Meristem Securities’ report on First Aluminum Nigeria PLC
Meristem Securities’ report on First Aluminum Nigeria PLC
Executive Summary & Investment Rationale
First Aluminium Nigeria Plc is an indigenous company that deals in the manufacture of aluminium coils, sheets, circles, and tubes (laminated and seamless plastic). Incorporated in 1960 as Alcan Aluminium of Nigeria Limited, the company later changed its name to First Aluminium Company (Nigeria) Plc in 1991. Subsequently, it secured quotation on The Nigerian Stock Exchange (NSE) in 1992. Its activities are driven by operations in 3 key Strategic Business Units (SBUs), namely; Rolling Mill, Aluminium City and Packaging with Aluminium City Limited existing as a full-fledged subsidiary. The Group’s annual sales averaged N7.12bn (US$60.34mn) over the past 5 years with its market capitalisation currently standing at N7.45bn (US$63.1mn).
The company has been bedeviled by a cluster of internal operational challenges such as the dearth of skilled manpower, excessively high operating and financial leverages, as well as other major externalities ranging from bureaucratic bottlenecks, unfavourable government policies, social, environmental and economic factors which seem deadlier than internal hitches.
Our analysis of the company’s historical performance from 2002 to till date suggests imperative need for financial re-engineering and capital restructuring as the company’s debt capital outweighs its equity funding by over 7 times, hence its excessively high annual financial leverage. This we believe is very critical to mitigate some of the operational challenges being faced by the Company.
Aside internal challenges, threats to the company’s recovery and fortunes include harsh government regulations and bureaucratic bottlenecks as well as high dependency on gas supply. In addition, insecurity in the Niger-Delta due to youth restiveness and incessant violent crimes remains a strong environmental factor to contend with. Therefore, efforts of the Federal Government to douse tension in the region and contain activities of militants will definitely mean well for the Company and Nigeria as a nation.
Also of prominence are foreign exchange risk and uncompetitive pricing regime that reigns in the industry due to cheap imports from China and loss of market as a result thereof. Similarly, the uncompetitive tariff rates on imported aluminium products (plain coil) and the unavailability of local raw material make local production unattractive and less profitable. However, it is hoped that the rejuvenation of hitherto moribund Aluminium Smelters Company of Nigeria (ALSCON) will provide succour for all local aluminium products Companies in Nigeria.
Our valuation reveals that First Aluminium is currently trading at 70.3 percent discount to its fair value. We applied both relative multiples and discounted free cash flow valuation metrics with a volatility index of 0.32, risk-free rate of 10.75 percent and weighted average cost of capital of 18.3 percent. Our weighted price for First Aluminium is N10.75k. We therefore recommend the stock for a medium to long term investors.
The Nigerian Industrial Sector: A Diagnosis
The proposition espousing the transition from agrarian to service delivery in the developmental path of every economy remains a maxim to be justified in the context of the Nigerian experience. Industrial development, propped up by complex production lines, Research & Development and product innovations, is a notable phase that heralds the birth of sophisticated service sector. In the Nigerian case, a comparative analysis of these phases of development revealed a “jump” which explains the critical state of the country’s industrial sector. At present the sector contributes only 10percent to Gross Domestic Product (GDP) and operates only around 30percent capacity utilization. Despite the prevailing operational challenges, the sector remains very attractive for both foreign and local investors. This is premised on large domestic market (unarguably the largest in Africa), rich mineral and other resources as well as unutilized, cheap and abundant labour. These, coupled with the government renewed interest to reinvigorate the sector toward the achievement of vision 2020, are likely factors for the increase in the influx of foreign investments in the industrial sector. This sector raked 41.1percent of cumulative foreign private investment in Nigeria as at 2005.
Growth Prospects and Opportunities
Compared to other emerging economies, the per capita consumption of aluminium in Nigeria is ridiculously low which provides enormous upside potential for the industry as the economy grows. Indian, for instance, has a per capita consumption that is 300 percent of the consumption level in Nigeria while Brazil consumes as high as 1500 percent!
Furthermore, the upstream end of the sector is yet to reach its full potential. The moribund state of ALSCON, which was meant to produce 193,000 metric tonnes of aluminium ingots and billets, added to the challenges of the sector. However, recent development occasioned by injection of N18bn (approx. US$150mn) by UC Rusal, a Russia-based aluminium producing giant,into ALSCON, might well be the required impetus to set the sector free of its low developmental pace. The odds are high in favour of a functional ALSCON as UC Rusal has 77.5 percent stake in the company. At present, ALSCON has commenced the exportation of locally produced aluminium ingot while the local demand is expected to be filled. This development presents a bright prospect for aluminium ingot-dependent companies.
