EUR 4.00 For Business Accounts Only

CCNN Plc - Expanding volumes, any upside for gross margin?

• In our last report on the enlarged Cement Company of Northern Nigeria Plc (CCNN) following the release of its Q1 2019 result (See report: ), we noted that despite the strong volume growth and the expanding market share in the North, the pass through to earnings per share remain clouded. While we see increasing volume growth on the horizon, with our forecast average capacity utilization of 88% and domestic market share of 5.6% by FY 2023 (excluding the additional capacity 3 million tons as guided by management) from 3.1% in 2018, we believe a lot more efficiency needs to be achieved on the new plant as regards energy cost for the top line growth to have a meaningful impact on shareholders given the sizeable dilution that accompanied the merger.
• However, reflecting our upbeat expectation on volumes and the recent N3,000 per tonne increase by the sector leader, we expect better margins in the coming quarters. Further into our forecast horizon, we see increased efficiency on the new plant translating to improvement in margins with average estimate of 48% (Prior estimate: 43%). Irrespective, we note that when compared to DANGCEM (58%), our modelled CCNN’s gross profit margin is much lower. During our discussion with management of BUA/CCNN in the past week, they guided to a dedicated approach to scale up efficiency on the new plant to achieve a more telling impact on EPS. Particularly, they guided to reducing the cost of transporting coal from Kogi, which is approximately 50% of the actual cost of the coal.
• While we maintain our view on the trajectory of margin over our forecast horizon, we delineate a scenario on how targeted approach to reducing energy cost (which currently accounts for 54% of total production costs) could translate to improved earnings to shareholder. We ruled out any significant increase in price ahead of the market leader, given that price remain the major competitive play for CCNN in the North.
• Overall, we estimate PBT of N19.9 billion, while based on a slightly slower effective tax rate of 24% (2018: 25%), PAT should print at N15.1 billion. This translates to EPS of N1.21 in 2019 compared to N0.44 in 2018, while we estimate dividend per share of N0.98 in 2019 (2018: N0.44) based a pay-out ratio of 85% (2018: 92%). That said, we note that possible upside for earnings lies in CCNN obtaining the approval for pioneer tax status from NIPC (which is currently ongoing) by the end of the year, as proposed by management. However, given the uncertainties surrounding pioneer tax applications (like it did in DANGCEM), we await further assurances before incorporating this to our model. 
• The above adjustments raised our FVE to N22.87 (previous estimate of N17.31) which translates to BUY on our rating. However, on a relative basis, we note that despite the increased FY 19E EPS, the stock is trading at a premium when compared to our FY 19 P/E of 19.9x when compared to DANGCEM of 15.96x.

See attached for full report.

 

2019E-2023E