BAGCO Initial public offer

[Apache]

Hi guys,
The Bagco IPO is coming out soon and i think it looks promising though i am still awaiting the prospectus.

Find below an excerpt from the vanguard the proshare site on the proposed offer. What do you think?

The Initial Public Offer (IPO) of Nigerian Bag Manufacturing Company Plc (BAGCO) is to commence November 7, 2007. The company is offering to the public 1.87 billion ordinary shares of 50 kobo each at N3.90 per share. This was after its shareholders approved its decision to raise the funds through the capital market. The offer which is scheduled to close on 14th of December 2007, is 80 per cent underwritten on a firm basis by Zenith Bank Plc.
The offer, according to the offer document, is undertaken to give investors opportunity to become part owners of the company which is currently a wholly owned subsidiary of Flour Mills of Nigeria Plc. After the conclusion of offer, Flour Mills 100 per cent holdings will be reduced to 70 per cent while the remaining 30 per cent will belong to investors in the IPO.
The Managing Director of the company, MR. Peter Soutar Low, disclosed that the proceeds of the offer would be utilised to settle current deposits which it incurred in the process of the making the company an efficient manufacturer of different types of bags.
He said, “The estimated net proceeds of the offer of N6.95 billion after deducting the cost of the offer, estimated at N320.76 million will be utilised in the repayment of loans valued at N6.26 billion, representing 90 per cent of the offer proceeds, while N695.27 million representing 10 per cent would be used as working capital, in addition to the fact that it will make it possible for the company to meet the requirements for listing on the Nigerian Stock Exchange (NSE).
It forecasts a turnover of N12.46 billion, N15.45 billion and N17.15 billion for years 2008, 2009 and 2010 respectively and a profit after tax of N1.07 billion, N1.67 billion and N1.89 billion respectively.
It promises to pay its shareholders a dividend of 17 kobo per share in the 2008 and 2009 financial year while they will be enjoying a dividend of 18 kobo per share in 2010.
It disclosed that with the coming on stream of United Cement Company of Nigeria Limited (UNICEM) in 2008, its bottom line will be boosted considerably, as it is the supplier of first choice to the company. “In addition to its existing markets, Bagco is supplier of first choice to UNICEM which is due to come on stream in 2008 and it is ready to take advantage of this.
It is generally accepted that Nigeria’s appetite for cement will continue to grow strongly for the foreseeable future. In conjunction with its dominance of its core market, it is embarking on other areas of packaging. Bagco Morpack will produce high quality film packaging for the consumer products industry,” The prospectus noted

[hispy99]

Originally Posted by Apache

Hi guys,
The Bagco IPO is coming out soon and i think it looks promising though i am still awaiting the prospectus.

Find below an excerpt from the vanguard the proshare site on the proposed offer. What do you think?

