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Cement Company Of Northern Nigeria Plc FY'18 - Higher Earnings Potential Upon Merger Completion

Higher earnings potential upon merger completion                                                                      

CCNN recently released its FY’18 results, reporting a record profit of ₦5.7 billion, 77% higher than 2017 figures and ahead of our estimate (₦5.5 billion). Notably, this is the first earnings release since the completion of the merger with Kalambaina Cement Company. While the merger was completed in Q4’18, management elected to report the performance of the merged entities as if the merger took place at the start of the year. Thus, whilst Net profit soared y/y, EPS shrunk 83% to ₦0.44, given that shares outstanding jumped over nine times to 13.1 billion units. Management proposed a dividend payout of 92%, representing ₦0.40/share (2017: ₦1.25).                                                                    

Given the impressive FY’18 results, we have made a number of adjustments to our FY’19 and forward estimates. First, we have adjusted our volume forecast to 0.82 million MT (Previous: 0.67 million MT), a 10% increase from 2018 as we expect a ramp up in volume offtake from the new plant. Based on our expectation of increased competition in 2019, we forecast a 1% drop in average revenue/tonne to ₦42,312. Thus, we project a higher revenue of ₦34.5 billion (Previous: ₦30.2 billion). After accounting for merger-related costs in FY’18 and improved efficiency, we arrive at a higher EBITDA margin of 34% (2018: 32%) and an FY’19 EBITDA of ₦11.9 billion. After adjusting for interest and tax expenses, we arrive at a PAT of ₦6.7 billion (Previous: ₦6.7 billion), up 17% from 2018. Post-2019, we forecast a 14% PAT CAGR to ₦11.2 billion in 2023, driven by a higher earnings potential from a larger and more cost-efficient plant.