July 30, 2019/InvestmentOne Report

§  Mixed Performance in Revenue: down 9.63% q/q, up 128.10% y/y.

§  Declining gross margin performance: down 163bps q/q, 396bps y/y.

§  Increasing OPEX/Sales ratio: up 233bps q/q, 166bps y/y.

§  Declining PBT Margin: down 309bps q/q, 362bps y/y.

CCNN published its Q2 2019 results on Friday. The results showed that the cement producer’s turnover was up 128.10% y/y, rising to N15.26billion. Nonetheless, the faster growth recorded in cost led to a decline in gross profit margin. Additionally, increase in OPEX/sales ratio further led to the drop in bottom-line performance.  

Top-line Performance – Increasing Market Share?

The company’s impressive topline performance is largely due to its expansion in production capacity, following its merger with Kalambaina Cement, which has allowed it to churn in higher revenue as a result of increased volume sales.  Revenue grew by 126.10% y/y to N15.26billion in Q2 2019. We believe the firm may be recording success in its plan to expand market share to other northern regions of Nigeria, as the North-west region may not have the capacity to absorb new volumes.

The cement producer’s gross profit margin however declined by 396bps y/y to 43.90%. While we believe that it is likely that the firm took a price increase in Q2 2019 as other players in the sector did, we point out that increase in cost may have been the major cause of the decline in margin performance.  

Not So Good Bottom-line Performance

Moving down the P&L, OPEX/sales ratio expanded by 166bps y/y, this was driven by a rise in both administration and selling expenses. While admin expenses grew by 125% y/y, selling and distribution expenses grew by 216%; this is as a result of expansion in operation.

In addition, the cement company recorded an increase in its net finance cost. This was on the back of a 54.07% y/y increase in finance cost. Consequently, there was a decline in PBT margin to 28.59% in Q2 2019 (from 32.21% in Q2 2018). We highlight that the increase in finance cost was as a result of a rise in bank charges (up c.137% y/y) as total borrowings dropped by 46.52% y/y to N322.77million. 

Still a Positive Outlook

On a sequential basis, the company reported a somewhat unimpressive q/q performance as topline declined by 9.63%. Furthermore, a rise in cost of sales (up 6.93% q/q), led to 163ps drop in gross profit margin.

In addition, we highlight that operating expenses rose by 5.18%, pushing OPEX/sales ratio up by 223bps q/q to 15.84%. Likewise, a 95.46% q/q decline in net finance was not enough to stop a decline in PBT margin (down 309bps q/q).

H1 2019 performance was however decent as we saw a 166.03% y/y jump in revenue to reach N32.15billion courtesy its 2018 expansion. OPEX/sales ratio also declined by 16bps y/y but the 47.57% y/y jump in net finance cost led to a drop in PBT margin to 30.21% (down by 8bps y/y).

Q3 2019 may be a tepid quarter due to the rainy season, which slows construction. However, going forward, we expect the company’s top-line performance to see support from potential increase in FG capex spending following the appointment of executive cabinet and implementation of 2019 budget. In addition, the cement producer should continue to reap benefits of its merger with Kalambaina Cement if its plans to enter new market and expand market share continues to be successful.

We also draw attention to a potential drop in cost in the medium term as its new factory is designed to run on multiple energy sources (such as gas and coal); this is unlike its old factory which is run predominantly with Low Pour Fuel oil (LPFO) which is the most expensive of all energy sources. If a switch in energy sources is effectively implemented, we see potential improvements in margin performance of CCNN as we have previously seen in other players operating in the sector.  

Source: Company financials, Investment One Research