Cement Company of Northern Nigeria PLC

Transcription

1 African Frontier Market LEAD ANALYST Chuks Anyanwu Biodun Salaudeen REGULATORY COMPLIANCE Taiwo Balogun Stock Rating BUY Industry View In-Line August 11, 2014 Cement Company of Northern Nigeria PLC EQUITY NIGERIA BUILDING MATERIALS Investment Summary & Highlight CCNN: is regional game play the game changer? A sequel to our Q Report H1-2014: Revenue rose by 7%, while net income spiked by 91% YoY triggered by sustained reduction in controllable cost line. Cement Company of Northern Nigeria ( CCNN or the Company) on Friday 25 th July 2014 released its unaudited H result. Revenue rose by 7% to N9.39billion ($58.72M) from N8.81billion ($55.07M) While Profit after Tax expanded by 91% to N1.59billion ($9.92M) from N832.06million ($5.20M) YoY. ZENITHBANK: CRR, clog to growth or On a quarter on quarter assessment, Revenue dropped by 7% to N4.51billion ($28.20M) from N4.88billion ($30.52M) between Q1 and Q2 2014, while the Net income widened by 27% to N889.62million ($5.56M) from N699.02million ($4.37M) over the same period. The Company continues to leverage on the impressive reduction in its controllable cost line. Operating expenses was down by 44% in H1 2014, sustaining the trend from Q Like we highlighted in our Q report of the Company ( CCNN s focus on its area of comparative advantage (North West) as against an aggressive push for market size into the North Eastern and North Central regions was compensated by the steep reduction in operating expenses ( distribution expense) and accounts for the impressive growth in the Company s Net Income in H The Company also managed a 19% reduction in direct cost of sales quarter on quarter, although direct cost was flat between H and H The Company also strengthened its profitability margins in H Gross profit margin was up to 39.21% from 34.78% YoY while Operating margin improved as expected given the decline in Operating expense. Operating margin settled at 25.11% up from 8.13% over the review period. MD/CEO Ayoleke O Adu FCS, CFA ceo@morgancapitalgroup.com Bloomberg Ticker: CCNN: NL NSE Symbol: CCNN Listed on the Nigerian Stock Exchange Key Ratios & Statistics Current Stock Price: N14.80 Fair Value: N18.84 Outlook: POSITIVE Market Capitalization: $117.91M Year End: December Price-to-Earnings (PE) 2013Trailing: 13.09X 2014Forecast: 6.27X 2015Forecast: 4.58X Earnings-per-Share (EPS) Current: (FY 2013) N Forecast: N Forecast: N3.23 Dividend-per-Share: N0.70 Return-on-Equity: 16.00% Return-on-Asset: 9.00% Outstanding Shares (m n) 1,256 Year-to-Date: 27.83% Latest Result H H a glance N (m n) N (m n) % H H Revenue 9,395 8, PBT 2,336 1, PAT 1, EPS 1.26K 0.66K 91.00

2 2 CCNN Quarterly comparative profitability margins for Q & Q CCNN Quarterly comparative profitability margins for FY 2013 & FY 2014 ROE & ROA recorded improvements between FY 2013 and FY 2012 Cement is a homogenous product and as much as we acknowledge the input of the respective cement manufacturers in ensuring that standards are maintained (which in any case is enforced by the Standard Organization of Nigeria, Council for Regulation Engineering in Nigeria, Nigerian Institute of Builders, etc) and brand identities are established, it is our opinion that product availability and price plays a key role in cement consumption. Sector Overview Nigeria has an abundant deposit of limestone, which makes the local manufacturing of Cement a natural occurrence in the Country. This in addition to the over170million people and the huge infrastructure gap present an attractive perspective to the cement manufacturing business in Nigeria, with the only major snag being the cost of power which accounts for up to 40% of the total production cost. The Federal Government of Nigeria under the administration of President Olusegun Obasanjo, in its bid to encourage local production of cement, came up with a policy that granted only those with local production capacity the import license to import the shortfall between local production capacity and the total consumption. The idea behind this policy was to direct investment into local cement manufacturing in other to make the country self-sufficient in cement production. This vision was actualized, as the policy attracted many indigenous and foreign investors. Dangote Cement with a combined installed capacity of 20.25MMTPA is the largest cement manufacturer in Nigeria, accounting for almost 70% of the total cement market. Dangote s Obajana cement plant is arguably the single largest cement plant in MorganCapital Africa and contributes Research 51% to the total installed capacity of Dangote Cement. Lafarge Wapco, Ashaka Cement, and CCNN are the other major cement companies in the country.

