Culled—Proshare

2/8/2017/Vetiva Research

·         Topline up 31% y/y, 4% ahead of estimates

·         EBIT margin remains healthy amidst decline in operating expenses

·         Revenue to be further supported by pricing

·         Tax rate adjusted lower to reflect H1’17 run rate

·         Target price unchanged at N7.88

Bottom line lifted by pricing, cost discipline
CCNN released its H1’17 results with profit lines coming in ahead of our estimates. As expected and in line with other cement manufacturers, stronger cement prices (over 70% y/y) continued to support topline growth with revenue up 31% y/y to ₦8.5 billion – beating our ₦8.2 billion estimate.

Buoyed by the price support, H1’17 gross margin strengthened to 36% (H1’16: 29%), yielding a 61% y/y increase in gross profit to ₦3.0 billion (Vetiva: ₦2.9 billion). Despite a 26% q/q moderation in operating expenses in Q2’17 standalone, the cost lines remained elevated in H1’17, up 86% y/y to ₦1.6 billion (Vetiva estimate: ₦1.5 billion).

Notwithstanding the cost pressure, bottom-line remained strong largely due to the impressive topline performance. Notably, the ₦1.0 billion H1’17 PAT recorded (7% above our estimate) is only slightly shy of the ₦1.2 billion reported for the whole of FY’16.

On a q/q perspective however, revenue moderated 4% in Q2’17 despite a further c.11% cement price increase over the quarter amidst intense rainfall that capped volumes within the period.

The mild q/q topline decline was however cushioned by significant OPEX pruning over the quarter as earlier highlighted. Overall, earnings came in flat in Q2’17 with EBIT, PBT and PAT almost printing at same levels as Q1’17.

Earnings forecasts, valuation relatively unchanged
With the half year numbers coming much in line with our estimates, we maintain our views on most part of the operations.

Meanwhile, we note recent media reports citing CCNN’s plans of cutting prices, and think the unfavorable net impact of the strong prices in Q2 revenue standalone could be fueling this.

After cutting our H2’17 price estimate slightly and raising our volume estimate on expectation of recovery, our revenue remains largely unchanged at ₦15.8 billion (Previous: ₦15.6 billion).

Whilst we maintain our OPEX estimates, we have revised our interest charges higher to ₦103 million (Previous: ₦76 million) in line with higher interest charges observed in H1’17. Notwithstanding, our FY’17 PBT and PAT estimates remain relatively unchanged at ₦2.4 billion and ₦1.8 billion respectively.

We maintain our target price of ₦7.88. Given the current market price of ₦8.34, our rating on the stock remains a SELL.

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