Nigeria Corporate Analysis | Public Rating

Dufil Prima Foods PLC Nigeria Corporate Analysis May 2018

Financial data:

(USD’m comparative)

31/12/16 31/12/17

N/USD (avg.) 252.7 305.3

N/USD (close) 304.5 305.5

Total assets 263.8 363.9

Total debt 162.3 213.7

Total capital 59.5 80.7

Cash & equiv. 16.3 17.9

Turnover 477.8 562.6

EBITDA 85.3 113.8

NPAT 32.0 73.6

Op. cash flow (14.4) 38.6

Market share: noodles (75%),

Vegetable oil (12-15%)

Market cap n.a

Dufil Prima Foods Plc (“Dufil”, “group”,

“the Company”)

Rating history: Initial rating (June 2016)

Long term: A-(NG)

Short term: A2(NG)

N10bn Series 1 Bond (Oct. 2017): A-(NG)

Rating Outlook: Stable

Last rating (April 2017)

Long term: A-(NG)

Short term: A2(NG)

Rating outlook: Positive

Rating methodologies/research Criteria for rating Corporate entities

(updated February, 2017)

Dufil Prima Foods PLC Issuer rating

report, 2016-2017

Glossary of terms/ratios, February 2017

GCR contacts: Primary Analyst:

Kunle Ogundijo

kunle@globalratings.net

Committee Chairperson:

Dave King

king@globalratings.net

Analyst location: Lagos, Nigeria

+23 41 904 9462

Website: http://www.globalratings.com.ng

Summary rating rationale

Dufil’s dominant presence in the packaged food segment of the economy is

supported by a long operational track record, strong shareholder support,

ongoing expansion of production capacity (including acquisition of smaller

competitors) and backwards integration. This underlies its superior competitive

strength and strong brand equity, which has seen most of its products enjoy

widespread acceptance across the country, with strong sales demonstrating

demand inelasticity to upward prices movement.

Over the review period, revenue growth has been driven by a combination of

expansion in production capacity, higher traded volumes, upward price

adjustments, and more recently, business acquisitions. This equated to a five-

year Compound Annual Growth Rate (“CAGR”) of 24%, translating to a

period high revenue of N171.8bn in FY17 (FY16: N120.7bn).

The robust growth in revenue in FY17 allowed Dufil to fully absorb much

higher production and administrative costs necessary for the enlarged

operations. Thus, on the back of the firmer earnings, profitability metrics

strengthened, translating to a higher EBITDA margin of 20.2% (FY16:

17.8%), with the operating margins widening to 18.7% (FY16: 15.7%).

Notwithstanding the strong cash generation capacity, liquidity pressure has

been experienced in recent years, largely resulting from increased working

capital requirements, as inventory and related party debtors have more than

doubled over the last three years. The cash position was further depleted by a

large dividend payment of N15.9bn in FY17 (including a N4.7bn payment

from FY16), necessitating additional borrowings to finance the huge capex.

Nonetheless, Dufil operates a favourable cash conversion cycle which should

mitigate any substantial future cash outflow.

Dufil displays an elevated debt profile, underpinned by ongoing capex and

working capital requirements. In this regard, total debt grew by 32% to

N65.3bn at FY17, well above budget of N39.2bn. Although, the issuance of

the Series 1 bonds served to reduce the concentration to short term debt, it still

comprised around two-thirds of total debt. Access to funding is supported by

the strong relationships with several banking counterparties.

Gearing metrics strengthened on the back of the firmer growth in earnings,

with net gearing moderating for a third consecutive year to a period low 243%

at FY17 (FY16: 246%), while net debt to EBITDA declined to 172% (FY!6:

206%) Similarly, firmer operating income resulted in a stronger net interest

cover of 3.3x (FY16: 2.6x). The improved credit protection metrics

demonstrate a strong capacity to absorb higher debt, however, Dufil could find

itself in an over geared position if earnings drop suddenly.

As the Bonds are senior unsecured obligations of the Issuer, and the Bond

programme features a negative pledge, the Series 1 Bonds bear the same rating

as the Issuer, and any change in the rating assigned to the Issuer will directly

affect the Bonds ratings.

Factors that could trigger a rating action may include

Positive change: Successful completion of all ongoing capacity expansion

projects, on time and within budget. With these contributing to margin

enhancement, sustained improvement in gearing metrics, as well as maximising

its superior competitive strength over the medium term.

Negative change: Continued increases in debt, even to fund profitable

expansions/acquisitions, would see gross debt rise above levels congruent with

the current ratings. This risk of high debt may be exacerbated by earnings

underperformance, construction delays and cost overrun, which would constrain

profitability and lead to a rapid deterioration in credit protection metrics

.

