initiation of coverage flour mills of nigeria plc · initiation of coverage flour mills of nigeria...

1

Equity Research

Initiation of Coverage

Flour Mills of Nigeria Plc

Capacity Additions to Boost Topline

In this report we present our views on Flour Mills of Nigeria Plc (FLOURMILL) following its recent release of

Q1’14 and FY’13 results, and updates on the company’s recently commissioned 750,000 tonnes sugar refinery

and additional flour mills. Thus, we initiate coverage with a HOLD rating on the counter, as current price of

N83.90 represents an 8% upside potential from our FY’14 target price of N90.67

Gains from recent capacity expansion to boost turnover… During the 2013 fiscal year,

Flour Mills completed a number of projects expected to boost revenue considerably in

the medium term. The most important of these projects is the commissioning of the

750,000MT sugar refinery in Apapa Lagos, which has since begun operation, selling to

industrial customers, with plans to commence sale of retail sugar in the pipeline for

September. Based on the company’s guidance of a 100,000MT raw sugar importation

quota for the year, we estimate that about 93,500MT (using a standard 0.935 to refined

sugar ratio) of refined sugar would be produced and sold. We believe that the low

utilization of the installed capacity is due to the fact that the refinery has just been

commissioned and will not be used at full capacity, at least in the first year. Also in the

year, Flour Mills commissioned a 350,000MT pasta factory in Ogun State, and three new

flour mills in Apapa, Lagos. The company also disclosed plans to complete the capacity

expansion of the recently acquired Rom Oil Mills Ltd by the end of FY’14. The gains from

the recent CAPEX were evident in the company’s Q1’14 result, where topline grew by an

impressive 43% YoY.

…But elevated cost still poses threat to profitability: The positive showing in Flour Mills

revenue line was unable to trickle down, as PAT declined by 8% YoY in Q1’14. The poor

showing in Flour Mills bottomline was hinged on a faster rise in cost of sales, which

spiked 54% YoY, similar to the trend seen in the recently released FY’13 numbers, where

cost of sales also paced ahead of revenue. Whilst we do not have the segmental

breakdown of the Q1’14 numbers, we surmise that the sharp rise in cost of sales is

attributable to increased input costs in the food and agro allied business as average

wheat prices were up 8% YoY. We saw a similar trend in UACN’s H1’13 result (we

consider Flour Mills and UACN as comparables, as food and agro-allied business

contribute at least two-third in revenues for both companies) where the company

recorded higher costs in its agriculture related business. Overall profitability margins

were lower as both PBT and PAT margins came in lower for Q1’14, settling at 4.6% and

3.6% from 7.3% and 5.6% in corresponding quarter of the 2013 financial year,

respectively. For FY’14, we expect the recent investments in capacity to translate into a

41% YoY growth in topline, while we expect Flour Mills after tax earnings to rise by 40%.

Despite the 8% decline seen in Q1 after tax earnings, we expect some improvement in

the other quarters, based on the recent trend in quarterly PAT contribution to full year

earnings figure. Over the last four years (except for FY’13 where the company recorded

a loss in Q4 and FY’10 where Q4 contributed 50% to FY earnings) Q1-Q3 have accounted

for an average of 85% of FY earnings. Taking the above into account, our revised EPS for

FY’14 comes in at N4.55, 40% higher than FY’12 EPS of N3.24.

27 August 2013

Stock Data

Bloomberg Ticker: FLOURMIL:NL

Market Price (N) 83.90

Shares Outs (Mn) 2,386

Market cap (N’Mn) 200,158

Price Performance FLOURMIL NSE

12-month (%) 61 58

6-month (%) 10 8

YTD (%) 29 30

Key Ratios 2012A 2013A 2014F

EBITDA Margin 10.32% 6.55% 9.00%

EBIT Margin 8.21% 7.82% 7.41%

PAT Margin 3.24% 2.56% 2.55%

ROAA 3.60% 2.96% 3.58%

ROAE 12.66% 8.70% 11.11%

Valuation 2012A 2013A 2014F

P/E (x) 23.38 25.90 18.45

P/BV (x)

