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CEMENT COMPANY OF NORTHERN NIGERIA PLC 9M'17 Earnings - FY’17 expectations raised as Q3 outperforms

CCNN released its 9M’17 result, with PAT coming in at ₦2 billion, up 182% y/y (already better than the ₦1.3 billion reported in FY’16) and 66% ahead of our estimate. Whilst the low base from prior year flattered the y/y performance, earnings were supported by a positive Q3 performance with PAT for the quarter (₦1.0 billion) nearly doubling the reported bottom line in Q2’17. Given the series of price increases taken earlier in the year, we had expected revenue to come in strong (particularly on a y/y basis). However, the impressive q/q growth is surprising considering that other listed cement companies reported revenue declines over the period. Furthermore, with cost of sales contained at ₦8.4 billion (25% increase y/y but 11% lower than expected), 9M’17 gross profit rose to ₦5.2 billion, 28% better than our estimate.                                        

After adjusting our model to reflect stronger than expected Q3’17 revenue, we raise our FY’17 revenue estimate to ₦18 billion (Previous: ₦16 billion). Meanwhile, taking a cue from increased gross margin over the quarter, we raise our gross margin estimate to 37% for FY’17 (Previous: 35%). Overall, we revise our FY’17 PAT to ₦2.7 billion (Previous: ₦1.8 billion), buoyed by the Q3 outperformance. Notwithstanding the brighter short-term earnings outlook, we continue to reiterate the company’s constrained growth potential given its limited installed capacity – 0.5 million MT capacity plant in Sokoto. After updating our model with the changes, we revise our Target Price higher to ₦8.10 (Previous: ₦7.88) but maintain a SELL rating.