Rating class Rating scale Rating Rating Outlook Expiry date Long term National A-(NG)

Positive May 2019 Short term National A2(NG)

N10bn Series 1 Fixed Rate Bond National A-(NG) Positive May 2019

Nigeria Corporate Analysis | Public Rating Page 2

Background and recent developments1

Dufil was incorporated in 2001 to carry on the business

of manufacturing of instant noodles. In 2008, the

Company converted into a public limited company and

became the group holding company with the principal

activities of the subsidiaries being; manufacturing and

marketing of noodles, seasoning, pasta, wheat flour,

packaging material, snacks and oil. Dufil currently

operates from factory locations in Lagos, Ogun, Rivers

and Kaduna States, with its corporate head office

situated in Lagos. There are seven wholly owned

subsidiaries in the group, as contained in Table 1.

Table 1: Dufil Prima Foods PLC

S/N Subsidiary Established Products Factory/Location

1 De United Foods

Industries Limited 1996

Seasoning,

Noodles Ogun and Lagos

2

Insignia Print

Technology LFTZ

Enterprise

2008 Packaging materials

Lekki FTZ, Lagos

3 Pure Flour Mills

Limited 2011

Flour, Snack,

Pasta Rivers

4 Raffles Oil LFTZ Enterprise

2013 Vegetable oil Lekki FTZ, Lagos

5 Northern Noodles Limited

2011 Noodles Kaduna

6

De United Foods

Industries Ghana Limited*

2013 Noodles and

Pasta Accra, Ghana

7 Enriched Pte

Limited* 2017 Procurement Singapore

* Foreign subsidiaries

Dufil is currently one of the most prominent companies

in the flour milling business, as wheat (processed into

flour) is the major input in the production of noodles. It

also has as an increasing presence in the vegetable oil

and snack segment. The Company’s strategic intent has

largely been focused on being the dominant brand in the

noodles’ segment of the food business, this has led to the

expansion of production capacities across geographical

regions. The noticeable developments over the years

have been supported by aggressive marketing and

efficient distribution, which has enhanced brand

acceptance across the country, in the process, creating

strong demand for its products across demographic lines.

Further to this, in a bid to secure the supply chain (and

thus reduce exposure to the vagaries in the operating

environment) and to increase production efficiency, a

policy of backward integration has been implemented.

Thus, through various subsidiaries, Dufil now produces

many of the inputs into its flagship product- noodles.

This has necessitated huge investments in various

production facilities/processes.

In line with the above, an additional 20,000MT was

added to the noodles production line in Ota. The new

line became operational in December 2017, and will

serve the increasing demand in the South-West region,

as well as exports. Similarly, the seasoning blending

capacity at the facility was doubled to 4.8MT per hour,

and 20 new packaging lines were added. However, the

expected installation of the blown film machine in the

1 Readers are advised to refer to previous rating reports for a detailed background.

packaging segment has been delayed, and will only be

completed in July, 2018.

The Singapore based subsidiary is expected to mainly

serve as a procurement arm for imports. This will reduce

associated foreign exchange risks prevalent in Nigeria.

In addition to the wholly owned companies, operating

lease agreements exist with Standards Flour Mills

Limited (Apapa, Lagos State) and Valluembra Flour

Mills Limited (Aba, Abia State) for the use of their

production facilities to augment production and supply

of flour for internal use.

Following the acquisition of Dangote Flour’s noodles

production facility in 2017, in May 2018, Dufil acquired

the noodles production division of May and Baker PLC.

Dufil will continue to trade under the brand name,

Mimee, which commands a 2% market share. This will

serve to further strengthen its dominance in the noodles’

segment. A pasta production facility was also acquired

by the Ghana subsidiary during 2017. This will be

complemented by the construction of a noodles

manufacturing plant in Ghana in the next few months,

which will eliminate the dependence on imported

finished products (noodles) from Nigeria.

Table 2: Capacity Utilisation (in Tons) as at March 2018

Product Installed capacity Production Utilisation (%)

Noodle 348,859 309,644 89

Packaging 9,045 9,045 100

Seasoning 29,918 19,415 65

Flour 126,279 126,279 100

Pasta 67,200 56,099 83

Oil 483,451 158,981 33

Snacks 14,410 13,001 90

Source: Management

The flour and packaging and sections are currently

operating at full capacity, while utilisation is very high

for noodles, pasta and snacks. While this reflects the

continued strong demand for Dufil’s offerings, it also

suggests that further expansionary projects will be

necessary to ensure earnings growth continues. It’s only

in oil that there is excess capacity, with the planned

expansion into this segment being hampered by delays in

acquiring suitable agricultural land (due to some issues

with the host community).

Shareholding and corporate governance

Dufil’s corporate governance framework is in

compliance with the relevant requirements of the

Companies and Allied Matters Act (“CAMA”) and

Securities and Exchange Commission (“SEC”). The size

and composition of the Board of Directors remained

unchanged over the last 12 months, with Company

affairs overseen by two executive directors and five non-

executive directors, including an independent director (a

Nigerian) and the Chairman. In compliance with good

governance principles, the activities of the board are

governed by a charter stipulating its responsibilities,

power and processes. The day to day running of the

company is delegated to the management team, led by

the managing director. The board is made up of seasoned

professionals with several years of experience in

Nigeria Corporate Analysis | Public Rating Page 3

different countries. Some of the directors also hold other

directorships in other international companies.