2.22

2.18

1.95

Div. Yield (%) 1.91% 2.38% 2.56%

0.80

1.00

1.20

1.40

1.60

1.80

Jan

-13

Feb

-13

Mar

-13

Ap

r-1

3

May

-13

Jun

-13

Jul-

13

Au

g-1

3FLOURMIL NSEASI

Analyst

Tochukwu Ezeoke*

[email protected]

YTD Price Performance (rebased)

Source: NSE, CardinalStone Research

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Equity Research



FY’13 Review

Strong growth in Food business drives FY’13 topline…: Flour Mills grew revenue by 17%

YoY for FY’13, as turnover for the period came in at N301.9 billion, significantly better

than the moderate 8% YoY growth recorded in FY’12. The significant growth in revenue

was buoyed by strong showings in Flour Mills Agro-allied, Packaging, and Food

businesses as revenue for the trio grew 53%, 42%, and 26% respectively. The Food

business remained the largest contributor to topline, accounting for 73% of Flour Mills

revenue figure, while the Agro-allied business maintained a distant second place,

contributing 17% to turnover.

…But spike in input costs depress earnings: However, Flour Mills recorded a faster rise

in its cost of sales line (21% YoY rise), while selling and distribution expenses were up

34% YoY as the company expanded its sales force and increased marketing activities in a

bid to grow market share. From the company’s FY’13 presentation, we deduced that the

sharp rise in the cost of sales was on the back of the increase in prices of input materials

for the company’s Agro-alllied business. Our point is further buttressed by the 42% YoY

decline in Flour Mills agro-allied business PBT line, despite the 53% YoY rise in revenue,

which translated into a PBT margin of 1.8% for FY’13 from 4.6% for FY’12. On the other

hand before-tax earnings were up 75% YoY in the Flour Mills food business, the strong

growth was hinged on larger volumes and higher margins.

Thus margins came in lower: Overall, after tax earnings for the FY came in at N7.7

billion, down 0.5% YoY from the N7.8 billion figure posted for FY’12. Also, PBT and PAT

margins declined for the period, standing at 3.7% and 2.6% from 4.6% and 3.0% in FY’12

respectively. Thus, Flour Mills FY’13 EPS came in at N3.24, down 0.5% from the N3.25

EPS recorded for FY’12. The company is proposing a dividend of N2.00 per share, the

payment date is 16th

of September, 2013.

38,88243,524 45,911

70,703

100,975

8%

11%

7% 7%

5%

0%

2%

4%

6%

8%

10%

12%

0

20,000

40,000

60,000

80,000

100,000

120,000

Q1'10 Q1'11 Q1'12 Q1'13 Q1'14

Turnover N'mn PBT N'mn PBT margin %

PBT margin analysis

Sources: CardinalStone Research, Company Financials

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Equity Research



Company Overview

Flour Mills of Nigeria is the largest flour miller in Nigeria, with installed capacity of 3.63 million

MT per annum. Over time, the company diversified into other businesses, enabling it to tap into

other markets, and grow efficiency in its core flour milling business. Flour Mills has four major

business segments namely; the food business, the agro allied business, the logistics and support

business, and other subsidiaries. The food business has remained the major contributor to both

topline in recent times followed by the agro-allied business, as the duo contributed 73% and 17%

to FY’13 revenue.

Foods, 73%

Agro-allied, 17%

Packaging, 7% Others, 2%

Foods

Agro-allied

Packaging

Others

Food, 91%

Agro-allied, 7%

Packaging, 10%

Others, -8%

Food

Agro-allied

Packaging

Others

Sources: CardinalStone Research, Company presentation

FY’13 Contribution to turnover by business segment

FY’13 Contribution to before-tax earnings by business segment

Sources: CardinalStone Research, Company presentation

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Equity Research



Business Segments The Food Business

The food business comprises of a number of products, and it is divided into two sub-sectors; the

branded consumer goods, and the branded intermediate goods. The branded consumer goods

consist of pasta, noodles, semovita, goldenvita, sugar, rice, edible oils, and snacks. While the

branded intermediate products includes; flour, soft flour, confectionery flour, sugar, and edible

oils. Flour Mills has the following subsidiaries under its food business;

Northern Nigeria Flour Mills Plc (52.6% stake): NNFM is a flour milling company with

capacity of 1,200MT per day. The company produces Golden Penny Flour, Golden Penny

Semovita, Wheat Offlas, and a range of maize products.

