Initial View - CCNN Plc Q3 19 - Border closure muddies 9M 2019 earnings
- CCNN released Q3 19 results after close of trading on Friday showing EPS of N0.11, which is a miss from our forecast of N0.21. The deviation from our estimates stemmed from lower than expected sales recorded in the quarter, which came in 26% below our forecast at N10.4 billion. Management alluded the lower sales to limited export sales due to the border closure, which further espoused the impact of the historically raining season in Q3.
- For context, while no data is available on export sales so far this year, the proportion of total sale is likely to exceed the 9% posted in FY 18, given the new capacities which came on board at the start of the year. Cement volume came in below the belt at 239,243 tons in the quarter, which translates to a utilization rate of only 48% (vs. Forecast of 68%) – the lowest CCNN has posted on record. Interestingly, revenue per ton printed 2% higher QoQ but was obviously insufficient to make up for the lost volumes.
- On cost, COGS per ton printed 9% ahead of our forecast and 13% higher QoQ at N26,231. Energy cost per ton (57% of COGS) eased from the elevated levels in Q2 to N13,938, far ahead of Q1 19 level of N12,151. The sticky energy prices fail to reflect impact of the cheaper coal fuel used in the new plant, as it prints above the 3-year average of N13,770 (ex-irregular 2018), when LPFO (2.8x gas price vs. coal: 0.7x of gas) was the sole fuel source. We will seek clarity on reason for the elevated prices, but we suspect this could be due to high transportation cost of coal which was highlighted during our last meeting with management. As a result, gross margin contracted 3ppts YoY to 40%. On the other hand, Opex to sales printed 6ppts higher than similar period last year at 20%, reflecting impact of the lower sales. As a result, EBIT margin dropped 9ppts YoY to 20% in the quarter.
- Overall, we found the Q3 result disappointing, smeared by impact of the border closure and heavy rainfalls. CCNN’s current P/E prints at 10.5x, a premium to domestic peer average of 9.6x. That said, CCNN still holds potential to maximise the capacities of its new plant and its cement leadership in the North, albeit downtrodden by impact of the border closure. Our FVE on CCNN prints at N20.14 which is a premium to current market price of N15 and translates to a BUY rating.
ARM Securities Limited is a full-service brokerage house that offers best-in-class brokerage services to local as well as foreign private and institutional investors. Formerly known as Hamilton Hammer, the Company commenced operation in 1994 and was acquired by ARM Investment Managers in 2008--an acquisition which has successfully re-positioned the company as a recognized brokerage firm in Nigeria. The Company is a dealing member of the Nigerian Stock Exchange (NSE) and is regulated by Securities and Exchange Commission (SEC). ARM Securities research team provides insightful commentaries on the Nigerian economy and its equity and debt markets using an approach which incorporates a thorough understanding of the fundamentals of the industries and companies under coverage. The research therefore adopts an integrated methodology of top-down analysis and bottom-up stock selection, which focuses on publicly quoted companies on the Nigerian Stock Exchange that are judged to offer the highest potential for earnings growth. In addition, its analysts provide periodic commentaries on a range of topical global and local issues which provide investing clients with a holistic view of the opportunities and risks in today’s financial market landscape.
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