October 28, 2016/Cordros Research

On Friday, CCNN released results for nine months and third quarter ended September 2016. Revenue and operating expenses for 9M-15 were restated, thus the latest Q3-15 figures for these heads differed from those presented in last year’s account. This update compares the third quarter 2016 result with that of 2015 derived using the latest management account.

The key features of the Q3-16 result are (1) significant y/y and q/q gross margin contraction; (2) opex savings; (3) notable y/y and q/q reduction in finance charges; and (4) decline in profits before (81.4% y/y and 84.9% q/q) and after tax (81.3% y/y and 84.9% q/q).

Over the nine months of 2016, revenue was down 17.2% while net profit dipped by 56.2%.

Revenue in Q3 grew 2.2% y/y but declined by 5.5% q/q. The y/y top-line growth is the company’s first since Q2-14 and may have been through marginal volume growth, given that average cement price was lower during the period, relative to last year. The price hike in September may have also supported revenue growth. Despite having the least production capacity across the industry, utilization (we estimate average of 60-65%) in CCNN’s facility has been hampered by protracted fuel supply challenges. The likelihood that revenue would be stronger in the fourth quarter is high, given price recovery and a very benign Q4-15 comparative.

Gross margin contracted by 1837bps y/y and 1536bps q/q during the period, wherein Nigeria’s manufacturing sector broadly experienced elevated cost pressure from further depreciation of the local currency. Pressure on CCNN’s margins is exacerbated by the heavy reliance on expensive LPFO. Depending on the pricing of the local currency and the availability of LPFO, we would expect improved cement price to positively impact margin in the final quarter of the year.

In line with a common trend among manufacturers that have released July-September results thus far, opex fell by 26.1% y/y. The decline can be traced to lower administrative expenses. As a proportion of revenue, operating expenses was 17%, 420bps lower from 21.2% in Q3 LY.

Finance charges fell by 15.8% y/y but were higher by 41.6% on quarterly basis.  Total borrowings stood at N1.51 billion, compared to N1.6 billion as at June ending, and N1.83 as at September LY. While volume may have accounted for the y/y decline in finance charges, higher interest rates may have been responsible for the q/q increase.

Overall, CCNN’s 2016 results remain disappointing, with Q3 earnings being the poorest YtD. That said, (1) price recovery and (2) the low base of Q4-15; should minimize earnings contraction over 2016FY (we estimate 13% contraction).

We are Neutral on CCNN. Estimates are under review.