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Initial View - CCNN Plc - Solid volume, diluted EPS, pricey valuation

• Reaping the benefits of an enlarged capacity following the infusion of Kalambaina, CCNN Plc Q1 2019 results released late yesterday showed material growth in sales volume, which annualised suggest capacity utilisation of 82%. While top line growth was strong, the pass through to EPS remain unseen following the sizeable dilution that accompanied the merger. For context, EPS as at Q1 19 printed at N0.28 from N0.86 in Q1 18. While our model is under review, we believe the stock is expensive at current pricing, with P/E of 15.0x compared to its 5-year average of 6.7x and DANGCEM of 8.3x. 
• Solidifying northern presence. As mentioned above, the company annualised 82% utilisation rate on the 2 million metric tons plant is gradually retracing the level recorded on the old plant (500,000 metric tons). Sales volumes in the quarter printed at 411,945 tons, which compared to the closest period on the same enlarged capacity (Q4 18) suggests 46% growth. Surprisingly, while the volume jump could have driven surge in receivables, actual trade receivables printed at just N50.5 million. Further suggesting CCNN’s grip of the northern market, advance payments from customers surged to N8.3 billion from N2 billion in FY 18.
• Recall we had guided in our Sector Update published in December 2018 (See report: ), that pricing will be a key driver for volume play in 2019. The results released bode well with our view, with CCNN guiding to price erosion of 2% and 5% compared to Q1 18 and Q4 18 respectively to N40,993/ton. However, the volume gain from the price play far outweighed the price erosion with revenue printing at N16.9 billion which is 39% higher compared to N12.2 billion recorded in Q4 last year.
• Reflecting the higher volumes, COGS rose 40% QoQ to N9.2 billion – higher when compared to the growth in revenue. As such, gross margin slipped 40 bps QoQ to 46%. Further on COGS, energy cost, which typically constitutes ~50% of total COGS, printed at N12,150/ton reflecting continued impact of the new coal-fuelled Kalambaina plant, as against sole use of the old LPFO plant which had driven energy costs to high levels of ~N20,860/ton over H1 2018.
• On opex, cost to income ratio contracted to 13.6%, which was lower than 15.6% and 30.4% recorded in Q1 and Q4 2018, respectively. Overall, PBT printed at N5.4 billion, while PBT margin rose 16.32 ppts YoY to 31.7%. Meanwhile, post-tax profit also came in strong at N3.6 billion despite a higher effective tax rate of 32% (Q1 18: 28%) with related margin expanding 737 bps to 22%. EPS for the quarter stood at N0.28 (reflecting impact of the additional shares) compared to N0.13 in Q4 2018.
• The improved utilisation rate, in part, soothes our concerns regarding the lagging performance over H2 18 (avg. 46%), which contradicted management’s guidance of a 90% utilisation rate at the time (See report: ). The company’s favourable market position in the North East, coupled with the company’s drive to push exports to neighbouring countries are the likely drivers of volume growth in near term. While we maintain our optimism of market share accretion in the North and better exports to neighbouring countries, our concern remains the trickling impact to EPS relative to current price.
• CCNN stock remains expensive with a P/E of 15.36x  compared to its 5-year average of 6.67x and DANGCEM of 8.26x. Our last communicated FVE of N17.31 translates to a SELL rating on the stock which currently trades at N17.00. Our model is under review.