WED, MAY 2 2018-theG&BJournal-CORDROS CAPITAL-Cement Company of Northern Nigeria Plc (CCNN) started 2018 on an impressive note, reporting EPS growth of 111% 17.79 y/y to NGN0.86, which when annualized, is almost 2 x market expectations. The EPS is only 9% below the company’s single-quarter best of NGN0.95 recorded in Q4-17. The impressive Q1-18 performance is broad-based, and in our view, is one of the company’s best yet, when the significant difference in prices in the recent past quarters is adjusted for.
Revenue grew by 24% y/y the three months period, the best we have seen among the quoted companies from Nigerian operations. Compared to Q1-17, industry cement prices are higher by single-digit on average, suggesting that most of CCNN’s Q1-18 revenue growth is volume driven.
The company achieved 94% utilization rate in 2017FY, despite reported 46% increase in selling price. We remain bullish on volume in 2018E and retain our 5% growth forecast on relatively competitive selling price (disclosed 2017FY price was lower than DANGCEM’s by 3% and higher than ASHAKACEM’s by only 1%), Ratios improved security condition in the North, and the low presence of competitors in the markets – including cross border – where the company supplies cement. We are yet to hear from CCNN’s management, but we consider the NGN50/bag price increase recently implemented by DANGCEM (effective April) a tailwind for other smaller cement producers’ revenues in 2018.
Gross margin of 42% was achieved in Q1-18 and is also a major driver of the earnings outperformance in the review period. The gross margin beat our estimate for the quarter by 916 bps and is immune to the energy cost pressure we had expected with the rallying price of crude oil. CCNN’s management said it is managing the risk associated with the volatile price of its kiln fuel LPFO (linked to both FX and the price of crude oil, and accounts for 60-65% of production cost) by exploring other alternate energy generation, although without detailed disclosure.
We believe the stability of the naira is also supportive of Price movement (CCNN vs. Benchmark Indices) the resilient margin. While we hold our view that gross margin will be tested this year by the surging price of crude oil (+53% y/y energy cost was reported in Q1), we have increased our estimate for 2018E by 300bps to 39%, reflecting (1) mainly the stronger-than-expected Q1 rate, and also, (2) the fact that cement prices have been increased by NGN50/bag in the industry.
Also noteworthy from the result are the 1200 bps average increase each in EBIT and PBT margins and 364% increase in RoAE. Operating expense was lower by 8% y/y while the ratio to revenue decreased by 543 bps y/y.
An amount of NGN961 million was reported as capex in Q1-18, which annualized, is ahead of last year’s record NGN2.6 billion. About 48% of the spending (NGN468 million) was for the addition/repair of trucks, in continuation from the NGN750 million spent in 2017FY – this could be to support distribution.
Compared to our previous estimate, we revise 2018E net profit higher by 16% to reflect the changes on the gross margin line. On 2017FY results, our revised net profit estimate is higher by 13% (previously -3%). On our revised estimates, we have a DCF-based TP of NGN17.82 (previously NGN15.64) for CCNN and maintain SELL. The stock has gained 115 YtD and is trading at forward (2018E) P/E and EV/EBITDA multiples of 7.0x and 4.0x respectively, consistent with its five-year historical averages.
