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Initial View - Cement Company of Northern Nigeria Plc FY 18 - Management guidance, a delusion of grandeur

• Following the completion of the merger arrangement between Cement Company of Northern Nigeria (CCNN) and Kalambaina Cement Limited, with onward listing of the shares of the enlarged entity on the Nigerian Stock Exchange, CCNN released results of the combined entity this afternoon. The numbers showed synergy benefits between the two companies, however, far lower than the pro forma presentation provided by management of both companies in the Scheme of Merger document, which necessitated the approval of the merger by shareholders. For context, reported revenue of N31.7 billion (which came in higher than our estimate of N26.5 billion) is far below the pro forma guidance of N46.9 billion.
• On volumes, the enlarged entity consolidated production volume at 742,224 tons for the full 2018 reflecting capacity utilisation on the enlarge plant size of 2 million tons per annum of just 37% (Adjusted average rate: 59%). Recall, average capacity utilisation on the 500,000 per annuum capacity printed at 96% over the last two years, with average annual production of 478,101 tons. Accordingly, compared to FY 17 volume of 467,707 tons (with 94% utilisation), the additional production volume at the Kalambaina plant was just 274,517 tons.
• Management guidance, a delusion of grandeur. In the pro forma scheme of merger numbers, management guided to a robust PAT of N17.9 billion over FY 18, citing the aggressive estimates on sales volume and cost synergy from the utilisation of a more efficient energy mix. The reported numbers deviated largely from the guidance, with PAT coming in at N5.7 billion, to even miss our highly conservative estimate of N6.3 billion.
• CCNN trades at a P/E and EV/EBITDA of 45.64x and 25.62x compared to Bloomberg Middle and East Africa Peers at 55.93x and 15.06x respectively. Our last communicated FVE of N17.31 translates to a SELL rating on the stock which currently trades at N19.90. Our model is under review.

 More analysis to follow.