June 27, 2019/Cordros Report

We initiate coverage on NASCON Allied Industries (NASCON) with a BUY rating and a one-year TP of NGN25.97, implying an upside of 73% from the last closing price. Our model suggests the company will deliver EPS growth of 8.6% CAGR over our forecast horizon. We find quite instructive, the company’s dividend pay-out of 78% on average since 2009, given that (1) it is unusual of a Dangote Industries Limited (DIL) member company and (2) the group’s recent expansion programmes have been largely met through equity. Against the foregoing, we estimate 2019E and 2020E DPS of NGN1.77 and NGN1.92, which corresponds to dividend yield of 12% and 13%, respectively.

A duopolistic competitive salt market with growth potential

NASCON and Royal Salt are the biggest players in the Nigerian salt industry, accounting for 60% and 25% of market share, respectively. While, NASCON is the undisputed leader (78-80%) in the bulk salt sub-segment, Royal Salt controls the refined salt market. Given the strong demand outlook, management says it is increasing refined salt capacity by 250kMT, to be commissioned in Q2 19. . In our view, the increased capacity will change the competitive dynamics in the refined salt market where NASCON currently has lower market share (25%-28%).
 
Salt and seasoning cubes to underpin strong revenue growth
 
At 95.7%, salt contributed the bulk of NASCON’s revenue (ex-freight revenue) over 2018FY. In 2019E, we project salt revenue will contribute 94.8% of total revenue, on assumption of 2% y/y and 11% y/y price and volume growth, respectively. Over 2020-2023E, we see salt revenue CAGR of 4.5%. Elsewhere, we expect the company to deliver seasoning revenue growth of 20.8% in 2019E and a CAGR of 13.3% over 2020-2023E. By 2023, we expect seasonings sales will contribute 8% to total sales, from 4.3% in 2018FY.

Catalysts: We see the resumption of the mothballed vegetable oil and tomato paste business as an upside risk to NASCON’s earnings.
 
Valuation: We value NASCON Allied Industries at NGN25.97/share based on our five-year discounted cash flow (DCF) methodology, which implies upside of 73.13% from the last closing price. That, together with our 2019E dividend yield expectation of 11.83%, implies total return of 84.97%.

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