Babban Gona Farmer Services Nigeria Limited top line declined by an annualised 18.9% in the nine-month period to June 2024 (Q3 2024) due to the temporary reduction in the area cultivated during the preceding farming season.
GCR ratings expect the decline to be sustained for the full year but project a return to growth in financial 2025 as more farmers are on boarded. On the other hand, earnings remained solid during Q3 2024, primarily driven by a nearly 2x increase in commodity prices and the trade-related grant income.
Therefore, EBITDA doubled to NGN8.5Bn (USD15.6 million) at a margin of 16% in financial 2023 (2022: 15%), compared to a review period average of 12.9%.
Analysts expect some moderation in maize prices in the outlook period, but it should remain well above the 2023 level. A reduction could be influenced by a number of factors including projected increase in local supplies or a fall in global commodity prices.
During the financial year to 30 September 2023 (financial 2023), Babban Gona began to implement a plan to transition high performing farmer members to a franchise model.
It has identified over 300 existing operators each of whom will oversee the activities of up to 100 farmers to be added to the Babban Gona scheme.
The experienced operators will provide support for the new farmers they support, as well as raise funding independently of Babban Gona, albeit with ongoing support from the company.
Through this model, Babban Gona anticipates adding about 30,000 smallholder farmers over the next 18 months (financial 2024: 42,000), with a proportionate increase in the hectares cultivated and revenue generated.
However, to ensure it has the necessary operating infrastructure, the company temporarily scaled down on its farming operations in financial 2024.
Leverage remains weak, attributable to the low interest coverage and generally negative operating cash flows. Although Babban Gona benefits from comparably low-priced debt and substantial interest income on foreign currency deposits, interest coverage contracted to a low 2.2x in financial 2023 due to a rise in debt and a spike in bank lending rates.
Furthermore, Babban Gona has successfully converted all previously cash-backed loans to unsecured credits in line with CBN requirements.
Babban Gona maintains a robust liquidity position given the strong foreign currency cash holding of NGN52Bn as of June 2024 relative to scheduled debt repayment and modest capital investment plans.
In addition, the company has committed credit facilities of about NGN18.4Bn (USD11.5 million), which it intends to utilise to repay maturing debt. The liquidity sources versus uses coverage is therefore estimated at 2.3x over the 15-month period to 30 September 2025.
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