Table 3: Corporate governance summary

Description Findings

Directors 2 executive

5 non-executive, including an independent

director and the Chairman

Frequency of meetings At least once per annum

Separation of Chairman Yes

Board committee Executive Management, Audit Committee

Internal control and

compliance Yes, reports to the audit committee

External auditor Deloitte and Touche; an unqualified, clean

audit opinion was issued for FY17

Dufil is controlled by two major shareholders, Tolaram

and Salim Groups, each holding a 49% stake. The

remainder is held by a number of local investors.

However, GCR notes that American multinational food-

manufacturing company, Kellogg’s recently (in May,

2018) acquired around 50% stake in Tolaram Africa,

diversifying the ultimate shareholder base. Given the

larger shareholdings, Dufil enjoys strong parental

support.

Industry Overview

The combined impact of changing consumption

preferences, rapidly expanding population and increased

urbanisation have supported the robust growth displayed

in the packaged food sector of the economy over the last

decade. The sector has witnessed significant investments

(local and foreign), underlying the huge demand for a

variety of packaged food items. According to industry

sources, the sector, which is one of the fastest growing in

the economy, is currently worth around N1tn, with the

sustained growth resulting in a 9%2 contribution to Gross

Domestic Product in 2017. Key product categories,

include; dairy, baked goods, cereal, pasta and noodles,

and chilled foods, and it is expected to continue its

upward trend given growing preferences for packaged

foods among the youths.

The sustained upward growth trajectory in the Fast

Moving Consumer Goods (“FMCG”) segment, which

has defied the challenging economic environment, has

been largely attributed to efficient marketing and

distribution strategies by the players, innovation and

increased branding and packaging of offerings, and the

continued ban on the importation of certain food

products, which has encouraged the expansion of local

production. Nevertheless, benefits from local production

are partly moderated by the significant portion of most

raw materials being imported.

Notwithstanding the massive infrastructural deficit

(which serves as a drawback to accelerated growth), the

packaged food sub-sector remains highly competitive

with the major players implementing various strategies

to maintain market share amidst declining margins. Key

locally based companies, include; Dufil, Honeywell,

Flour Mills, WAMCO, Promasidor and Yale, while

major international companies are represented by

2Nigeria Bureau of Statistics

Cadburys, Nestle and Unilever. Other foreign owned

brands maintain their presence through alliances with

Nigerian companies to repackage and/or market their

products in the country, thus lowering the risk of market

entry.

Besides Dufil, other key players in the flour milling

industry include, Flour Mills of Nigeria Plc, Olam

group, Honeywell Flour, and Dangote Flour among

others. Notwithstanding increasing flour milling capacity

(now over 30,000 MT per day), buoyed by the growing

demand for flour based products like bread, pastry and

biscuits, wheat is mainly imported, given the poor

yields. However, in order to improve local yields and

wheat output, the Federal Government and some key

private establishments have invested in research

(through research institutes, universities and private seed

companies) towards developing quality seeds that are

resistant to both heat and flood, are high yielding, and

can mature early. This fits into the government’s

Agricultural Promotion Policy, which aims to half the

amount of wheat imported in 2018.

Furthermore, the CBN has also supported the sector by

providing low interest loans to farmers to encourage

investment in mechanised farming. Accordingly, market

experts anticipate continued concerted efforts to lead to

improved wheat production to around 2m MT by end of

2019.

Table 4: Key industry

Comparatives FY16 (N’m)

Dufil

Dec. 2017

Honeywell

Mar. 2017

FMN

Mar. 2017

Revenue 171,751.8 53,227.9 524,464.4

Op. profit 32,052.9 8,262.8 41,439.9

NPBT 23,166.5 5,469.8 10,472.8

Total Debt 65,274.5 47,468.9 241,605.1

Cash (5,465.2) (7,624.7) (45,018.5)

Net Debt 59,809.2 39,844.2 196,586.6

Equity 24,642.6 52,313.2 94,107.6

Key ratios (%):

Gross margin 29.9 23.9 12.7

Op. margin 18.7 15.5 7.9

Total debt: equity 264.9 90.7 256.7

Net debt: equity 242.7 76.2 208.9

Source: Audited Financials

Earnings diversification

Dufil has a diverse product portfolio, with most enjoying

widespread acceptance among various age groups. Its

product offering is centred on the food segment with

country-wide presence enabled by its relationship with

Multipro Consumer Products Limited (“MCPL”),

serving as the sole distributor Although this creates an

excessive reliance on a single party, Dufil does benefit

from MCPL’s extensive distribution network. Marketing

activities are handled directly by the head office, with

the Company expending a significant portion of turnover

on advertising and promotions that are aimed at growing

market share in the various product.

Dufil has maintained its leading position in the noodles’

segment of the food sector by increasing market

penetration, including acquisition of direct competitors.

