May 2, 2017/Vetiva Research
- Topline up 22% y/y, slightly ahead of estimates
- Robust EBIT growth despite surge in OPEX
- Strong cement price outlook to sustain earnings recovery
- FY’17 earnings revised higher following Q1 earnings beat
- Target price revised higher to N7.88 (Previous: N7.34)
Strong cement prices, stable energy supply lift earnings
CCNN released its Q1’17 earnings last week, showing sizable y/y growth across all profit lines. In line with trend observed across other industry players, strong cement prices (up c.70% y/y) weighed on CCNN’s cement volume but still provided greater positive impact on topline as revenue rose 22% y/y to N4.4 billion (Vetiva: N4.2 billion).
More importantly, energy supply, particularly LPFO, remained stable over the quarter (allowing for stable cement production) thanks to lower demand from bigger cement producers who increased usage of gas.
Amidst these, Q1’17 Gross Profit doubled to N1.6 billion, 38% ahead of our estimate.
Notwithstanding a surge in OPEX (up 114% y/y), EBIT over the 3-month period remained strong, up 84% y/y to N727 million. Overall, Q1’17 PAT rose 112% y/y to N514 million (Vetiva: N352 million), supported by lower effective tax rate (25% vs Q1’16: 32%) and 2016 low base.
Valuation reviewed higher amidst revision to estimates
From our discussion with price setters in the cement industry, we understand that there are no near-term plans to slash prices.
As such, we expect volume to remain under pressure for the rest of FY’17. Just like Q1’17 however, we believe the net impact of the strong prices will be positive on revenue and margins.
We retain our FY’17 revenue estimate at ₦15.6 billion. Also, we are cautiously optimistic that the decreasing use of LFPO by some big players will improve its supply to CCNN. As such, we revise our FY’17 gross margin forecast to 35% (Previous: 28%).
After updating our model, we revise our FY’17 PAT to ₦1.7 billion (Previous: ₦1.3 billion), and our target price to ₦7.88 (Previous: ₦7.34).
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.