3 3 Geographical Segmentation of the Cement Market in Nigeria Having already established Power as one of major challenges confronting cement manufacturers in Nigeria, another equally major challenge is distribution. The poor road network makes the distribution of cement from the limestone quarries where they are manufactured to the six geo political zones in Nigeria an uphill and very expensive venture. In other to mitigate this challenge, cement manufacturers usually establish their plants in areas close to limestone dumps and carve a market nitche for themselves in the same geographical location which is an efficient way of managing distribution expenses and boosting comparative cost advantage. This trend is also a global phenomenon with major cement manufacturers. However, with the recent spate of expansions in the sector, the likes that have seen companies like Dangote Cement and Lafarge Wapco add huge capacities to their production lines; the need to find new markets which results to movements into other geo-political zones arises with the already established distribution cost challenges. Source: Matters Arising The major challenges in the sector in recent times are as follows Increased MorganCapital competition Research following the huge investment in capacity by major cement manufacturing companies. Reduction in sales volume (particularly in the North-East because of the rising insurgence of the Equity Boko Research Haram Nigeria sect which has slowed down construction activities in that region)

4 4 Our Opinion of the Sector The sector has huge growth potentials. The infrastructure gap in the country is evident in the poor road network, insufficient housing units for the rapidly growing population and inadequate infrastructure. The abundance of the sectors primary raw material in the country is also a major incentive. The map above shows the country s six geo-political zones and the geographical locations of the four major cement manufacturing companies in the country. The South Western zone is clearly a hot spot with the two largest manufacturers of cement in the country (Dangote and Lafarge) slogging it out for market share. The North Central zone is another hot spot with Dangote s Obajana plant (with its installed 10.25MMTPA capacity) competing for market dominance with the likes of Ashaka Cement. Unfortunately however, beyond the competition from Dangote s Obajana plant, Ashaka Cements hub (North Eastern zone) is also the strong hold of the Boko Haram Sect and has consequently reduced cement consumption volume in the zone. The most interesting zone from the geographical arrangement of the map above is the North Western zone. The zone is far away enough from other cement manufacturers for distribution cost to be a major challenge for them if they consider encroaching into this market. The only cement manufacturer in this zone is CCNN and despite the general fears of people concerning the insurgence of the Boko Haram sect in the North, the zone has been very peaceful. Given the above, it is our opinion that if CCNN continues to consolidate on its near monopolistic advantage in the North Western space, without playing for size with its bigger competitors, then the company s revenue is sustainable. Furthermore the current owner of the company has also commenced the construction of a new cement plant in the South -South zone; though it is yet to be determined if the earnings from the new cement plant will be consolidated with the earnings from CCNN, we like the strategy of building new smaller plants in different locations to meet the local market needs than install a huge production capacity in one plant which will increase distribution cost if the company wants to break new market grounds beyond its immediate location It is our opinion that building excessive capacity in one plant may become an inefficient strategy in the long run because of the abundance of limestone deposits in different parts of the country which can give rise to smaller more efficient plants springing up in different locations and producing enough to become major threats to the bigger plants, who may be burdened by high operating expenses. We also think that the strategy of building smaller plants in different locations may eventually lead to the actualization of the much anticipated reduction in cement prices in the country because of the heightened competition that it will create, considering that the impact of distribution cost will reduce significantly Earnings Projection (FY 2014) Our FY 2014 revenue estimate for CCNN is N17.37billion ($108.54M) which translates to a 10% improvement relative to FY 2013, while our net income estimate is N2.96billion ($18.52M) and equates to 109% improvement relative to FY This yields an EPS of N2.36 and a forward P/E of 6.27X (based on the price at report date). The sector is a growth sector with huge potentials because it is tied to the infrastructural development of the country. Despite the rising competition in the sector, the pie is big enough for all players in the sector. Overall, we expect a slight improvement in revenue growth YoY because the company has not invested in capacity expansion like most of its peers in the sector, we think that the company should focus more on its niche and strive to gain more grounds in that space. On the other hand, we expect the net income to rise at a much faster pace compared with the revenue because the trend of strong reduction in distribution and finance charges to continue going forward.

5 5 COMPARATIVE METRICS OF FOUR CEMENT MANUFACTURING DEC 2013 KEY RATIOS AND VARIABLES CCNN DANGOTE CEMENT WAPCO ASHAKA CEMENT REVENUE GROWTH 4% 29% 12% -1% GROSS PROFIT MARGIN 32% 63% 32% 29% COST/INCOME 265% 62% 25% 290% PBT MARGIN 12% 49% 28% 13% ROE 16% 37% 30% 6% ROA 9% 24% 18% 4% FIXED ASSETS/TOTAL ASSETS 47% 82% 78% 72% SHARE PRICE (N) SHARES OUSTANDING 1,256,677,766 17,040,507,405 3,001,600,004 2,239,453,125 CASHFLOW PER SHARE EARNINGS PER SHARE (N) PRICE/CASFLOW PER SHARE(X) PRICE/EARNINGS (X) DEBT/EQUITY 9% 33% 28% Nil PBT GROWTH 19% 40% 30% -48% Source: : Stock Price is as at 31 st of December 2013 to have a uniform time frame for all companies. Valuation & Valuation Analysis Our valuation analysis shows that the stock of CCNN is currently trading at a 27.29% discount to our fair value estimate of N18.84, with a 12month investment horizon. Our fair value computation is based on our financial performance expectation for FY Our dividend estimate is N1.30 and amounts to a 55% payout ratio and a 6.9% dividend yield from our fair value. We reviewed our Revenue, Net income and dividend estimates upwards given the considerable push in the revenue in H and the improved management of the Company s controllable cost-line which yielded a strong bottom line improvement. We expect the Company to sustain this momentum in H The target price for CCNN was reviewed upwards from N15.40 in our Q report to N18.84, after the share price hit our fair value estimate (returning 59.09% within 3 months from the price as of May 20th 2014, the date our Q report on the company was published) in August 2014 with about 9months of our investment horizon to spare. The sustained improvement in the Company s net income growth gave impetus for the upward review in our target price. Our fair value for CCNN shares was calculated using the Dividend Discount Model comprising our expected dividend estimate for the company and a MorganCapital customized tweak to adjust for the risk of investing in the Nigerian Building Material Sector. Our Required Rate of Return (RROR) factors in a risk premium of DISCLOS 7% and the yield for the most recently issued 20-Year FGN Bond was applied as the risk free rate of return.

