29/7/2019/Cordros Research

Late on Friday, CCNN released its Q2 19 financial report which showed an EPS of NGN0.55; representing a decline of c.77% y/y, mostly on account of the material dilution arising from the merger with Kalambaina cement in 2018. Nonetheless, the EPS is tracking well ahead of Bloomberg consensus full-year 2019E estimate of NGN0.86 and Cordros’ estimate of NGN1.01. Although the new 1.5MT Kalambaina cement plant started operation in the corresponding period of 2018, the company reported revenue growth of 128.1% y/y, driven by a 123.6% y/y volume growth, on an assumption of 2% y/y growth in price in line with guidance.

Topline Growth, Margin Weakened – Relative to Lafarge Africa (BUY: 19.57/share) whose volume growth in Nigeria only expanded by 3.3% y/y in Q2 19, we found CCNN’s achieved volume growth impressive. This portends the fact that the company might be taking market share from competitors, especially in the North West. While we acknowledged that Ashaka (capacity: 900MT) might be limited by capacity in the North as management confirmed that capacity utilization rate is a little shy of 100%, we see DANGCEM as the most susceptible to CCNN aggressive market penetration. Meanwhile, despite the reported topline growth, gross and operating margins deteriorated, declining by 4.0 pps and 3.6 pps to 43.9% and 28.6% respectively, as both COGS (+145.4% y/y) and OPEX (+154.8% y/y) ran ahead of sales growth. For us, the crucial issue in Q2 19 is that CCNN recorded material decline in energy cost per tonne (-36.6% y/y), however total cost per tonne printed a notch higher by 1.2% y/y, driven by a ten-fold jump in COGS related depreciation expense.

Valuation – On our estimates, the stock is trading at 2019E and 2020E EV/EBITDA of 7.1x and 7.6x, relative to 15.12x and 7.96x for Bloomberg Middle East & Africa peers. Our TP implies a total return of 124% as at the closing price yesterday. We maintain our BUY rating on the stock.

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