the medium term could also bode positively for the ratings.

Conversely, an escalation in debt, particularly short-term debt, could result in a ratings downgrade, especially if there is no corresponding increase in earnings. Persistent working capital pressures and spike in interest payments that further weakens the debt service metrics could trigger a negative rating action.

Analytical Contacts

Primary analyst Biyi Baruwa Analyst
Lagos, Nigeria Biyi@GCRratings.com +234 1 904 9462
Committee chair Eyal Shevel Sector Head: Corporates and Public Entities
Johannesburg, ZA Shevel@GCRratings.com +27 11 784 1771

Related Criteria and Research

Criteria for the GCR Ratings Framework, May 2019
Criteria for Rating Corporate Entities, May 2019
GCR Ratings Scales, Symbols & Definitions, May 2019
GCR Nigeria Country Risk Score, October 2021
GCR Nigeria Corporate Sector Risk Scores, August 2021

Ratings History

Flour Mills of Nigeria Plc

Rating class Review Rating scale Rating Outlook/Watch Date
Long Term Issuer Initial National BBB+(NG) Stable May 2016
Short Term Issuer Initial A2(NG)
Long Term Issuer Last National BBB+(NG) Stable October 2020
Short Term Issuer Last A2(NG)

RISK SCORE SUMMARY

Risk score
Operating environment 6.50
Country risk score 3.75
Sector risk score 2.75
Business profile 1.25
Competitive position 1.25
Management and governance 0.00
Financial profile (0.25)
Earnings (0.50)
Leverage & capital structure 0.25
Liquidity 0.00
Comparative profile 0.00
Group support 0.00
Peer analysis 0.00
Total Risk Score 7.50

Glossary

Credit Rating See GCR Rating Scales, Symbols and Definitions.
Debt An obligation to repay a sum of money. More specifically, it is funds passed from a creditor to a debtor in exchange for interest and a commitment to repay the principal in full on a specified date or over a specified period.
Diversification Spreading risk by constructing a portfolio that contains different exposures whose returns are relatively uncorrelated. The term also refers to companies which move into markets or products that bear little relation to ones they already operate in.
Exposure Exposure is the amount of risk the holder of an asset or security is faced with as a consequence of holding the security or asset. For a company, its exposure may relate to a particular product class or customer grouping. Exposure may also arise from an overreliance on one source of funding. In insurance, it refers to an individual or company’s vulnerability to various risks
Interest Cover Interest cover is a measure of a company’s interest payments relative to its profits. It is calculated by dividing a company’s operating profit by its interest payments for a given period.
Issuer The party indebted or the person making repayments for its borrowings.
Leverage With regard to corporate analysis, leverage (or gearing) refers to the extent to which a company is funded by debt.
Long Term Rating See GCR Rating Scales, Symbols and Definitions.
Rating horizon The rating outlook period, typically 18 to 24 months.
Risk Management The process of identifying and monitoring business risks in a manner that offers a risk/return relationship that is acceptable to an entity’s operating philosophy.
Short Term Rating See GCR Rating Scales, Symbols and Definitions.
Short Term Current; ordinarily less than one year.

SALIENT POINTS OF ACCORDED RATINGS

GCR affirms that a.) no part of the ratings process was influenced by any other business activities of the credit rating agency; b.) the ratings were based solely on the merits of the rated entity, security or financial instrument being rated; and c.) such ratings were an independent evaluation of the risks and merits of the rated entity, security or financial instrument.

The credit ratings have been disclosed to Flour Mills of Nigeria Plc. The ratings above were solicited by, or on behalf of, the rated entity, and therefore, GCR has been compensated for the provision of the ratings.

Flour Mills of Nigeria Plc participated in the rating process via tele-conferences and other written correspondence. Furthermore, the quality of information received was considered adequate and has been independently verified where possible. The information received from Flour Mills of Nigeria Plc and other reliable third parties to accord the credit ratings included:

  • 2021 audited annual financial statement, and prior four years annual financial statements;
  • management accounts for the period to 30 June 2022;
  • Industry comparative data and regulatory framework and a breakdown of facilities available and related counterparties;
  • Information specific to the rated entity and/or industry was also received;
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