Nigerian Eagle Flour Mills Limited (51% stake): Is a flour milling company with a capacity

340,000MT per year.

Golden Pasta (100% stake): The company is involved in the production and sale of

different variants of macaroni and spaghetti.

Golden Noodles Company Limited (100% stake): Golden Noodles produces and sells

noodles to the general public.

Golden Sugar Company Limited (100% stake): Golden Sugar started operations this year,

as the company commissioned its 750,000MT per year factory. The company

commenced sale of industrial sugar in February this year, while it disclosed plans to

begin retail sale in Spetember.

The Agro-allied Business

The agro-allied business covers Fertilizer blending and distribution, domestic cultivation of

sugarcane, soybean, maize, rice and oil palm. The company is also involved in crop processing, oil

seed crushing and refining, as well as animal feed production. Under the agro-allied business, the

company has the following subsidiaries;

65% 68% 73%

15% 12% 0%

10% 13%17%

6% 5% 7%

0%

20%

40%

60%

80%

100%

120%

2011 2012 2013

Others

Port operations

Packaging

Agro-allied

Cement

Food

Contribution to revenue by business segment


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Equity Research



Premier Feed Mills Company Limited (62% stake): Premier Feeds is one of the major

animal feed manufacturers in the country, and manufactures under its trade name

TOPFEEDS. The company has a wide range of products which covers all aspects of

animal feed requirements in the domestic economy. In June 2010 Premier Feeds

completed its 300,000 ton per year animal feed factory, and this brought total

production capacity to 600,000 tons per year.

Kaboji Farms Limited (100% stake) – Kaboji Farms is a farming enterprise with over

3,000 hectares of farmland which cultivates maize, soyabean, rice and cassava. Flour

Mills have disclosed plans to increase the cultivated area further by 2,000 hectares over

the next five years, Flour Mills recently entered into a technical assistance agreement

with Adecoagro, a leading South American agro-industrial company to help manage

and develop Kaboji Farms.

ROM Oils Pty Limited (90% stake) – A recently acquired subsidiary, is a mid-sized edible

oil extraction and refining company.

Thai Farms International Limited (100% stake) – Thai Farms is involved in the processing

of cassava tubers to produce cassava flour.

Golden Fertilizer (100% stake) – Golden Fertilizer is involved in fertilizer blending,

distribution and supply.

The Logistics and Support Business

Under the logistics and support business, Flour Mills provides a wide range of services, namely;

packaging, transportation, logistics, power generation, and port operations. The company has

the following subsidiaries under this business;

Apapa Bulk Terminal Limited (100% stake): Was set up as an SPV to take advantage of

the concession granted by the Nigerian Ports Authority/Bureau of Public Enterprises to

manage and operate Terminals A and B of the Apapa Port Complete. The company

offers services such as, transit warehousing for export cargo, and network cargo

distribution and delivery.

Golden Transport Company Limited (100% stake): Golden Transport is a haulage and

dsitribution company with nationwide reach, which enables efficient product delivery

of Flour Mills goods to customers.;

Other subsidiaries in the Logistics and Support business are, Golden Shipping Company

Limited (100% stake), Flour Mills Registrars Limited (100% stake), and a Real Estate

business in which the company has a 100% stake.

Other Subsidiaries/Associate Companies

The sole constituent in this business is UNICEM, a 2.5 million MT integrated cement plant in

which Flour Mills has a 28% stake, in a joint venture including Lafarge S.A and Holcim Ltd, the

world’s two biggest cement producers. The 2.5 million tonnes plant plant, which was

commissioned early 2009, is currently fourth biggest cement plant in the country. UNICEM

discontinued the importation of cement in Q1’13, given the increased ramp up of its plant and an

increasingly stricter government policy regarding cement importation; thus UNICEM’s

contribution to Flour Mills topline dwindled as the year matured.

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Equity Research



Forecasts & Valuation Assumptions DCF Assumptions The Discounted Cash-Flow valuation for FLOURMILL spans a period of five years and our

assumptions are highlighted below;

The major revenue driver for Flour Mills is the recent investments in increasing capacity

in the different business segments. Most significant is the company’s commissioning of a

750,000MT sugar refinery in Lagos. We expect the price of refined sugar to trend

upwards over the forecast years (on the back of data from OECD – FAO Agricultural

Outlook 2013-2022) and this should boost revenue for Flour Mills. We opine that the

company will increase utilization in the coming years, and this has been factored into our

valuation. On the back of this, we expect the revenue from the sugar refinery to double

over the next 5 years.

