May 20, 2020/Cordros Report
In our last update “See report: Focus on Nigeria Makes for Less Distraction”, we had stated that the negative impact of COVID-19 on WAPCO’s volume growth will be a lot more evident on earnings from Q2-20. Our prognosis was largely hinged on management’s guidance that volume sold in January and February was already ahead of last year as at the time of publishing (April 08, 2020). In line with our expectations, WAPCO delivered another solid standalone EPS growth of +150.4% y/y (NGN0.50/s), stemming largely from a strong, volume-led, topline growth and a steep decline in finance charges. For the next few quarters, we believe WAPCO will have to grapple with significantly pressured cement demand, occasioned by (1) the challenged revenue profile of the Nigerian government, which is expected to weigh markedly on FGN’s CAPEX implementation, and (2) COVID-19 induced economic lockdown, especially for the better part of Q2-20. Nonetheless, the blend of stronger energy efficiency and further moderation in finance charges is expected to partly offset the impact. As such, we retain our 2020E EPS estimate of NGN1.27/share.
Cement Volume Growth to the Fore: We like that Q1-20 revenue and EPS printed well ahead of our estimates by 5.2% and 7.8%, respectively. On the former, WAPCO delivered an 8.0% y/y volume growth, together with a 1.6% y/y growth in price per bag, setting the stage for a 9.8% y/y growth in sales. During the earnings conference call, management acknowledged that it anticipates volume growth pressure, especially in Q2-20, following the COVID-19 induced economic disruption. Our view aligns with management as we believe slower volume growth will now reflect on the company’s earnings in Q2-20, before a gradual pick-up over H2-20, as economic activities recover. Our estimated 4.1% y/y decline in volume growth, together with a flat price forecast, translates to a 7.8% y/y decline in revenue over 2020E.
Gross Margin Bows to Input Cost Pressure, Albeit Not for Long: We are disappointed by yet another y/y deterioration in gross margin, which settled 2.7ppts lower than the corresponding period of the prior year. For the sake of clarity, Q1-20 total cost/tonne grew by 5.5% y/y (revenue/tonne: +1.2% y/y), driven by production cost/tonne (+12.1% y/y) and variable cost/tonne (+11.5% y/y). It is worth noting that energy cost/tonne rose by 40.8% y/y, portending that the company still faces significant energy cost pressure. We now expect the impact of the recently completed Capitative Power Plant (CPP) in Ashaka, which management said could deliver energy cost savings of c.20%, to reflect favourably on input cost going forward. Management said it remains on course to raise Alternative Fuel (AF) usage to c.50% (from c.30% currently) of its energy need by end of 2020, a move we consider a significant margin tailwind over the rest of the year.
Valuation: We value WAPCO at a TP of NGN17.90/share, translating to an expected total return of 58.4%. As such, we maintain our “BUY” recommendation. the stock is trading on one-year and two-year forward P/Es of 14.2x and 13.2x, respectively. On an enterprise basis, we estimate that it is trading at a 2020FY EV/EBITDA multiple of 6.9x.
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