The Nigerian Stock Exchange (NSE) recorded its first listing this year, two weeks ago, with the listing of Notore Chemical Industries Plc, the first agro-allied and chemical company on the stock market. In this report, Capital Market Editor Taofik Salako examines the prospects of the Onne, Rivers State-based company.
Notore Chemical Industries (Notore) Plc early this month listed its entire paid up share capital on the Nigerian Stock Exchange (NSE), opening up the agro-allied company to the general investing public. This is coming 13 years after it was privatised by the Federal Government.
A total of 1.612 billion ordinary shares of Notore were listed at N62.50 per share under the agro-allied and chemical subsector of the NSE. Notore, formerly known as O-Secul Fertiliser Company Limited, was established in 2005 to acquire the core assets of the National Fertiliser Company of Nigeria (NAFCON).
With the listing, the NSE created a new agro-allied and chemical sub-sector to capture the broad range of activities under the Notore Group. Analysts regarded the listing as a major positive development for the stock market, which has continuously clamoured for the listing of major companies in key sectors of the economy.
Agriculture is Nigeria’s largest sector and the fulcrum of the government’s economic revitalisation programme.
NSE Chief Executive Officer, Mr Oscar Onyema, said the listing was a promising development in the agro-allied and petrochemical sector as it would encourage more local players to explore various opportunities in the capital markets for raising long-term capital.
According to him, increased participation of indigenous companies in the capital markets will increase investors’ confidence and entrench good corporate governance, transparency and sustainability in the sector.
Diversified business
portfolio
Notore, a vertically integrated agro-allied, chemical and power group based in Onne, Rivers State, has six subsidiaries, including Notore Supply & Trading Mauritius Limited, Notore Power Limited, Notore Seeds Limited, Notore Foods Limited and Notore Industrial City Limited. With its broad business portfolio, Notore appeared to be in a position to offer investors long-term value. The company is a leading producer of fertiliser products traded locally and exported to West Africa, Southern Africa and Europe. Given the efforts of the Federal Government to diversify the economy with much focus on agriculture, companies operating in the agro-allied space have huge headroom for growth.
Notore is a licensed independent power producer, which generates electricity for use in its fertiliser plant and residential estate, with excess capacity available for sale to nearby off-takers. The power plant has a total capacity of 50 megawatts (Mw) with own use requirements of between 8 Mw and 13 Mw.
Expanding the frontiers
The board and management of Notore saw the listing as a win-win scenario that brings benefits of the restructured company to the investing public while allowing it access to larger capital and corporate governance standards. Chairman, Notore Chemical Industries (Notore) Plc, Gen Yakubu Gowon (rtd), said the listing was a step in the right direction as this will make the company stronger.
According to him, the listing will provide an avenue for growth and provide liquidity for the business
“We can now continue to improve and expand upon our current activities, seek out other areas for growth and continue to impact the lives of the average farmer and farming family,” Gowon said.
Notore Chemical Industries (Notore) Plc Group Managing Director, Mr. Onajite Okoloko, said the listing would further support government’s effort to deepen the capital market while improving liquidity and tradability of the company’s shares.
He said the listing would increase visibility and credibility of the company in the market and beyond as well as provide access to capital that will fund the company’s future growth initiatives.
According to him, Notore’s strength lies in its huge potential to diversify its revenues due to its favourable location within a prolific gas hub and access to a jetty, which guarantees easy export of any products manufactured in the facility. Notore is the only urea producer in sub-Sahara Africa with control over gas supply and has vast distribution network in the local market. Notore produces 1,000 metric tonnes of urea fertiliser on a daily basis.
“Notore sells 75 per cent of its urea fertiliser locally and export 25 per cent to leading international traders such as Helm AG, Ameropa and Yara. Notore is a licensed independent power producer, which generates electricity for use in the fertiliser plant and residential estate with excess capacity available for sale to nearby offtakers,” Okoloko said.
He said Notore has secured approval for $37 million facility to fund its turnaround maintenance programme (TAM), including acquisition and installation of back-up power supply and critical plant spares.
The TAM is aimed at restoring the daily production capacity of the company to its 1,500 mtpd design production capacity. Notore is expected to have an incremental production of approximately 150,000mt annually over its current average annual production of 300,000mt. In the medium term; Notore will develop new compound fertiliser blends specifically for major growth crops, expand its seed business and develop a crop protection business.
“We will also leverage the company’s free zone developer status to develop the proposed industrial complex into a gas hub and an integrated logistics service provider to the oil and gas sector,” Okoloko said.
Okoloko added that dredging activities are expected to commerce on Notore’s privately owned jetty next year, increasing the jetty berth capacity from 15,000mt vessels to 25,000mt.
He assured that the company would continue with its strategy of creating substantial value and building a strong organisation that will support the agricultural sector through the availability of good quality inputs and trainings to the farmers.