The Initial Public Offer (IPO) of Nigerian Bag Manufacturing Company Plc (BAGCO) is to commence November 7, 2007. The company is offering to the public 1.87 billion ordinary shares of 50 kobo each at N3.90 per share. This was after its shareholders approved its decision to raise the funds through the capital market. The offer which is scheduled to close on 14th of December 2007, is 80 per cent underwritten on a firm basis by Zenith Bank Plc.
The offer, according to the offer document, is undertaken to give investors opportunity to become part owners of the company which is currently a wholly owned subsidiary of Flour Mills of Nigeria Plc. After the conclusion of offer, Flour Mills 100 per cent holdings will be reduced to 70 per cent while the remaining 30 per cent will belong to investors in the IPO.
The Managing Director of the company, MR. Peter Soutar Low, disclosed that the proceeds of the offer would be utilised to settle current deposits which it incurred in the process of the making the company an efficient manufacturer of different types of bags.
He said, “The estimated net proceeds of the offer of N6.95 billion after deducting the cost of the offer, estimated at N320.76 million will be utilised in the repayment of loans valued at N6.26 billion, representing 90 per cent of the offer proceeds, while N695.27 million representing 10 per cent would be used as working capital, in addition to the fact that it will make it possible for the company to meet the requirements for listing on the Nigerian Stock Exchange (NSE).
It forecasts a turnover of N12.46 billion, N15.45 billion and N17.15 billion for years 2008, 2009 and 2010 respectively and a profit after tax of N1.07 billion, N1.67 billion and N1.89 billion respectively.
It promises to pay its shareholders a dividend of 17 kobo per share in the 2008 and 2009 financial year while they will be enjoying a dividend of 18 kobo per share in 2010.
It disclosed that with the coming on stream of United Cement Company of Nigeria Limited (UNICEM) in 2008, its bottom line will be boosted considerably, as it is the supplier of first choice to the company. “In addition to its existing markets, Bagco is supplier of first choice to UNICEM which is due to come on stream in 2008 and it is ready to take advantage of this.
It is generally accepted that Nigeria’s appetite for cement will continue to grow strongly for the foreseeable future. In conjunction with its dominance of its core market, it is embarking on other areas of packaging. Bagco Morpack will produce high quality film packaging for the consumer products industry,” The prospectus noted

Might not be as promising as it sounds. A majority of the funds is going to be used to pay down debt (which is about N6 billion if my memory serves me correct). I also think that the PE is going to be about 22x.

[Murphy]

Hello guys! anyone with a soft copy of the prospectus can pls share with the forum.
Many thanks

[Apache]

hi Guys,

find attached the abridged prospectus for the Bagco offer.

can the guru's digest this and give us some analysis please

[pumping]

Originally Posted by Apache

hi Guys,

find attached the abridged prospectus for the Bagco offer.

can the guru's digest this and give us some analysis please

Main Points

- 90% of the proceeds is to pay off loans so no expectation of major expansion..
- Current PE is around 18 which is not so great.
- Projected PE for 2008 is 22 and then 14 and 13 in 2009 and 2010 respectively.

** If you are into long term investments this may be appealing.

I think this is being offered at a premium and the fact that the proceeds are to pay off loans is not encouraging.

I will let this one pass.

[ojobello]

Pumping,
From the prospectus, Bagco Group have over the last three years invested N10 billion in the establishment of 2 state of the art polypropylene packaging manufacturing facilities – Bagco in Lagos and Bagco North in Kano. For plants of this capacity, it makes sense that they started a few years ago. One of the plants is due to commence production in 2008. Based on this, I think the N6billion+ they are repaying can be rightly construed as meant for expansion because that is what it is. I will be concerned if they are raising this money now to start building the plants because it would take a few more years before we start to see the effects of the expansion.

Note also that there seems to be a strong barrier to market entry because of patent to the technology for producing these bags today. That is like a monopoly. There can never be a shortage for bags because of exisiting markets in cement, construction and commodities industries including the potential demands by Eleme Petrochemical Company.

I think its a good buy especially if you are thinking of long term.

[Dark Knight]

Guys sack packaging is very profitable now.it seems demand passes supply.and remember that dangote sack company accounts for a large chunk of the revenue in his dangote flour mills.and i feel its the same for flour mills of nigeria.im sure it will pay off in the mid to long term

[RethinK2.0]

my bone of contention is "In what way is bagco better than the other offers in the market?"
Its more expensive than 90% of the offers i have seen recently. (i cannot even remember a more expensive offer except maybe int'l breweries)

[dotunk]

if 90% of the funds are going to be used to pay debt then for short term and some medium term investors, this may not be good. but for the long term it will be good.

...manufacturing is the bomb.

[pumping]

Originally Posted by Dark Knight

Guys sack packaging is very profitable now.it seems demand passes supply.and remember that dangote sack company accounts for a large chunk of the revenue in his dangote flour mills.and i feel its the same for flour mills of nigeria.im sure it will pay off in the mid to long term

It may be profitable but from the prospectus, by the time the profit is shared, for now, it is not enough.

