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Q3 2015 results review: Moving to Neutral on weak Q3 results

​Moving to Neutral on weak Q3 results

• 32% cut to our PT; moving to Neutral from Outperform Ashaka Cement's (Ashaka) Q3 2015 PBT came in 88% behind our forecast. We have cut our EPS forecast by 39% over the 2015-17E period to reflect the subdued pricing environment for cement. Although Ashaka's advantage of being the sole cement producer in north-eastern Nigeria implies that it is less prone to price volatility, we have reduced our price assumption by 7% to N30,916 (US$156) per tonne. Our new price target of N20.1 is 32% lower and implies a potential downside of -11% from current levels. Ashaka shares are trading on a 2015E P/E multiple of 12.9x for 13.8% EPS growth in 2016E. These compare with the 13.1x multiple for 6% EPS growth that Lafarge Africa is trading on. Given the potential downside implied by our new price target, we downgrade our recommendation on the stock to Neutral from Underperform.

• PBT down 79% y/y due to weak sales and margin contraction: Ashaka's Q3 results showed marked y/y declines across key headline items on the P&L. While sales declined by 23% y/y to N3.8bn, PBT and PAT both fell by 79% y/y and 83% y/y to N267m and 148m respectively. Although opex declined by 20% y/y to N541m and net interest income swung to +N75m from -50m in Q3 2014, these positives were completely offset by the y/y decline in sales, and a gross margin contraction of 1,810bps to 22.6%. Sequentially, sales declined by 39% q/q. However, PBT and PAT declined by 91% q/q and 94% q/q respectively, largely due to a gross margin contraction of 2,155bps q/q.

• Unit volumes down 24% y/y; improved outlook in Q4: Q3 was particularly difficult for Ashaka as volume dispatches declined by 24% y/y to 124,000 metric tonnes (mt). Apart from the y/y decline in sales, we believe that a drop in coal utilisation to the mid-70s at the peak of the rainy season from well over 80% in Q2 was a significant factor behind the contraction in gross margin. In addition, restructuring costs of around N700m related to the integration of the businesses also weighed on the bottom line. Beyond Q3, we expect gross margin to expand by 1,369bps y/y to 39% in Q4, and PBT to improve to N1.4bn (vs –N436m). Notwithstanding, we forecast 2015E sales and EPS to decline by -4% y/y and -14% y/y to N20.3bn and N1.75 respectively.