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CCNN Plc: A case for optimism…stay tactical!

• Limited Upside for CCNN without expansion. Over 2017, CCNN achieved a capacity utilization of 94%, suggesting little upside for volumes growth over the medium term. Asides volumes upside, the relatively low production capacity, has masked gains from economies of scale with CCNN consistently reporting the highest energy cost per tonne among peers due to its heavy reliance on LPFO – sourced from the epileptic Kaduna refinery. Noting the expected capacity max out in 2018 amidst still elevated energy costs (60% of total cash cost), the company’s operation in the medium to long term signals high sensitivity to price movements.
• Some Cause for Cheer as BUA comes to the rescue. Playing to the increasing cement consumption in the Northern region and to address the impending loss of market share as production capacity at the 500KT plant reaches its zenith, BUA Group (CCNN’s parent company) announced plans to increase production capacity by 1.5MT in 2015.
• Over most part of 2016 and 2017, update on the plant was not made available by BUA, however, our engagement with the management of BUA revealed that the plant would be commissioned in May 2018. The commissioning process of the plant has started, and the cement production is expected to start soonest.
• How will this play out? Given a total capex spend of N8 billion by CCNN between 2015 and 2017, compared to the estimated plant cost of $350 million (N126 billion), we believe the expenditure is being undertaken BUA. In accessing the possible structure on how the plant would be integrated into CCNN, we assumed three possible scenarios: (1) a debt related structure (finance lease); (2) contract manufacturing services (operating lease); and (3) consolidation of BUA cement plants into a single entity. In all, we believe the value accretion would vary depending on the structure and therefore analysed the impact of the possible arrangements on earnings.

Structure	FVE (N)	2018 EPS (N)	2018 PE (x)
Current Capacity	25.31	3.10	5.7
Expansion (Finance lease)	32.83	1.78	13.9
Expansion (Operating lease)	34.74	1.96	9.6
Expansion (Merger)	42.96	2.85	6.7

• CCNN vs. DANGCEM…who has competitive advantage in the north? From the look of things, CCNN and DANGCEM have a strategic roadmap of increasing its market share in the northern region as well as expanding its export base through Niger Republic. On this basis, we look at the factory location of both players to the major northern Market (Kano State), and to Niger Republic. Based on distance and cost of transportation, we think CCNN will play better in terms of competition.