According to management, Dufil currently accounts for

c.75% of market share in the noodles’ segment, with

Nigeria Corporate Analysis | Public Rating Page 4

indomie, minimie and the recently acquired Dangote

noodles further strengthening its competitive position.

Furthermore, the Company’s market share is likely to

expand further, as another competitor, mimee was

recently acquired (in May 2018), accounting for 2%

market share.

The noodles’ segment remains a major contributor to

sales and thus revenue. Although, revenue increased by

around one-third in FY17, overall contribution fell

below 70%, following higher contributions from other

product segments. The noodles’ segment has many

flavours, satisfying a diverse range of taste preferences,

thus enabling a rapid growth across demographic lines

and creating a somewhat inelastic demand to price

increases.

Table 5: Revenue

diversification

2015 2016 2017

N’m % N’m % N’m %

Noodles 64,751 62.3 87,767 72.7 117,242 68.3

Flour 6,303 6.1 5,806 4.8 6,878 4.0

Pasta 4,012 3.9 5,668 4.7 6,632 3.9

Packaging 998 1.0 1,662 1.4 1,269 0.7

Palm oil 26,406 25.4 16,971 14.1 31,872 18.6

Snacks 1,424 1.4 2,868 2.4 7,859 4.6

Total 103,894 100 120,741 100 171,752 100

Dufil also ranks as one of the fastest growing companies

in the cooking oil segment, accounting for around 15%

of market shares in the refined category. Lately, efforts

have being concentrated on growing other product

segments, with investments in palm oil plantations and

machinery for the packaging, snack and flour segments

expected to increase in capacity/utilisation over the

medium term, leading to higher revenue contributions.

Although, moderate increases in revenue were reported

in other segments, the overall contribution to revenue

remains small. Dufil continues to implement various

measures to ensure it remains competitive in the market.

Financial performance

A five-year financial synopsis is reflected at the end of

this report, and commentary follows hereafter. Dufil’s

financial statements were compiled in line with

International Financial Reporting Standards (“IFRS”), as

well as the requirements of CAMA and Financial

Reporting Council of Nigeria. The Auditors, Deloitte

and Touche issued unqualified opinions for each of the

five years of audited financial statements.

With the impact of price increment (on products) taken

at the end of 2016, having a full year effect in 2017 and

a combination of increased production capacities and

higher traded volumes, revenue spiked by 42% to a new

high of N171.8bn in FY17 (FY16: N120.7bn). This

equated to a robust five-year CAGR of 24%.

Notwithstanding the sluggish economic activity at the

start of 2017, the robust demand for Dufil’s products

reflected the inroads the Company has made in

expanding the noodle market and entrenching its brands.

Profit margins have remained robust through the review

period, as revenue growth has consistently outpaced

costs. This has been enabled by the benefits of

economies of scale, as well as backwards integration.

Despite fully absorbing a 36% rise in production costs

(largely reflecting the expansion of operations), the gross

margin still registered at a period high 29.9% in FY17

(FY16: 26.9%), almost double the industry average.

In line with the larger operations, consumptive spend

(mainly comprising marketing and administrative

expenses) rose by N5.7bn to N19.3bn. Nevertheless,

operating profit nearly doubled to a high N32.1bn, thus,

widening the operating margin to 18.7% (FY16: 15.7%).

Table 6: Income

statement (N'm) FY16 FY17

FY17

Forecast

%

achieved

Revenue 120,741.0 171,751.8 184,088.9 93.3

Gross Profit 32,467.5 51,362.7 52,714.3 97.4

EBITDA 21,546.7 34,747.3 35,186.1 98.8

Depreciation (2,599.3) (2,694.4) (2,744.4) 98.2

Op. Profit 18,947.4 32,052.9 32,441.7 98.8

Net interest (7,298.5) (9,699.7) (7,049.2) 137.6

Forex loss (4,084.5) (325.7) 0.0 n.a

Other 737.5 1,138.9 0.0 n.a

NPBT 8,301.9 23,166.5 25,392.5 91.2

Key ratios (%) Gross margin 26.9 29.9 28.6 -

EBITDA margin 17.8 20.2 19.1 -

Op. margin 15.7 18.7 17.6 -

Net int. cover (x) 2.6 3.3 4.6 -

The net finance charges rose by a further N2.4bn to

N9.7bn, underlying increased utilisation of debt facilities

for expansion and working capital requirements. At over

N6bn, the outflow emanates from interest payments on

overdrafts and import finance facilities, while interest

income (mainly earned off government grant) remained

negligible at N0.1bn. Notwithstanding this, the impact of

firmer operating income resulted in a higher net interest

cover of 3.3x (FY16: 2.6x), suggesting sufficient

capacity to effectively manage the rising debt profile.

Resulting from the relative Naira stability, the forex

losses on translation/restatement of year-end inventory

and loans was reduced to N0.3bn (FY16: N4.1bn). This

was offset by a N1.1bn receipt from the sale of scrap and

other miscellaneous income. Overall, Dufil reported

NPBT of N23.2bn in FY17, much higher than the

cumulative income reported between FY14-16. After

deducting a tax charge of N0.7bn (FY16: N0.2bn),

NPAT grew by almost 3x to N22.5bn.

