Culled—Proshare

November 10, 2016/Vetiva Research

CCNN’s 9M’16 PAT was down 56% y/y to N0.7 billion (Vetiva estimate: N1.0 billion) following a disappointing Q3. Despite q/q increase in cement prices (46% price hike only took effect from September), revenue over the 3-month period declined 5% q/q to N2.7 billion and suggests volume must have been down over the period.

Asides the impact of the price hike on volume, we believe the challenges around LPFO (CCNN’s main kiln fuel) supply could have also weighed more on production. Amidst the volume pressure, coupled with impact of currency devaluation on FX-exposed costs, Q3 cost of sales as a percentage of sales rose to 78% (Q2: 63%) and almost singlehandedly derailed all profit lines over the period. For context, Q3 PAT was down 85% q/q to N63 million (Q2: N416 million).

Outlook not too rosy
From where we stand, the outlook on CCNN appears quite tough on a number of fronts. One, the unstable state of local refineries and FX market illiquidity continue to spell bleak outlook for local/foreign LPFO supply.

Two, the persistent currency weakness stands to keep CCNN’s FX-exposed costs on the high side. More importantly for longer term, we think it is high time CCNN broke out of its capacity constraint in order to improve its organic growth outlook.

At just 0.5 million MT capacity, CCNN might not be milking its regional advantage in the far North (Sokoto State, North West) well enough given its relative distance from competition. The closest major competition to CCNN (ASHAKACEM in Gombe state, North East) is c.985km away, making CCNN’s market in the immediate neighboring states protected to a large extent.

Although we understand that there is an ongoing plant capacity expansion to 1.5 million MT (construction first reported in the media September 2014), we have not considered the expansion in our model as we await clarity on progress.

Our estimates and valuation are still based on the current 0.5 million MT capacity. Whilst we retain our revenue forecast at N12.2 billion, we revise our FY’16 cost of production assumptions to reflect the impact of FX challenges on FX-related inputs.

After updating our model, we revise our FY’16 PAT estimate to N0.8 billion (Previous: N1.2 billion). Our target price is revised lower to N7.03 (Previous: N9.21), driven by our lower optimism on post-2016 organic growth outlook and energy challenges.