[prince22]

Someone to enlighting us about when we are receiving Certificate for FBN & Access bank PO

[windywendy]

Did anyone notice the dividend per share for 2008? I don't understand what has been done there. Are they going to do a 100% payout? The calculation isn't even based on the 6bill plus shares that'll be in issue. Or are they saying that investors in the IPO won't benefit from dividend payments in 2008? Did anyone also notice the 10 for 1 bonus given just before the IPO Amazing! Pls go for Ikeja hotels instead. I'm not that impressed with this IPO -- don't know where anyone got the idea that this is a money spinner

[tonyjon]

So what you guys are saying in essence is that Bagco offer is not a good offer Chikana.

Peace.

[squido]

are u guys tryin to say bagco shres are not tit?

[Apache]

These Bagco guys are not serious. It clearly shows from the forecast that investors won't be entitled to the 2008 didvdend as it is based on the 4.3 billion shares in issue before the IPO.
These guys are just crazy. There reason for this is that they won't get the proceeds before Jan 2008 meanwhile their year end is December. say they get it by Feb 08, won't they utilise it in 2008?

@Squido
We are not saying that Bagco is not a good buy rather we are saying it is not attractive enough. For those that can wait till 2009 for 17k, then no problem.
At least, it is better than Transcorp

[Avocado]

VALUATION
We employed a number of valuation metrics in order to arrive at a
fair value for BAGCO. The valuation methods we used are:
Maintainable Earnings Valuation , Discounted Future Earnings
Valuation , Discounted Free Cash Flow Valuation , Price to
Sales Valuation and Price to Book Value Valution.

General Assumption Underlying the Valuation Methods.
• In our valuation, we used the three-year forecast of
BAGCO for the years ending 2008, 2009 and 2010. We
also used its five (5)-year historical PATs for the years
ended 2003, 2004, 2005, 2006 and 2007.

• We applied the inflation rate, as recorded by the National
Bureau of Statistics (NBS) as at March of each of the
respective years on the 5-year historical earnings in order
to bring the earnings to current values. We used 18.08% as
the discount rate. We arrived at the discount rate for
BAGCO by adding 2.3595%(which is 15% of the cost of
equity of NAMPAK).The premim we added is necessary
because BAGCO is a private company. In arriving at the
discount rate for NAMPAK we used a risk free rate of
9.25% which is the coupon rate on 7-year Federal
Government Nigeria (FGN) bond issued in the month of
Setptember 2007. We used a beta value of 0.81 derived
from the 5-year historical share price and we used a risk
premium of 8%.

We used the P/E ratio of the NAMPAK which is
16.72x as at November 15, 2007 to capitalise the
earnings. Also we discounted the P/E ratio by
15% to arrive at 14.21% because BAGCO was a
private company. We used a terminal growth rate
of 15%.

• We used price to book value multiples and price
to sales multiples of 1.71x and 0.93x respectively.
That is, the average of the comparables:
NAMPAK and Beta Glass.

• We used 2,750,000,000 Ordinary Share, which
include the bonus of 10 new shares for every 1
share which was approved at the extra-ordinary
general meeting held on September 12, 2007 to
value the historical performace and 6,215,000,000
shares expected to be in issue after the
completion of the ongoing Offer.

The result of the various valuation methods are presented
on the table below. Taking the simple average of all the
valuation methods, we arrive at N4.52 per ordinary share
of 50k each which is our final intrisic value (fair value) of
BAGCO. The Offer price of N3.90 is at 15.90% discount
to the fair value. Comparing the fair value with the forecast
earnings per share of the company for 2008, 2009 and 2010
generate P/E ratios of 22.94, 16.19x and 14.57x
respectively.
.

Final recommendation: BUY

Source: excerpt from FSDH Executive Summary on BAGCO.