6 6 Investment Conclusion An undervalued stock based on our research, with focus on our FY 2014 estimates. The potential for huge investment in infrastructure in Nigeria given the current acute shortage/decay is an incentive for the sector. The near monopolistic advantage of CCNN in the North-West will protect the company from the size advantage of its competitors. The company currently trades at the lowest P/E multiple compared to the other listed cement manufacturers and although this situation may have been on account of the fact that the company has not invested in capacity expansion like the others, it is our opinion that if the company maintains its stronghold in the North West, the company s H performance can be sustained all through the year. We place a BUY rating on the shares of CCNN, which is csurrently trading below our fair value with focus on FY Our fair value estimate for CCNN shares is revised upwards to N18.84 from N15.40, up by 22%. CEMENT COMPANY OF NORTHERN NIGERIA (F) 2015(F) MARKET CAPITALIZATION (N'm) ($) GROSS REVENUE (N'm) 13,915 15,126 15,787 17,370 18,412 PROFIT B/F TAX 3,294 1,653 1,970 4,117 5,970 TAX ,157 1,910 PROFIT AFTER TAX 2,304 1,196 1,423 2,960 4,060 EARNINGS PER SHARE (EPS) PRICE-EARNINGS RATIO SHARE CAPITAL OUSTANDING SHARES (M'n) 1,256 1,256 1,256 1,256 1,256 OWNERS' EQUITY 7,008 7,639 9,062 9,320 10,718 CASH DIVIDEND 45K Nil 70K SCRIP DIVIDEND NIL NIL NIL RELEASE DATE 12/06/12 26/03/13 26/04/13 AGM DATE CLOSURE DATE In our analysis, Fair value is our opinion of the actual fundamental worth of a stock, irrespective of what the market is willing to pay for the stock. A BUY rating from us in our opinion, prompts investors to purchase the stock guided by their risk appetite A SELL rating from us in our opinion, prompts investors to exit the stock. A HOLD rating from us in our opinion, prompts investors to desist from buying the stock if they do not already have the stock, and not sell if they already have the stock. MorganCapital Securities Ltd The Pent Floor 3, Biaduo Street, Off Keffi Street, S/West Ikoyi. P.O.Box Victoria Island, Lagos ,

7 7 Analyst Certification Where applicable, the views expressed in this report accurately reflect the analysts' views about any and all of the investments or issuers to which the report relates, and no part of the analysts' compensation was, is, or will be, directly or indirectly, related to the specific recommendations, views or corporate finance transactions expressed in the report. Conflict of Interest MorganCapital Securities Ltd and its sister companies within the MorganCapital Group may execute transactions in securities of companies mentioned in this document and may also perform or seek to perform investment banking services for those companies mentioned herein. Trading desks may trade, or have traded, as principal on the basis of the research analyst(s) views and report(s). Disclaimer The contents of this report are obtained from publicly available sources and in good faith but no representation or warranty, either express or implied, are made to its accuracy or completeness. This report is not an offer to buy or sell or a solicitation to buy or sell securities, where mentioned. This report is distributed (through s) in the United States, Europe, Asia and Africa by MorganCapital Securities Limited and its Sister Companies within the MorganCapital Group all operating in Lagos, for general circulation only. The opinions and recommendations herein do not take into account individual client circumstances, objectives, or needs and are not intended as recommendations of particular securities, financial instruments or strategies to specific clients. The financial instruments discussed in this report may not be suitable for all investors thus investors must make their own investment decisions based upon their specific financial situations, investment horizons and investment objectives. If a financial instrument is denominated in a currency other than an investor's currency, a change in exchange rates may adversely affect the price or value of, or the income derived from, the financial instrument, such an investor effectively assumes currency risk. In addition, income from an investment may fluctuate and the price or value of financial instruments described in this report, either directly or indirectly, may rise or fall. Furthermore, past performance is not necessarily indicative of future results. MorganCapital Securities Limited and its sister companies within the MorganCapital group are not licensed to distribute research reports in the US, Europe, Asia or other African countries thus this document must not be acted on or relied upon by persons who are not Relevant Persons, as defined in the paragraph below. Any investment or investment activity to which this document relates is only available to Relevant Persons and will be engaged in only with relevant persons. Relevant Persons are persons who are clients or staff employed by MorganCapital Securities Limited or its sister companies within the MorganCapital Group.