The initiation report states that the main driving forces of a boost to margins and growth in the short term include a stable FX environment, moderating inflation and higher selling prices post-currency devaluation. The long-term prospects are supported by favourable demographic trends within the country.
Renaissance Capital’s top picks are NASCON and Dangote Flour Mills based on greater upside potential compared with peers and stronger fundamentals through the cycle. NASCON is a growth company, investing in its core salt production business and diversifying into new businesses. Dangote Flour Mills recently emerged from a difficult period, bouncing back after disposing of its noodle business to the market leader and focusing on its core business. Renaissance Capital sees value in Flour Mills of Nigeria and Dangote Sugar Refinery but higher levels of uncertainty.
Dangote Sugar Refinery has repeatedly posted strong EBITDA margins, generated healthy FCF and paid out dividends. While Flour Mills of Nigeria’s earnings growth has been poor in the past five years, Renaissance Capital sees earnings growth recovering from FY18 on higher flour selling prices and an increased contribution from the sugar business.
The report highlights that Dangote Sugar Refinery plans a material capex programme in the next six years which will depress FCF from FY20. The timing of the capex and size of the investment also raise the business’s risk profile, in the Firm’s view.
Source: The Independence