It is expected that the fresh funds from UC Rusal, and other stakeholders, Ferrostaal AG (7.5 percent) and the Federal Government (15 percent), will in the next three years facilitate the growth process in the industry.
With its first-rate technology and expertise, UC Rusal is charged with herculean tasks of ensuring that ALSCON products are highly competitive and transforming the smelter into a key driver behind the development of the Nigerian economy. Experts say the acquisition of ALSCON through the privatisation was part of the Federal Government’s strategy to boost aluminum production in the country and sub-region as well as strengthen the Company’s position in the industry.
First Aluminium Group: Background Information
First Aluminium Nigeria Plc was incorporated in Nigeria on August 20, 1960 as Alcan Aluminium of Nigeria Limited, a subsidiary of Alcan- Aluminium Company of Canada, one of the leading global Aluminium Companies. The Company changed its name to First Aluminium Company (Nigeria) Limited when it became a subsidiary of Alucon Holdings S.A., a wholly owned subsidiary of Inlaks Group, based in Monte Carlo, Monaco . The Company later changed its name to First Aluminium Company (Nigeria) Plc in 1991. Its core investor/majority shareholder- Alucon Holdings S.A owns about 64 percent of the Company’s issued share capital of N621.11mn (approx. US$5.26mn) .
Business Model
First Aluminium Group is made up of three strategic divisions one of which was incorporated in 1995 as a wholly owned subsidiary- Aluminium City Limited. Over 70 percent of the Company’s sales revenue is accounted for by its Rolling Mill division while the other strategic business units share the remaining 30 percent. The group maintains a technical assistance and know-how agreement with its core investor- Alucon Holdings SA, and commits 3 percent of its annual turnover after appropriate withholding tax to service the agreement. The Rolling Mill is a manufacturer of rolled aluminium products such as coils and circles. The packaging division with a total capacity of 120 million tubes per year manufactures collapsible aluminium, plastic laminate and seamless plastic tubes for the Nigerian and West African Markets. These materials are used for the packaging of toothpaste, cosmetic products, pharmaceutical products, industrial products and food products. On the other hand, Aluminium City specialises in supply of all types of aluminium products, manufacturing and installation of aluminium windows and doors, aluminium roofings and high quality office interiors. It is a popular brand in the marketplace.
Strategic Updates and Future Plans
First Aluminium Group added another coil coating line in 2007 to its Rolling Mill business division with a view to growing sales revenue vis-à-vis market share in response to the boom in the construction industry. Later same year, the management reviewed its strategic business focus in favour of its core operations- fabrication and installation of sheeting and roofs- for which it has competitive edge and expertise. In addition, construction is already under way at the Port Harcourt factory for a second coil coating line which will enable Rolling Mill to further grow its renowned Colortek brand. The Company also established a new division named First Engineering Procurement Service (FEPS) with the sole responsibility of proffering engineering solutions and procuring engineering equipment for Oil, Gas and Industrial companies in the country. Efforts are being made by Aluminium City to expand its sheet and roofing business in the Northern region of Nigeria as well as focus more on the existing markets in Lagos and Port Harcourt axes.
By and large, management has expressed strong desires to further consolidate on its turn around maintenance (TAM) efforts to return the Company back to the path of profitability in 2008 and beyond. Management hopes are hinged on the success of the rejuvenation of the ALSCON, as well as its own internal recovery strategies put in place to substantially jerk up its installed capacity especially at its Rolling Mills business unit. Apparently to pacify and excite its shareholders, the Company is making another key strategic move to buffer its working capital via fresh equity injection through rights issue of about N3bn (approx.US$25mn).Supposedly, this will also reduce its huge financial leverage and subsequently impact on its profitability to equity holders.
Highlights of Management Performance
Liquidity and Efficiency
Historically, First Aluminium has not matched its current assets with increases in short term debt obligations. Over the past five years, current ratio, though relatively stable, has averaged 0.98 far below the theoretical benchmark of 2. A closer look at the balance sheet reveals that the Company has not been investing remarkably on assets and taking more short term financing from outside. Year-on-year (y-o-y), assets have gone mildly up just as the liabilities.
Tags: companyanalysis
Market Analysis, News, business, financial advice | 
donne4real | June 1, 2008