Newly Nigerian Stock Exchange (NSE) listed company, Notore Chemical Industries Plc had a facts behind the Listing Presentation last Thursday.
BusinessDay analysed historical financials of Notore over a five year period (2013 – 2017) and our conclusion is that we would not be buyers of the equity for now as the industrial goods firm is grappling with rising interest expense and deteriorating working capital while operating in a soon to be highly competitive sector (with the looming entrance of Dangote Industries Fertilizer plant into the market this year and established player Indorama).
Dangote’s $2.5 billion fertilizer plant, located in Lagos, should produce its first batches of urea by the end of this year. It has a capacity of 3 million metric tons a year, which is set to be one of the biggest globally.
Indorama Eleme Fertilizer & Chemicals Limited (IEFCL) is a group company of Indorama Corporation, a global manufacturing conglomerate operating in over 25 countries across Asia, Europe, Africa and North & South America.
IEFCL is one amongst the ambitious green field projects of Indorama in Nigeria and is the world’s largest single train Urea – Fertilizer plant, commissioned in June 2016.
The Fertilizer Plant includes 2,300 Metric Tons Per day (MTPD) ammonia plant, 4,000 MTPD Urea granulation plant and associated offsite and utilities.
This is equivalent to 839,500 mt capacity of ammonia and 1.46 million mt capacity of Urea.
By comparison Notore produced 203,233 mt of Ammonia and 315,298 mt of Urea in 2017.
A cursory look at the income statement shows Notore has recorded losses for each of the financial year from 2014 to 2016, and it is expected that shareholders will bear the burden in form of negative retained earnings.
The firm posted a loss after tax of (N11.653 billion) in 2014, (N12.71 billion) in 2015 and (N12.42 billion) in 2016.
The company also recorded a pre-tax loss of N2.14 billion for the financial year ending December 2017, but a tax credit of N10.80 billion was responsible for a profit after tax of N8.65 billion.
Notore has been struggling to meet its short term obligations in the last four years as evidenced by a recurring negative working capital. Its current assets of N7.34 billion as at December 2017 cannot cover current liabilities of N59.12 billion, resulting in a negative working capital of N51.78 billion.
Notore’s revenue fell by 53 percent between 2012 and 2014 from N35.88 billion to N16.57 billion, due to problems with production and output of Ammonia and Urea has not recovered to 2012 levels even by 2017, although revenues earned in 2017 are at par with 2012.
This has brought about increased short term borrowings (from N27 million in 2012, to N59 billion in 2017) causing illiquidity in the company.
Notore’s operating income is not enough to cover interest expenses as evidenced in times interest coverage ratio of 0.76 times operating profit (EBIT), in 2017.
The lower a company’s interest coverage ratio is, the more its debt expenses burden. When a company’s interest coverage ratio is 1.5 or lower, its ability to meet interest expenses may be questionable.
Notore has secured approval for $37 million funding which will be utilized for a turnaround maintenance (TAM) of its brownfield plant, purchase of critical spares, and acquisition/installation of back-up power, which will ensure production reliability.
The above means future finance cost may edge up hence eroding profitability.
Notore listed its 1.61 billion shares at N62.5 per share for a market capitalisation of N100bn, equivalent to about 3x sales and 12x earnings for 2017.
Plugging in 2016 numbers would give 4x sales and indeterminate Earnings multiple as profits were negative in 2016.
This compares to Middle East/ Africa (MEA) listed Israel Chemicals which trades at a Price to Sales ratio of 1.19x and P/E ratio of 5.2x.
A lower valuation of 1.19x sales and 5.2x earnings if applied would give a valuation ranging from N42.7 bn – N44.99 bn equivalent to N26.5 per share – N27.9 per share.
The poor financial performance of Notore Chemicals in the last five years can be traced to macro, industrial and company specific challenges.
The agricultural industry as a whole has been declining as a percentage of GDP in the past decade, thus putting pressure on companies operating in this sector. In 2007, agriculture contributed more than 30 percent to GDP but this year contribution of agriculture to GDP was only 20 percent.
Fertilizer prices have been declining since last year as the prices of Urea, NPK 15 15 15 and NPK 20 10 10 are all down in excess of 10 percent.
Although fertilizer prices are declining, Notore reported that fertilizer consumption in the country is also on the decline.
Fertilizer production in Notore is also down in the last five years. Ammonia produced fell from 260,001mt in 2012 to 203,223mt in 2017. Urea produced fell from 369,838mt in 2012 to 315,298mt in 2017. Lower production level translated to lower sales volume.
Production level dropped as a result of non-availability of gas for 98 days in 2013 and 137 days in 2014 which temporarily shut down operations in the fertilizer plant. As a result, company earnings were volatile between 2012 and 2013.
