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Cement Company of Northern Nigeria Plc Q2 17 - Moving beyond recovery to growth

• ​Cement Company of Northern Nigeria Plc (CCNN) is expected to benefit from a ramp-up in plant size by FY 2018 based on ongoing capacity expansion from 500kT to 1.5MT per annum. Furthermore, the company’s plan to diversify its energy mix to include coal suggests substantial moderation in cost pressures in the coming years. Consequently, the stock outperformed its peers (CCNN: +96.8% YTD, Cement Sector: +39.6% YTD) as sector-wide price increases (Lafarge: +81% YoY, DANGCEM: +75% YoY) was supported by expectations of capacity expansion over H1. Largely reflecting pass-through from the former, the company reported an over 43% and 23% YoY surge in revenue and PAT to N4.2 billion and N515 million. Although the benefits from pricing failed to cascade to margin recovery in Q2 17, optimism continued to run high as market looked beyond current earnings to capacity-led growth in coming years.

• Energy concerns subsisted in Q2 17: On the revenue front, CCNN reported a 43% YoY increase in revenue, outperforming its peers by 9pps and supporting our often-stated view that the North West market is relatively less price sensitive. By our estimates, CCNN’s volume dropped 21% YoY to ~86KT in Q2 17. However, the company was unable to achieve energy efficiency in the period with its input cost rising 51% YoY to N2.8 billion (+1.6% QoQ) despite lower output. Consequently, related margin came in 3.5pps lower YoY even after an over 29% jump in gross profits to N1.4 billion.

• Capacity expansion to bloat post 2017 earnings: Going forward, we see scope for further top-line gains from currently elevated prices which should drive FY 17 revenue higher to N16.4 billion (+17 YoY), despite decline expected declines in volume. On the cost front though, we see scope for near term pressures with operations in the Kaduna refinery only gradually recovering. This informs our projection for a 4% YoY increase in cost to N10.6 billion by YE 2017. Farther out however, the company’s plan to expand capacity and diversify its energy mix to include coal suggest substantial moderation in cost pressures in the coming years (cost to sales over forecast horizon: 62.5%). Leaving other cost assumptions unchanged, we project 2017E PAT at N1.8 billion with expected EPS at N1.45 and DPS at 29 kobo by the end of the year.

• ​Overall, net impact of our adjustments drove our FVE 77% higher to N8.19 with 2017E P/E at 6.2x (vs. 12.7x for Bloomberg EMEA peers)—a discount we believe is still justified by the company’s small size in a universe of relatively bigger cement companies. Due to the recent strong rally in the company’s share price, our FVE is at a 24% discount to current market price of N10.84, which implies a SELL recommendation by our rating system.

• See attached for full report