Cash flows

In line with the increased scale of the Company, cash

generated by operations almost doubled in FY17,

reaching a period high N37.2bn. With the exception of

FY15, where a small release was reported, Dufil has

reported significant working capital absorptions in all

02468101214161820

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FY13 FY14 FY15 FY16 FY17

%N'm Figure 1: Revenue Vs Total Cost

Revenue Total costs Op. margin (RHS)

Nigeria Corporate Analysis | Public Rating Page 5

years under review, supporting the continuous increase

in production capacity. Since 2011, Dufil has

consistently commissioned new production facilities, or

expanded existing production lines in order to meet

rising demand for its products. As such, an increase in

plant capacity is usually met by higher production

volumes, correspondingly, this scenario also leads to an

increase in debtors, as the sales volumes rise.

Of the N13.4bn absorption reported in FY17 (FY16:

N14.7bn), a substantial N11.6bn derived from trade and

other receivables with the related parties - MCPL (the

sole distributor) accounted for around two-thirds of the

increase, while the remainder was owed by PT Indofood.

Although, Dufil provides a favourable 30-day payment

period to its debtors, the adverse operating environment

had affected MCPL’s capacity to make advanced

payments for goods supplied, leading to substantially

higher level of receivables, when compared to previous

years. This notwithstanding, management indicated that

the bulk of payments are received within the stipulated

timeframe. Similarly, inventory increased by N9.1bn,

reflecting a greater volume of raw material stock

required. Nevertheless, the actual inventory holding

period was reduced to one to two months, compared to

FY16, where the inadequacy of foreign exchange

necessitated holding raw material stock for longer

periods.

Table 7: Working Capital

Schedule (N'm) FY15 FY16 FY17

Accounts Receivable 2,474 (9,945) (11,621)

Inventory (2,686) (5,849) (9,098)

Accounts Payable 1,761 3,619 7,944

Other rec. and prepayments (470) (2,516) (1,295)

Other payables and accruals 293 (43) 620

Net Working Capital (NWC) 1,373 (14,734) (13,450)

Change in NWC (8,668) (13,361) 1,284

Partly moderating the absorption was a release from

creditors of N7.9bn, mainly comprising outstanding

payments to related parties (N5.5bn), with the remainder

comprising accruals (for adverts and promotions), and

some other statutory payments (VAT and WHT).

Typically, the head office is responsible for procurement

and then distributes stock to the various factories, based

on requisitions. Dufil generally enjoys four-five months

payment period on foreign transactions, while receiving

a 30-day term on most local purchases.

Notwithstanding the higher net interest and tax charges,

cash generated from operations registered at N11.8bn

(FY16: N3.6bn outflow). The robust inflow partly

enabled a significant N15.9bn to be paid out to

shareholders (as dividend), translating to a 50% pay-out

ratio on FY17 profit. The payment includes a N4.7bn3

dividend for FY16, while dividends of N7.5bn and

N3.7bn were paid for FY17. While the pay-out ratio has

been high (above 70%) in years of robust profitability,

the dividend payment in FY17 appears unsustainably

larger, particularly, as it completely depleted the

operating cashflow.

3A dividend of N4.73bn was approved by shareholders, however, this was not paid as a

result of the huge cash outflow from operations reported in FY16.

Additional capex amounted to N11.1bn, mainly related

to plant and machinery in the noodles and seasoning

division, as well as some construction work in progress,

land acquisition and improvement work in some

factories. Thus, while the robust cash generated was

sufficient to meet operational requirements, after paying

the large dividend, Dufil relied on additional borrowings

to finance a portion of working capital and the huge

capex. As such, net debt rose by N15.2bn during FY17.

Funding Profile

The continuous rise in the asset base has been largely

driven by the rapid expansion in production capacity

across the various product lines. Accordingly, Dufil’s

assets base has expanded to N111.2bn at FY17, from

just N45.6bn at FY13, before rising marginally to a high

N113.5bn at 1QFY18. The 38% growth reported at

FY17 was driven by increased working capital assets, as

production was ramped up to take advantage of the

increased capacity. As a result of this, short term assets

now comprise over 60% of the asset base. Of this,

Inventory rose to N35bn at FY17, representing around a

third of assets, while receivables increased to

N29.6bnAlthough, the cash balance edged higher to

N5.5bn at FY17, the bulk pertains to unspent

borrowings, as the dividend had wiped out the strong

cash generated from operation. Hence, cash is likely to

decrease as borrowings are deployed to capex and

working capital requirements during FY18.

Nevertheless, excluding unspent borrowings, cash

typically trends at nominal levels, in line with the

holding policy.

Although, a significant portion of annual earnings was

distributed, Shareholder’s equity grew by 36% to

N24.6bn at FY17, rising further to N29bn at 1QFY18,

underpinned by retained earnings. Short term liabilities,

including trade and other payables and income tax

payable amounted to N18.7bn at FY17 (17% of

funding). The relatively low level of short term liabilities

when compared to the rising working capital

requirements explains Dufil’s reliance on short term debt

to fund the liquidity gap.

