Q3 10 Earnings Release Margins under pressure? We maintain our neutral rating on AshakaCem despite its unimpressive performance in its Q2 and Q3 quarterly earnings this year. Since our last Earnings Release update on Ashaka s H1 10 earnings when we had an Accumulate rating on the stock, it has appreciated by c.19%. With a YTD gain of 98.9%, the stock has been the best performing among the cement producers and in the entire stock market mainly because the share price came from a low- base at the beginning of the year. The increased conservative stance on the expected improvement in the company s operating efficiency has necessitated a reduction in our fair value mid-point to N22.91. Slowing sales in line with expectations Ashaka s top-line reflects broad expectations for cement producers this year in view of the declining sales that generally characterised the industry in Q3 10 (July September). Nonetheless, Ashaka s top line appears to have been hit considerably as turnover declined by c.29.5%, in comparison to a marginal decline of c.3.5% observed in Q2 10 (April June) turnover on a QoQ basis. As expected, management attributes the decline to the seasonality caused by the heavy rainfalls during the period. Margins however disappointing: In our previous updates on Ashaka, we had stated an expected rise in profitability margins in view of its new coal plant which enables the use of coal fuel rather than Low Pour Fuel Oil. This had been the basis of our key investment case for Ashaka given the anticipated cost savings expected from such conversion. However, the company s profitability margins have been on a declining trend since Q1 10, dipping to 12.5% in Q3 10 (July to September) from c.20% and c.26% in Q2 10 (April to June) and Q1 10 respectively, despite the completion and the use of coal this year. According to management, the decrease in turnover took toll on pre-tax profit and profitability margins. Though Ashaka is gradually substituting LPFO with coal, the company still utilised Low Pour Fuel Oil, which had been bought at significant highs earlier in the year, for production during the quarter. Thus, the reduction in pre-tax profit margin is adduced to the higher costs of sales associated with Low Pour Fuel Oil. Management however expresses confidence that there would be major impacts of the use of coal on profitability margins from next financial year 2011. Expansion would improve prospects: In line with management s guidance, Ashaka s kiln expansion project is still on-going. We expect new 400,000 tonnes kiln to become operational by 2012, thus increasing the company s capacity to 1.25 million tonnes. With the additional capacity the company would be able to drive higher volumes, which is critical to sustaining turnover growth given the low possibility of price increases in the medium to longer term. Analyst Tosin Oluwakiyesi t.oluwakiyesi@vetiva.com Stock Data Symbol: NSE: Bloomberg: Reuters: ASHAKACEM ASHAKA.NL ASHAKA.LG Current Price (N): 22.66 Trailing EPS (N): 0.74 Trailing P/E (x): 30.50 2010 P/E (x): 20.05 Shares Outstanding (Bn): 2.24 Market Cap (Nbn): 50.75 Market Cap ($ Mn): 338 Year High (NGN): 26.11 Year Low (NGN): 11.39 Share Price Performance 30 Days (%): 20.0 90 Days (%): 0.71 52 weeks (%): 69.10 Ownership Structure: Lafarge 52-week S.A share (%): price performance (Rebased) 50.16 Others (%): 49.84 2.5 2.0 1.5 1.0 0.5 0.0 Vetiva Research 4 November 2010 Fair Value Range N21.76 N24.05 Ashaka NSE ASI Build. Mat. Index 2-Nov 2-Feb 2-May 2-Aug 2-Nov Vetiva Capital Management Limited Plot 266B Kofo Abayomi Street Victoria Island Lagos, Nigeria Tel: +234-1-4617521-3 Fax: +234-1-4617524 Email: research@vetiva.com 1