Also, the increase in flour milling capacity is expected to add to topline as the company

commissioned 3 new flour mills with capacity of about 363,000MT per annum, which

brings the total flour milling capacity of the company to 3.63 million MT per annum.

Assuming similar price level and capacity utilization as FY’13 level, We expect the new

flour milling capacity to account for about 6% of the FY’14 turnover figure.

Given the trend over the last few years, we expect some uptick in the company’s Cost of

sales (as % of sales) in FY’14, as wheat prices remain high. However, over the next five

years wheat prices are expected to soften moderately as countries, especially in Africa

and Asia ramp up production. Though the insecurity in the northern region of the country

has caused prices of agricultural inputs to rise, we expect the recent state of emergency

declaration to aid in curbing the menace. On the back of the above, we expect to see a

slower rise in the cost of sales line in the coming years.

Our WACC assumptions are as detailed in the table below;

WACC Assumptions

After tax cost of debt 8.34%

Tax rate 30.80%

Risk Free Rate 12.73%

Beta 0.43

Equity Risk Premium 5.50%

Stock beta (3Y daily adj.) 0.43

Debt/Equity 1.58x

Weighted Avg Cost of Capital (WACC) 10.95%

LT growth rate 3.00%

Source: CardinalStone Research

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Equity Research



Valuation: On the back of the deviation in Flour Mills FY’13 bottom-line performance

from our forecast, we have revised our model accordingly (see Appendix table for

revised forecasts). Hence our equally weighted DCF and P/E valuation, gives a revised TP

of N90.67 for FLOURMILL, which implies an 8% upside potential from current price of

N83.90. We therefore put a HOLD rating on the stock. On our revised numbers,

FLOURMILL is trading at a trailing and forward P/E of 27x and 18x, compared to its

comparable (Middle East and Africa) emerging market peers average of 16x and 17x.

(N'mn)

2014F 2015F 2016F 2017F 2018F

EBIT 31,476 35,553 43,094 49,702 55,691

Tax charge (9,695) (10,950) (13,273) (15,308) (17,153)

NOPAT 21,781 24,603 29,821 34,394 38,538

Less: Capex (42,469) (33,317) (20,230) (31,184) (26,803)

Add: Depreciation 11,747 17,202 19,225 20,784 23,464

+/- Decrease/Increase in OpWC 21,397 (5,223) (4,321) (3,227) (3,429)

Operating FCF 12,456 3,264 24,495 20,767 31,771

Discount factor 0.9013 0.8124 0.7323 0.6600 0.5949

Present Value of OpFCF 11,227 2,652 17,937 13,707 18,901

Terminal Value

Operating FCF 390,480 Discount factor 0.5949 Present Value of OpFCF 232,305

EV 309,455

Less: Net debt (71,904)

Staff gratuities 4,453

Minorities 2,915

Equity Value (Market cap) 244,920

Price/Share (N) 102.66

PE Valuation

PE (3YR. Daily AVG.) 17

FY'14 EPS 4.55

FY'14 TP (N) 78.68

Weighted TP (FY'14) (N) 90.67

Risks: Major risks to our outlook on Flour Mills include volatility in the prices of input

materials, increasing unpredictability of weather patterns as well as insecurity in

Northern Nigeria. Also, the company’s increasing leverage position is a source of

concern, as interest expense continues to depress earnings.