Table 8: Funding

profile (N’m) FY16 FY17

2017

forecast

%

achieved

ST Debt 41,800.4 44,697.5 26,228.5 170.4

LT Debt 7,632.5 20,576.9 12,984.8 158.5

Total Debt 49,432.9 65,274.5 39,213.3 166.5

Cash (4,968.4) (5,465.2) (277.6) 1,968.4

Net Debt 44,464.5 59,809.2 38,935.6 153.6

Equity 18,103.9 24,642.6 36,742.8 67.1

Key ratios (%):

Total debt: equity 273.1 264.9 106.7 -

Net debt: equity 245.6 242.7 106.0 -

Total debt: EBITDA 229.4 187.9 111.4 -

Net debt: EBITDA 206.4 172.1 110.7 -

Dufil has placed significant reliance on a mix of debt

facilities to fund its various projects over the years. In

this regard, total debt rose rapidly from a period low

N28.9bn at FY13 to N65.3bn at FY17, before tapering to

N61.4bn at 1QFY18, as some maturing obligations were

settled. Short term debt comprised around 68% of total

Nigeria Corporate Analysis | Public Rating Page 6

debt at FY17, as import finance facilities and

commercial paper (amounting to a combined N36.3bn)

were utilised to fund operations. Most of the short term

credit facilities are renewable annually and are spread

across a number of financial institutions. Long term

funding has historically been provided by commercial

banks and the Bank of Industry. However, Dufil issued

an initial N10bn in Series 1 bonds in 3Q FY17, under its

N40bn Bond Issuance Programme. The notes have a

maturity of five years and bear interest at 18.25% per

annum.

Table 9: Loan type (N’m) FY16 FY17

Overdraft 4,462.4 4,065.1

Short Term loans 6,628.6 4,334.7

IFF and commercial papers 30,709.4 36,297.7

Term Loans 7,632.5 10,576.9

Bond 0.0 10,000.0

Total 49,432.9 65,274.5

*Debt registered at a lower N61.5bn at 1Q FY18.

Despite higher debt, the firmer growth in profitability

supported an improvement in gearing metrics, with gross

debt to equity ratio declining to 265% at FY17 (FY16:

273%), while net gearing reduced to 243% (FY16:

246%). Similarly, earnings based gearing were also

reduced, with gross and net debt to EBITDA declining to

188% and 172% respectively (FY16: 229% and 206%),

indicating further strengthening of the balance sheet

position of the Company.

Outlook and Forecasts

Dufil’s medium term growth strategy is based on the

ongoing expansion of production capacity, raising its

market share and the diversification into other product

segments. This should see volumes increase and the

Company benefit from economies of scale and other

efficiencies through backward integration. In this regard,

management projects a 23% growth in revenue to

N211.7bn in FY18, underpinned by higher contribution

from noodles, as traded volumes continue to increase.

Thereafter, revenue growth over the medium term is

expected to be moderate, but remain robust at 17%, as

production is ramped up to capacity, with a revenue

target of around N365bn by FY22. To achieve the

anticipated medium term growth, new production lines

are expected to become operational in the noodles and

seasoning segment, while the flour milling capacity will

be expanded to around 2,800MT per day.

Profitability margins are expected to widen, with the

operating margin trending towards 20% over the next

couple of years. Similarly, credit protection metrics are

projected to improve, with the higher interest coverage

ratios reflecting sustained improvement in earnings.

While revenue targets appear aggressive, given the

challenging economic environment, Dufil has displayed

sufficient capacity to attain set targets in the past.

Moreover, the economy appears to be strengthening,

with key economic metrics trending upwards, which will

naturally support volume and revenue growth

Revenue of N45.1bn at 1Q FY18 was in line with

budget, and registered an annualised 5% growth over

FY17. While margins remain robust, they registered

slightly behind budget, given some costs overruns,

associated with increased commodity prices and freight

charges at the start of 2018. As a consequence, net

interest cover declined to 2.7x (FY17: 3.3x). Overall,

NPBT of N3.8bn, represented only 14% of FY18

budget. Management has however indicated that more

stringent cost control measures are to be implemented,

while enhancing revenue generation drive to ensure the

target is attained by year end.

Dufil plans to raise additional funds from the capital

market, under the N40bn Programme. This would be

utilised to repay expensive short term loans and fund

expansion activities, thereby improving financial

flexibility, as long term loans are generally cheaper, and

repayments are spread over a longer period.

Nevertheless, total debt would remain elevated over the

next two years, reducing from FY20, as projects are

successfully bedded down. In this regard, gearing

metrics are expected to gradually reduce over the

medium term, as earnings rise and debt level reduces,

falling below 1.5x of equity from FY20.

Update on N10bn Series 1 Bond Issue

In FY17, Dufil registered a N40bn multi-year Bond

programme, followed by the successful issuance of

N10bn under Series I in August, 2017.

