Focusing on Q3-19 performance, in our last update, – Margin weakened on higher COGS – we identified both transportation and energy costs as the key drivers of CCNN’s COGS pressure. Clearly, management’s cost-cutting strategies are yet to reflect on the company’s numbers, as COGS grew significantly by 45.2% y/y in Q3-19, running ahead of revenue growth (+38.4% y/y) in the same period. Thus, gross margin deteriorated further by 2.8ppts to 39.5%. To be clear, energy cost (53% of cash cost), rose by 132.1% y/y, as the percentage of expensive imported coal utilized in the company’s total energy mix remains significant (c. 70% of coal need). Thus, while energy cost per ton rose by 56.1% y/y, the total cost per ton moderated by 2.1% y/y as volume sold (+48.7% y/y) grew faster than COGS in the period.

Elsewhere, we estimate that CCNN produced c.265kMT in Q3-19, on a c.53.0% capacity utilization assumption. This is on the back of the heavy rainfall which we believe had materially affected sales in the period. At this run rate, capacity utilization is now at c.69.0%, relative to management’s FY-2019 guidance of c.80.0%. Meanwhile, given the strong competition, especially in Nigeria, and the unrelenting rainfall over the quarter, we believe management sustained its price discounting strategy (-6.9% q/q) which, to our mind, was in a bid to continue to gain market share. Hence, revenue expanded by 38.4% y/y in Q3-19. This story appears similar over 9M-19 as gross margin weakened (-6bps to 54.5%), driven by a faster rise in COGS (+119.7% y/y) relative to revenue growth (+117.2% y/y).

Over the quarter, the dual impact of a sharp jump in OPEX (+92.8 y/y) and a material decline in other income (-6,865.7% y/y), cascaded into a 2.3% y/y moderation in operating profit. Thus, the EBIT margin declined by 8.1ppts to 19.5%. Worse still, on account of a four-fold jump in bank charges, the company reported a net finance cost of NGN4.6million (vs. Q3-18: NGN0.21 million net finance income). Against that backdrop, PBT declined by 4.7% y/y, with related margin shedding 8.6ppts to 19.0%. However, PAT expanded by 5.2% y/y, supported by a 7.0ppts decline in effective taxes. Overall, Q3-19 EPS improved marginally by 6bps y/y to NGN0.11.

That said, relative to our estimates, the company’s performance was disappointing, with its annualized EPS now way below our estimate. To put in a better perspective, CCNN annualized EPS of NGN0.89 is 20.0% below our estimate of NGN1.11 for FY-19.

Comment: CCNN’s significant cost pressure is not surprising to us, given that (1) expensive imported coal still dominates its energy mix, and (2) the company still relies on third-party transportation to move the coal to its plants. Thus, despite the strong topline performance, the uninspiring PAT run-rate could spike a negative reaction to the stock in today’s trading. Our estimates are under review.