Valuation – Enterprise Value DCF and PE Valuation

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Equity Research



Emerging Market Comparables Valuation1

Name Country Mkt Cap $'m EBITDA Mrgn EV/EBITDA T12M Est P/E Curr Yr

Flour Mills of Nigeria Plc Nigeria

1,240

11.5

10.4

18.4

Savola Saudi Arabia

7,266

8.6

14.2

16.3

Dangote Flour Mills plc Nigeria

294

11.3

11.3

42.2

Dangote Sugar Refinery Plc Nigeria

810

14.9

6.7

10.6

Agthia Group Pjsc United Arab Emirates

637

12.6

10.6

15.1

Zad Holding Co Qatar

231

15.5 n/a n/a

Oman Flour Mills Oman

265

15.5 n/a n/a

Salalah Mills Co Oman

172

15.2 n/a n/a

Tongaat Hulett Ltd South Africa

1,267

18.0

7.5

10.7

Lesieur Cristal Morocco

331

7.3

8.5

23.1

Afgri Ltd South Africa

179

9.6

7.3

13.5

Tiger Brands Ltd South Africa

5,639

17.2

15.9

17.4

Cosumar Morocco

952

20.7

7.5

11.5

Enl Land Ltd Mauritius

341

13.9

99.7 n/a

Nestle Nigeria Plc Nigeria

4,591

25.7

25.6

29.4

Delta Sugar Egypt

244

24.0

8.6

5.9

1Peer comparables in the Middle East and Africa

Source: Bloomberg

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Equity Research



Financial Statements and Key Ratios (N'Mn) Income Statement (N'Mn) 2011 2012 2013 2014F 2015F 2016F Revenue 238,797 258,268 301,941 424,692 555,288 674,334 Cost of Sales (190,885) (210,442) (256,886) (351,221) (461,445) (561,046) Gross Profit 47,912 47,826 45,055 73,472 93,844 113,288 Sell.Distri. And Admin Expenses (18,086) (21,182) (25,271) (35,249) (46,089) (55,970) EBITDA 29,825 26,644 19,784 38,222 47,755 57,318 Depreciation (7,726) (8,260) (7,045) (11,747) (17,202) (19,225) EBIT/Operating profit 24,923 21,215 23,611 31,476 35,553 43,094 Interest Expense/Income (3,640) (6,299) (11,407) (12,797) (14,354) (15,714) Pre-tax earnings 16,445 12,049 11,165 15,679 18,199 24,380 Taxation (6,995) (3,672) (3,439) (4,829) (5,605) (7,509) Profit after tax 9,450 8,377 7,727 10,850 12,593 16,871

Statement of Financial Position (N'Mn) 2011 2012 2013 2014F 2015F 2016F

Assets Fixed Assets 71,802 103,744 144,346 175,069 191,185 192,190 Inventories 46,634 50,565 64,367 67,357 88,496 107,598 Trade Debtors 8,624 8,173 19,467 13,962 18,256 22,170 Bank and Cash Balances 8,876 26,239 21,837 15,450 1,055 2,785 Other current assets 10,510 22,378 3,296 4,654 6,085 7,390

Total Assets 163,262 232,858 280,247 303,426 332,011 359,065

Liabilities Trade Creditors 7,637 8,668 45,504 64,471 84,704 102,986 Bank overdrafts 9,856 33,643 53,878 55,878 58,878 62,878 Taxation 8,073 4,116 2,747 4,184 5,404 7,129 Amount due to related companies 8 0 46 1 1 1 Dividend payable 267 192 190 72 259 251 Term loans 8,419 28,833 39,863 41,863 44,863 48,863 Retirement Benefit Obligation 3,553 3,822 4,453 4,936 5,683 6,630 Deferred taxation 7,556 9,288 10,927 10,927 10,927 10,927

Total Liabilities 113,266 150,517 196,353 209,753 230,640 245,298

Capital and Reserves Share capital 940 1,167 1,193 1,193 1,193 1,193 Share Premium 5,867 33,526 36,813 36,813 36,813 36,813 Retained Earnings 33,176 32,816 36,135 45,125 51,887 63,051 Other component of equity 5,241 9,691 6,839 6,839 6,839 6,839

Shareholders' funds 45,223 77,200 80,979 89,969 96,732 107,895

Total liabilities and equity 158,490 227,717 277,332 299,722 327,372 353,193

Key Ratios 2011 2012 2013 2014F 2015F 2016F

Profitability Return on Average Equity 18.30% 12.66% 8.70% 11.11% 12.14% 14.65% Return on Average Assets 5.79% 3.60% 2.96% 3.58% 3.79% 4.70% EBITDA Margin 12.49% 10.32% 6.55% 9.00% 8.60% 8.50% EBIT Margin 10.44% 8.21% 7.82% 7.41% 6.40% 6.39% Pretax Profit Margin 6.89% 4.67% 3.70% 3.69% 3.28% 3.62% Net Profit Margin 3.96% 3.24% 2.56% 2.55% 2.27% 2.50%