The N10bn Series 1 bond is a senior unsecured

obligation, and has a five-year tenor, with a fixed

18.25% annual interest rate. The legal maturity date is 1

September 2022. Interest on the bonds will accrue from

issue date and will be payable semi-annually in arrears in

March and September of every year, while the principal

will be settled through a bullet repayment upon maturity.

The net proceeds from the Bond Issue have been utilised

to repay some expensive short term debt and fund a part

of the expansion project. The first coupon payment of

N901.5m was made in March 2018, with the next

expected in September 2018, with full settlement

expected in 2022.

GCR has reviewed the trustees report (received from

ARM Trustees and Stanbic IBTC trustees), regarding the

performance of the bonds, dated 14 May, 2018. GCR

notes that the coupon payment was made to bondholders

in a timely fashion, it was also reported that there has

0

100

200

300

400

500

600

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

FY13 FY14 FY15 FY16 FY17

%N'm Figure 2- Gearing metrics

Total debt Net debtGross gearing (RHS) Net gearing (RHS)Net debt:EBITDA (RHS)

Nigeria Corporate Analysis | Public Rating Page 7

been no breach to covenants or pledges, and there have

been no changes to the security structure.

Meaning of the Rating of the Series 1

The ratings accorded to the Series 1 Bonds are public national

scale ratings. National scale credit ratings are an assessment of

credit quality relative to the rating of the lowest credit risk in a

country. This lowest risk will normally, although not always,

be accorded to financial commitments issued or guaranteed by

the relevant sovereign state.

The public ratings accorded to the Bonds relate to ultimate

payment of interest and principal (as opposed to timely, akin

to an expected loss rating, which is a function of probability of

default and loss severity). The ratings exclude an assessment

of the Issuer’s ability to pay any (early repayment) penalties.

Being senior unsecured debt, the Bonds reflect similar

recovery prospects to senior unsecured creditors in the event

of a default. As such, the Series 1 Bonds reflect the same long

term rating as that accorded to the Issuer. Should the rating of

the Issuer change, the ratings of the Series 1 will also change,

but not necessarily in the same quantum.

The suffix code identifies to which country the rating relates;

‘NG’ means Federal Republic of Nigeria. A Rating outlook

indicates the potential direction of a rating over the medium

term, typically a one or two year period.

Nigeria Corporate Analysis | Public Rating Page 8

Dufil Prima Foods PLC (Naira in Millions except as Noted)

IFRS

Statement of Comprehensive Income- 31 December

2013 2014 2015 2016 2017 1Q2018*

Turnover

67,965.4 89,717.7 103,893.9 120,741.0 171,751.8 45,075.9

EBITDA

8,953.8 16,285.5 8,012.2 21,546.7 34,747.3 6,866.1 Depreciation

(1,947.9) (2,276.9) (2,430.1) (2,599.3) (2,694.4) (800.6)

Operating income

7,005.9 14,008.6 5,582.1 18,947.4 32,052.9 6,065.5 Net finance charges

(1,898.4) (2,043.1) (4,457.2) (7,298.5) (9,699.7) (2,269.5)

Foreign exchange (loss)/gain 97.0 (1,772.2) (67.9) (4,084.5) (325.7) 0.0 Other operating income/(expense)

400.9 626.1 403.6 737.5 1,138.9 0.0

NPBT

5,605.2 10,738.1 1,460.6 8,301.9 23,166.5 3,796.0 Taxation paid

(300.6) 15.1 (115.3) (203.8) (695.8) (250.5)

Profit from continuing operations

5,304.7 10,753.2 1,345.4 8,098.1 22,470.7 3,545.5 Other comprehensive (loss)/gain

(16.6) (85.9) (123.9) (150.2) (0.2) 0.0

Interim dividend paid

0.0 0.0 0.0 0.0 0.0 0.0 Total Comprehensive Income 5,288.1 10,667.4 1,221.4 7,947.9 22,470.5 3,545.5

Statement of cash flows

Cash generated by operations

11,041.7 19,816.4 10,255.7 20,516.8 37,163.8 n.a Utilised to increase working capital

(3,143.3) (10,041.1) 1,373.0 (14,733.9) (13,449.7) n.a

Finance charges/interest paid

(1,898.4) (2,129.4) (4,550.7) (7,187.8) (9,622.3) n.a Taxation paid

(1,797.0) (2,142.2) (1,931.3) (2,239.7) (2,316.6) n.a

Cash flow from operations

4,203.0 5,503.7 5,146.8 (3,644.6) 11,775.1 n.a Maintenance capex‡

(1,947.9) (2,276.9) (2,430.1) (2,599.3) (2,694.4) n.a

Discretionary cash flow from operations

2,255.1 3,226.8 2,716.7 (6,243.9) 9,080.7 n.a Dividends paid

(4,254.6) (11,818.4) (67.5) (67.5) (15,937.9) n.a

Retained cash flow

(1,999.5) (8,591.6) 2,649.2 (6,311.5) (6,857.2) n.a Net expansionary capex

(1,263.9) (2,111.5) (632.2) 1,804.5 (8,358.3) n.a

Investments and other

(1.6) (16.7) 3.8 0.2 0.0 n.a Proceeds on sale of assets/investments

138.3 99.4 45.5 64.1 47.2 n.a

Shares issued

0.0 0.0 0.0 0.0 0.0 n.a Cash movement: (increase)/decrease

99.0 (753.6) (391.2) (3,707.0) (496.8) n.a

Borrowings: increase/(decrease)