Key Headlines Q3'10 Q3'09 Chg 2010F Q3 as % NGNbn % NGNbn of 2010F Turnover 13.57 12.71 6.80 18.19 74.60 PBT 2.73 1.78 53.75 3.73 73.19 Tax (0.82) (0.59) 39.76 (1.19) 68.91 PAT 1.91 1.19 60.64 2.54 75.19 Performance highlights Ashaka s quarterly performance in 2010 6.00 4.50 5.133 4.949 3.488 30% 25% 20% 3.00 15% 1.50 1.309 0.935 0.435 10% 5% 0.00 Q1 Q2 Q3 0% Turnover PBT PBT Margin Source: Company Filings, Vetiva Research Increasing receivables; incentive to stimulate sales? We observe the 334% jump in Ashaka s trade debtors account to N382 million at the end of Q3 10 from N88 million as at FY 09, which is quite unusual for Nigerian cement producers as the business has historically been cash-based. In fact, the entire N294 million increase in accounts receivables came in Q3 (July September). This, in our view, suggests that the company relaxed its credit policy in order to accommodate more sales given the sluggish demand for cement during the period. In view of expectation of better economic recovery and real sector spending next year, we do not expect such steep rise in account receivables to continue. Fixed asset balance soars on capitalized coal plant: We would begin to see a sharp rise in Ashaka s depreciation charge in view of the significant rise in fixed asset balance as at Q3 10. Ashaka s management has revealed that the 177% jump in its fixed asset balance (to N14.462 billion from N5.218 billion) at the end of Q3 10 is due to the capitalisation of its coal plant investment, which before then has been classified as work-in-progress, and not depreciated. 2
While we expect the depreciation expense to reduce operating profit margin, the expected reduction in energy costs from the increasing use of coal, in our view, would be more significant than the implicit reduction likely from higher depreciation expenses. Therefore, the net effect as we anticipate would be an overall gradual increase in operating profit margin. FY 10 forecasts revised slightly downwards: Ashaka s lower-thanexpected bottom-line performance has called for some downward revisions to our forecasts. We therefore revise our average capacity utilisation rate assumption by FY 10 downwards to 86.5% from 92% and consequently FY 10 turnover and PAT forecasts are also scaled down by 6% and 17% to N18.19 billion and N2.53 respectively. Our initial FY 10 PAT is particularly revised downwards by a higher percentage to capture the declining profitability margins observed QoQ for Ashaka this year, reflecting the fact that for this year, we are not likely to see any significant impact of the of the company s use of coal on its profitability margin as previously anticipated. In all, we still hope to see a better FY 10 performance in comparison to FY 09. Valuation Our valuation is based on the Discounted Cash-flow Method which spans through a period of 6 years, capturing our expectation on the company s expansion. We assumed that the additional 400,000 metric tonnes production line being built by the company would become operational by 2012. Using the company s cost of equity of 15.63% as our discount rate since Ashaka has no long term debt; we arrive at a fair value range of N21.76 N24.05. The discount rate is obtained using a risk free rate of 10%, equity risk premium of 5% and beta of 1.19. Our fair value range implies a midpoint of N22.91, which translates into a upside potential of 1.1% relative to its current price of N22.66. Thus, we maintain our Neutral rating on the stock. Forward (2010) Comparables valuation Local peers Valuation multiples P/E (x) EV/EBITDA (x) Div Yield ROE (%) EBIT Margin (%) Ashaka Cement 20.1 33.1 2.2 17.4 20.5 Lafarge WAPCO 16.9 9.3 0.6 14.0 26.0 CCNN 17.3 6.7 2.3 15.6 16.8 DCP 19.3 16.5 3.7 58.8 51.1 Source: Vetiva Research 3