Valuation Multiples P/E (x) 20.73 23.38 25.90 18.45 15.89 11.86 P/B (x) 2.22 2.18 1.95 1.80 1.61 1.42 Dividend Yield (%) 1.92% 1.91% 2.38% 2.56% 2.37% 3.18% EV/EBITDA (x) 9.69 10.85 14.61 7.56 6.05 5.04


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Equity Research



Financial Statements and Key Ratios ($'Mn) Income Statement ($'Mn) 2011 2012 2013 2014F 2015F 2016F

Revenue 1,568 1,656 1,939 2,647 3,361 3,962

Cost of Sales (1,254) (1,350) (1,649) (2,189) (2,793) (3,297)

Gross Profit 315 307 289 458 568 666

Sell.Distri. And Admin Expenses (119) (136) (162) (220) (279) (329)

EBITDA 196 171 127 238 289 337

Depreciation (51) (53) (45) (73) (104) (113)

EBIT/Operating profit 164 136 152 196 215 253

Interest Expense/Income (24) (40) (73) (80) (87) (92)

Pre-tax earnings 108 77 72 98 110 143

Taxation (46) (24) (22) (30) (34) (44)

Profit after tax 62 54 50 68 76 99

Statement of Financial Position ($'Mn) 2011 2012 2013 2014F 2015F 2016F

Assets Fixed Assets 458 666 927 1,091 1,157 1,129

Inventories 298 325 413 420 536 632

Trade Debtors 55 52 125 87 110 130

Bank and Cash Balances 57 168 140 96 6 16

Other current assets 67 144 21 29 37 43

Total Assets 1,042 1,495 1,799 1,891 2,009 2,110

Liabilities Trade Creditors 49 56 292 402 513 605

Bank overdrafts 63 216 346 348 356 369

Taxation 52 26 18 26 33 42

Amount due to related companies 0 0 0 0 0 0

Dividend payable 2 1 1 0 2 1

Term loans 54 185 256 261 272 287

Retirement Benefit Obligation 23 25 29 31 34 39

Deferred taxation 48 60 70 68 66 64

Total Liabilities 723 966 1,261 1,308 1,396 1,441

Capital and Reserves Share capital 6 7 8 7 7 7

Share Premium 37 215 236 229 223 216

Retained Earnings 212 211 232 281 314 370

Other component of equity 33 62 44 43 41 40

Shareholders' funds 289 496 520 561 585 634

Total liabilities and equity 1,011 1,462 1,781 1,868 1,981 2,075

Key Ratios 2011 2012 2013 2014F 2015F 2016F

Profitability Return on Average Equity 18.30% 12.66% 8.70% 11.11% 12.14% 14.65%

Return on Average Assets 5.79% 3.60% 2.96% 3.58% 3.79% 4.70%

EBITDA Margin 12.49% 10.32% 6.55% 9.00% 8.60% 8.50%

EBIT Margin 10.44% 8.21% 7.82% 7.41% 6.40% 6.39%

Pretax Profit Margin 6.89% 4.67% 3.70% 3.69% 3.28% 3.62%

Net Profit Margin 3.96% 3.24% 2.56% 2.55% 2.27% 2.50%

Valuation Multiples P/E (x) 20.73 23.38 25.90 18.45 15.89 11.86

P/B (x) 2.22 2.18 1.95 1.80 1.61 1.42

Dividend Yield (%) 1.92% 1.91% 2.38% 2.56% 2.37% 3.18%

EV/EBITDA (x) 9.69 10.85 14.61 7.56 6.05 5.04


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Equity Research



Disclosure

Analyst Certification

The research analyst(s) denoted by an “*” on the cover of this report certifies (or, where multiple research analysts are primarily

responsible for this report, the research analysts denoted by an “*” on the cover or within the document individually certifies, with

respect to each security or issuer that the research analyst(s) cover in this research) that: (1) all of the views expressed in this report

accurately articulate the research analyst(s) independent views/opinions, based on public information regarding the companies,

securities, industries or markets discussed in this report. (2) The research analyst(s) compensation or remuneration is in no way

connected (either directly or indirectly) to the specific recommendations, estimates or opinions expressed in this report.