Promising fundamentals
Notore’s turnover has grown from N21.285 billion in 2013 to N35.985 billion in 2017 while profit after tax rose from N1.694 billion in 2013 to N8.652 billion in 2017. The company recently released its nine-month results for the period ended June 30, 2018. It recorded revenue of N20.584 billion, down by 20.3 per cent compared with N25.834 billion recorded in the corresponding period of 2017. However, gross profit rose 14.2 per cent from N7.114 billion to N8.161 billion. This was driven by an exceptional item valued at N3.91 billion, which reduced the cost of sales. The exceptional item was in respect of the Export Expansion Grant confirmed receivable from the Federal Government of Nigeria on the cumulative export sales made by Notore between 2011 and 2016.
Cost of sales was well within control. Natural gas accounts for approximately 80 per cent of the cost of sales of urea fertilizer and Notore benefits from a 20-year fixed Gas Supply and Purchase Agreement priced at US$1.50/mmbtu, which was signed in March 2016. Notore also reported earnings before interest taxation, depreciation and amortisation (EBITDA) margin of 47.54 per cent, up from 39.04 per cent in 2017. According to the company, its EBITDA of N9.79 billion for the period under review, was 2.96 per cent lower, which was driven by a 34.02 per cent increase in operating expenses as a result of an increase in administrative expenses – partly due to increase in employee benefits during the period, as well as selling and distribution expenses to promote local sales during the off-planting season.
Net financing cost declined marginally by 1.21 per cent to N7.69 billion from N7.78 billion in 2017, while the company ended with a loss before tax of N3.94 billion, relative to loss of N3.45 billion in the corresponding period in 2017. However, Notore’s free cash flow increased by 15.05 per cent to N7.21 billion.
Okoloko said the company recorded N20.58 billion in revenue in the nine-month period due largely to sub-optimal capacity utilisation of the existing plant, noting that the company TAM, which is expected to be completed by the third quarter of 2019, will enable the plant produce urea at its nameplate capacity of 1,500 mtpd, significantly above the 53 per cent average capacity utilisation in the nine-month period to June 2018.
“We expect that the plant’s capacity utilisation will increase to a minimum of 90 per cent after the TAM, positively impacting revenue on a like-for-like basis,” Okoloko said.
Notore has extensive local and international distribution channels, which guarantee that the company sells all the fertiliser it produces. In addition to being the leading player in the fertiliser industry in Nigeria, and leveraging the inherent growth within agriculture, Notore’s key strength lies in its significant potential to significantly expand its operations and diversify its revenues due to its favourable location within a prolific gas hub and access to a jetty, which guarantees easy export of any products manufactured in the facility. The Brownfield status of the plant and available land mass creates expansion opportunities with reduced construction cost and risk.
Considering the fact that Nigerian fertiliser demand was robust and Notore was able to sell all that it produced locally during the nine-month period under review, the company undoubtedly has a bright outlook. This is bolstered by the fact that demand is expected to continue to grow because of the federal government’s agenda to use agriculture as one of the key sectors to diversify the economy.
The dynamics for the fertiliser industry remain quite favourable because with about 34 million hectares of arable land, Nigeria requires a minimum of seven million metric tonnes of NPK & urea fertiliser annually. Add to this the fast growing cash crop segment with a minimum 1.2 million MT annual demand of crop specialty blends locally. There is equally rising importation of fertiliser by neighbouring West African markets from Nigeria (estimated at approximately 500,000 MT yearly).
To ensure the sustainability of its revenue model, Notore has well-developed and structured commercial capabilities. These include fully automated field sales teams driving end-to-end demand generation and fulfilment across over 700 local government areas in Nigeria. In addition, about 40 redistribution vans traverse over 2,000 rural farming communities, building distribution footprints and enhancing faster farmer accessibility to Notore products.
Notore also leverages over 6,000 direct and indirect extension service staff embedded in rural farming communities driving farming awareness on modern best practice and inputs application to enhance fertiliser adoption. Other commercial capabilities that make Notore stand out comprise a network of 58 commercial farms and off-takers delivering 10-15 per cent of annual sales, as well as the effective collaboration with foremost non-government organisations, donor agencies and key government agencies and parastatals to improve economic conditions for smallholder farmers across the Nigeria.
These opportunities complement Notore’s key competitive advantages such as access to a reliable and abundant gas field just 14km away from its facilities, ownership of a dedicated private jetty with direct port status for exports and imports at its convenience, and reasonably controllable logistics cost. The company also has a Free Zone Developer Status with its attendant tax incentives specifically for export-oriented businesses.
With a good management and business strategy, Notore appears to be a company investors looking for significant future returns must not ignore. Most analysts see the company as a future stock, citing the impressive performance of the other major agricultural stocks- Presco and Okomu Oil Palm Plc, which had delivered more than 200 per cent returns in recent years. Usually investors in equities market search for stocks with good prospects and the potential to deliver significant returns on their investments. One of the ways to identify such stocks is the industry they operate and the capacity and ability of the company to deliver on all the financial parameters that will eventually lead to positive returns.