Appendix Ashaka Cement Financials: Actual and Forecasts (N million and USD Million) INCOME STATEMENT (N'Mill) 2006 2007 2008 2009 2010 F 2011 F 2012 F Turnover 16,772 16,473 21,378 17,194 18,189 21,025 23,358 Cost of Sales (8,794) (10,868) (14,039) (11,771) (11,846) (12,058) (11,528) Gross Profit 7,978 5,605 7,339 5,423 6,343 8,967 11,830 Selling and distri. Expenses (2,408) (1,486) (1,437) (432) (1,137) (1,472) (1,635) Core Operating Profit 5,570 4,120 5,902 4,991 5,207 7,495 10,195 EBITDA 5,948 4,452 2,697 3,785 1,533 4,115 5,603 Depreciation & Amortization (436) (514) (519) (526) (604) (630) (659) EBIT/Operating Profit 4,016 2,183 3,265 1,007 3,512 4,973 7,433 Interest Payable & Charges - - - - - - - Profit Before Taxation 4,952 2,513 3,430 1,324 3,512 4,973 7,433 Taxation (1,574) (1,361) (911) (1,422) (983) (1,641) (2,379) Profit After Taxation 3,378 1,153 2,519 943 2,528 3,332 5,055 BALANCE SHEET (N'Mill) 2006 2007 2008 2009 2010 F 2011 F 2012 F Non-Current Assets Fixed Assets 2,685 3,811 5,686 5,218 19,840 20,262 20,771 Work in Progress 5,333 8,891 10,901 13,849 2,981 3,030 3,031 Current Assets Inventories 4,931 4,220 4,706 4,707 5,017 5,107 4,883 Debtors 1,674 386 139 88 100 115 128 Bank and cash balances 3,798 2,137 1,636 850 361 2,929 6,131 Other Receivables and Current Assets - 2,785 1,958 908 1,200 1,388 1,542 Total Current Assets 10,403 9,528 8,440 6,552 6,678 9,539 12,684 TOTAL ASSETS 18,421 22,230 25,027 25,618 29,499 32,831 36,485 Current Liabilities Creditors & Accruals 887 1,151 1,921 2,296 1,315 1,986 2,206 Other Creditors 3,341 6,164 7,269 5,967 4,892 5,655 6,283 Short Term Loan - 968 - - - - - Taxation 1,661 1,687 928 1,385 983 1,641 2,379 Total Current Liabilities 5,890 9,971 10,117 9,648 7,191 9,282 10,867 Non-current Liabilities Long-Term Loans - - - - - - - Provision for Gratuity 408 836 982 1,648 2,862 2,505 2,039 Deferred Taxation 526 710 1,144 1,181 1,921 1,621 1,349 Total Non-Current Liabilities 934 1,546 2,125 2,829 4,783 4,126 3,388 TOTAL LIABILITIES 6,824 11,518 12,242 12,477 11,974 13,407 14,255 Net Assets 11,598 10,713 12,785 13,142 14,085 15,488 17,337 Source: Annual Report, Vetiva Research 4
INCOME STATEMENT (USD'Mill) 2006 2007 2008 2009 2010 F 2011 F 2012 F Turnover 143 140 172 117 121 136 151 Cost of Sales (75) (92) (113) (80) (79) (78) (74) Gross Profit 68 48 59 37 42 58 76 Selling and distri. Expenses (20) (13) (12) (3) (8) (9) (11) Core Operating Profit 47 35 47 34 35 48 66 EBITDA 51 38 22 26 10 27 36 Depreciation & Amortization (4) (4) (4) (4) (4) (4) (4) EBIT/Operating Profit 34 19 26 7 23 32 48 Interest Payable & Charges - - - - - - - Profit Before Taxation 42 21 28 9 23 32 48 Taxation (13) (12) (7) (10) (7) (11) (15) Profit After Taxation 29 10 20 6 17 21 33 BALANCE SHEET (USD'Mill) 2006 2007 2008 2009 2010 F 2011 F 2012 F Non-Current Assets Fixed Assets 23 32 46 35 132 131 134 Work in Progress 45 76 88 94 20 20 20 Current Assets Inventories 42 36 38 32 33 33 32 Debtors 14 3 1 1 1 1 1 Bank and cash balances 32 18 13 6 2 19 40 Other Receivables and Current Assets - 24 16 6 8 9 10 Total