Analysts’ Compensation: The research analyst(s) responsible for the preparation of this report receive compensation based upon

various factors, including the quality and accuracy of research, client feedback, competitive factors, and overall firm revenues, which

include revenues from, among other business units, Investment Banking and Asset Management.

Investment Ratings

CardinalStone employs a 3-step rating system for equities under coverage: Buy, Hold, and Sell.

Buy ≥ +15.00% expected share price performance

Hold +5.00% to +14.99% expected share price performance

Sell < +5.00% expected share price performance

A BUY rating is given to equities with strong fundamentals, which have the potential to rise by at least +20.00% between the current

price and the analyst’s target price.

An HOLD rating is given to equities with good fundamentals, which have upside potential within a range of +5.00% and +14.99%,

A SELL rating is given to equities that are highly overvalued or with weak fundamentals, where potential returns of less than -5.00% is

expected, between the current price and analyst’s target price.

Cardinal Stone Research distribution of ratings/Investment banking relationships as of August 26, 2013

Rating Buy Sell Hold

% of total recommendations 29% 53% 18%

% with investment banking relationships 0% 0% 0%

Valuation and Risks: Please see the most recent company-specific research report for an analysis of valuation methodology and risks

on any security recommended herein. You can contact the analyst named on the front of this note for further details.

Frequency of Next Update: An update of our view on the company would be provided when next there are substantial

developments/financial news on the company.

Conflict of Interest: It is the policy of CardinalStone Partners Limited and its subsidiaries and affiliates (individually and collectively referred to as “CardinalStone”) that research analysts may not be involved in activities that suggest that they are representing the interests of Cardinal Stone in a way likely to appear to be inconsistent with providing independent investment research. In addition, research analysts’ reporting lines are structured so as to avoid any conflict of interests. For example, research analysts are not subject to the supervision or control of anyone in CardinalStone’s Investment Banking or Sales and Trading departments.

12

Equity Research



However, such sales and trading departments may trade, as principal, on the basis of the research analyst’s published research. Therefore, the proprietary interests of those Sales and Trading departments may conflict with your interests.

Company Disclosure: CardinalStone may have financial or beneficial interest in securities or related investments discussed in this report, which could,

unintentionally, affect the objectivity of this report. Material interests which CardinalStone has with companies or in securities

discussed in this report are disclosed hereunder:

Company Disclosure

FLOUR MILLS OF NIGERIA PLC

a. The analyst holds personal positions (directly or indirectly) in a class of the common equity securities of the company b. The analyst responsible for this report as indicated on the front page is a board member, officer or director of the Company c. CardinalStone is a market maker in the publicly traded equities of the Company d. CardinalStone has been lead arranger or co-lead arranger over the past 12 months of any publicly disclosed offer of securities of

the Company e. CardinalStone beneficially own 1% or more of the equity securities of the Company f. CardinalStone holds a major interest in the debt of the Company g. CardinalStone has received compensation for investment banking activities from the Company within the last 12 months h. CardinalStone intends to seek, or anticipates to receive compensation for investment banking services from the Company in the

next 3 months i. The content of this research report has been communicated with the Company, following which this research report has been

materially amended before its distribution j. The Company is a client of CardinalStone k. The Company owns more than 5% of the issued share capital of CardinalStone l. CardinalStone has other financial or other material interest in the Company

Important Regional Disclosures

The analyst(s) involved in the preparation of this report may not have visited the material operations of the subject Company (ies)

within the past 12 months. Commission is the commission rate or the amount agreed with a customer when setting up an account or at

any time after that. To the extent this is a report authored in whole or in part by a Non-U.S. analyst and is made available in the U.S.,

the following are important disclosures regarding any Non-U.S. analyst contributors:

The Non-U.S. research analysts (denoted by an * in the report) are not registered/qualified as research analysts with FINRA; and

therefore, may not be subject to the NASD Rule 2711 and NYSE Rule 472 restrictions on communications with a subject company,

public appearances and trading securities held by a research analyst account. Each analyst (denoted by an *) is a Non-U.S. Analyst and

is currently employed by Cardinal Stone.

Legal Entities

Legal entity disclosures: CardinalStone Partners is a member of The Nigerian Stock Exchange (NSE) and is authorized and regulated by

the Securities and Exchange Commission (SEC) to conduct investment business in Nigeria.

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