3,027.8 11,374.0 (1,675.0) 8,149.8 15,665.1 n.a Net increase/(decrease) in debt

3,126.8 10,620.4 (2,066.2) 4,442.7 15,168.3 n.a

Statement of financial position

Ordinary shareholders interest

10,218.1 9,053.0 10,216.9 18,103.9 24,642.6 29,003.1 Outside shareholders interest

0.0 0.0 0.0 0.0 0.0 0.0

Pref shares and conv debentures

0.0 0.0 0.0 0.0 0.0 0.0 Total shareholders' interest

10,218.1 9,053.0 10,216.9 18,103.9 24,642.6 29,003.1

Current debt

18,903.1 33,443.8 35,286.6 41,800.4 44,697.5 40,647.0 Non-current debt

9,971.3 8,778.4 5,449.4 7,632.5 20,576.9 20,840.8

Total interest-bearing debt

28,874.3 42,222.3 40,735.9 49,432.9 65,274.5 61,487.8 Interest-free liabilities

6,507.1 7,702.6 9,162.0 12,786.3 21,250.9 22,981.3

Total liabilities

45,599.6 58,977.8 60,114.8 80,323.1 111,168.0 113,472.2 Property, Plant and Equipment

25,220.8 28,049.3 28,619.2 26,811.0 35,145.6 37,890.6

Investments and other non-current assets

1,247.4 724.7 190.8 219.6 175.0 0.0 Cash and cash equivalent

116.6 870.2 1,261.4 4,968.4 5,465.2 6,591.3

Other current assets

19,014.7 29,333.6 30,043.4 48,324.1 70,382.1 68,990.3 Total assets

45,599.6 58,977.8 60,114.8 80,323.1 111,168.0 113,472.2

Ratios

Cash flow: Operating cash flow : total debt (%)

14.6 13.0 12.6 neg 18.0 0.0

Discretionary cash flow : net debt (%)

7.8 7.8 6.9 neg 15.2 0.0 Profitability:

Turnover growth (%)

14.9 32.0 15.8 16.2 42.2 5.0 Gross margin (%) 24.4 27.6 17.3 26.9 29.9 n.a EBITDA : revenues (%)

13.2 18.2 7.7 17.8 20.2 15.2

Operating profit margin (%)

10.3 15.6 5.4 15.7 18.7 13.5 EBITDA : average total assets (%)

20.3 31.4 13.7 32.1 38.4 25.8

Return on equity (%)

54.7 111.6 14.0 57.2 105.1 52.9 Coverage:

Operating income : gross interest (x)

3.6 6.6 1.2 2.6 3.3 n.a Operating income : net interest (x)

3.7 6.9 1.3 2.6 3.3 2.7

Activity and liquidity:

Trading assets turnover (x)

5.0 4.9 4.6 4.4 4.3 7.7

Days receivable outstanding (days)

40.9 38.6 32.6 39.4 50.6 30.0 Current ratio (:1)

0.8 0.8 0.7 1.0 1.2 1.2

Capitalisation:

Net debt : equity (%)

281.4 456.8 386.4 245.6 242.7 189.3

Total debt : equity (%)

282.6 466.4 398.7 273.1 264.9 212.0 Net debt : EBITDA (%) 321.2 253.9 492.7 206.4 172.1 199.9 Total debt : EBITDA (%) 322.5 259.3 508.4 229.4 187.9 223.9

‡ Depreciation used as a proxy for maintenance capex expenditure *Unaudited numbers

Nigeria Corporate Analysis | Public Rating Page 9

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GCR affirms that a.) no part of the rating was influenced by any other business activities of the credit rating agency; b.) the rating was based solely on the merits of the rated entity, security or financial instrument being rated; c.) such rating was an independent evaluation of the risks and merits of the rated entity, security or financial instrument; and d.) the ratings expire in XXX/2019. Dufil Prima Foods PLC participated in the rating process via face-to-face management meetings, teleconferences and other written correspondence. Furthermore, the quality of information received was considered adequate and has been independently verified where possible. The credit ratings were contested by Dufil Prima Foods PLC, but the rating appeal was not successful. The information received from Dufil to accord the credit rating included;

2017 audited annual financial statements (plus four years of comparative numbers),

industry comparative data and regulatory framework

five year projections

a breakdown of facilities available and related counterparties.

information specific to the rated entity and/or industry was also received. The ratings above were solicited by, or on behalf of, the rated client, and therefore, GCR has been compensated for the provision of the ratings.

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