Current Assets 88 81 68 44 45 62 82 TOTAL ASSETS 157 189 201 174 197 212 235 Current Liabilities - - Creditors & Accruals 8 10 15 16 9 13 14 Other Creditors 28 52 58 41 33 36 41 Short Term Loan - 8 - - - - - Taxation 14 14 7 9 7 11 15 Total Current Liabilities 50 85 81 66 48 60 70 Non-current Liabilities - - - - - - Long-Term Loans - - - - - - - Provision for Gratuity 3 7 8 11 19 16 13 Deferred Taxation 4 6 9 8 13 10 9 Total Non-Current Liabilities 8 13 17 19 32 27 22 TOTAL LIABILITIES 58 - - - - - - Net Assets 99 98 98 85 80 86 92 Source: Annual Report, Vetiva Research 5
Key financial ratios: Actual and Forecasts 2006 2007 2008 2009 2010F 2011F 2012F Growth Turnover growth -2% 30% -20% 6% 16% 11% 13% Growth in Core Operating profit -46% 50% -69% 249% 42% 49% 17% EBITDA Margin 27% 16% 18% 9% 23% 27% 35% EBIT Margin -49% 36% -61% 165% 42% 49% 17% PAT Margin -66% 119% -63% 168% 32% 52% 17% Profitability Return on Equity (AVG) 10% 23% 8% 19% 24% 33% 33% Return on Equity (END) 29% 11% 20% 7% 17% 20% 26% Return On Asset (AVG) 19% 6% 11% 4% 10% 12% 16% Return On Asset (END) 18% 5% 10% 4% 10% 11% 15% Share Metrics EPS (N) 2.20 0.58 1.27 0.47 1.13 1.49 2.26 DPS (N) 1.50 0.56 0.30-0.50 0.66 1.00 NAPS (N) 5.84 5.39 6.43 6.60 6.49 7.32 8.57 EBITDA per Share (N) 2.99 2.24 1.35 1.90 0.68 1.84 2.50 Sale per Share (N) 8.42 8.27 10.74 8.64 8.12 9.39 10.43 Shares Outstanding (N) 1,991 1,991 1,991 1,991 2,240 2,240 2,240 Production data Capacity(million tonnes) 0.85 0.85 0.85 0.85 0.85 0.85 1.25 Production (million tonnes) 0.73 0.68 0.87 0.65 0.69 0.82 0.92 Utilization (%) 86.24 79.65 101.88 76.47 80.75 97.00 73.28 Price/Tonnes (N) 22,881 24,332 24,686 26,452 26,500 25,500 25,500 Cost of sales/tonnes (N) 8,900 12,989 12,549 21,599 17,150 14,367 13,163 EBITDA/Tonnes (N) 6,074 3,984 4,370 2,358 5,996 6,796 8,835 Source: Company Financials, Vetiva Research 6
INVESTMENT RECOMMENDATIONS Vetiva uses a 5-tier recommendation system for stocks under coverage: Buy, Accumulate, Neutral, Reduce and Sell. Buy/Overweight +25% expected absolute price performance Accumulate +10% to +25% expected absolute price performance Neutral/Hold +/-10% range expected absolute price performance Reduce -10% to -20% expected absolute price performance Sell/Underweight -20% expected absolute price performance Definition of Ratings Buy/Overweight recommendation refers to stocks that are highly undervalued but with strong fundamentals and where potential return in excess of or equal to 20% is expected to be realized between the current price and analysts target price. Accumulate recommendation refers to stocks that are undervalued but with good fundamentals and where potential return of between 10% and 25% is expected to be realized between the current price and analysts target price. Neutral/Hold recommendation refers to stocks that are correctly valued with little upside or downside where potential return of between +/- 10% is expected to be realized between current price and analysts target price. Reduce recommendation refers to stocks that are overvalued but with good or weakening fundamentals and where potential return of between -10% and -25% is expected to be realized between current price and analysts target price. Sell/Underweight recommendation refers to stocks that are highly overvalued but with weak fundamentals and where potential return in excess of or equal to - 25% is expected to be realized between current price and analysts target price. 7
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