April 25, 2019/Cordros Report
Event: CCNN published Q1-19 results after close of market yesterday, showing net profit expanded by 235.6% y/y. Net profit was supported by surge in gross profit (+239.7% y/y), which neutered expansions in OPEX (+172.5% y/y), net finance charges (+37% y/y), and effective tax. However, on account of material outstanding shares increase, arising from its merger with Kalambaina, EPS declined by 67.9% y/y.
Q1-19 revenue was higher by 213.1% from a year ago, as the company continues to ramp up production from the new Kalambaina cement plant. By our estimate, CCNN produced c.395kMT in Q1 alone, more than half of the 765kMT produced over 2018FY. At this run-rate, we highlight that capacity utilization currently sits at 79%, and supports the view that there exists strong cement demand in the North West region, together with strong export opportunities. In fact, management is planning to expand its production distribution into north-east and north-central regions as it does not expect the north-west to absorb its enlarged production capacity of 2Mt/yr. On q/q basis, revenue grew by 39%, driven by higher volume.
Furthermore, the improved volume cascaded into stronger gross margin for the company. Pointedly, gross margin expanded by 3.6 pps to 45.5%, as revenue growth outpaced higher COGS (+193.8%). We highlight that CCNN continues to enjoy scale benefits arising from last year’s merger with Kalambaina cement (which tripled production capacity to 2Mts/yr), as cost per ton declined by 8.5% y/y in the review period.
Over the quarter, the combination of sharp jump in selling and distribution expenses (+310.2 y/y) and admin expenses (+115.9 y/y) drove OPEX higher (+172.5% y/y), albeit at a rate slower than revenue growth. Thus, OPEX to sales ratio moderated by 2 pps to 13.6%. That, together with strong gross margin, drove EBITDA higher by 295.5% y/y, with related margin higher by 3.4 pps to 31.9% (Q1 18: 28.5%).
Further down, despite higher net finance cost (+37% y/y) and effective tax (+400 bps to 32%), the company reported PBT and PAT growth of 255.5% y/y and 235.6% y/y to NGN5.35 billion and NGN3.36 billion, respectively. However, the material outstanding shares increase (by 946% to 13.14 billion) from last year’s merger weighed on EPS (67.9% y/y).
Comment: CCNN’s significant PAT growth is not surprising, as the impact of the production ramp up from its new plant already factored. However, the still depressed EPS could spike a negative reaction in the market. Our estimates are under review.
