March 14, 2022/Cordros Report
NASCON’s 2021FY result aligned with our expectations that the company will see out the year with positive results, as both the top (+18.8% y/y) and bottom (+10.4% y/y) lines posted double-digit growth. However, we regard the revenue growth in 2021FY to be sub-optimal, given the exciting growth potentials for staple food producers. Going into 2022E, we expect revenue growth to be driven by price increases, as we see little scope for volume expansion in the salts segment. In addition, we expect inflationary pressures to persist and constrain margins in the year. Following the revisions to our estimates, we lower our target price to NGN14.86/s (previously: NGN21.02/s) and revise downwards our rating on the stock to a “HOLD” from “BUY”.
Higher prices to shore revenue growth: NASCON’s revenue grew by 18.8% y/y in 2021FY, mainly driven by increases in its flagship businesses – salt (+17.4% y/y | 89.4% of revenue) and seasonings (+31.9% y/y | 10.6% of revenue). Salt revenue was driven solely by price increases (c. 12.0% y/y). We note that the reduction in volumes come despite the expansion of its refined salt capacity from 82k/mt to 250k/mt. We believe NASCON’s inability to ramp up refined salt volumes is attributable to Royal Salt’s (c. 70.0% of market share) control of the refined salt segment. On the other hand, the sturdy growth in the seasonings segment emanated from higher volumes and prices. On the latter, we highlight that NASCON’s seasoning product (Dan-Q) retailed at lower prices to other brands, reiterating NASCON’s affordability strategy. Across its regional footprint, NASCON’s strategy to penetrate other regions asides from the North (62.8% of revenue | 2020FY: 67.2%) paid off, as the company gained some traction in the West (29.1% of revenue | 2020FY: 25.7%) and East (8.0% of revenue | 2020FY: 7.1%). For 2022E, we forecast a 17.0% y/y growth in topline, majorly driven by price increases. We believe higher salt prices will support higher salt sales, with volume growth unlikely given Royal Salt’s dominance of the refined salts segment. For the seasonings segment, we expect the current momentum to be sustained, driven by the company’s low-price strategy. Over the medium term (2023 – 2026E), we model annual revenue growth of 14.8%.
Lower margins & profitability on cost pressures: Gross margin declined by 534bps to 35.9% in 2021FY, owing to a 133.8% y/y increase in the cost of raw materials, reflecting the effects of FX challenges and elevated inflationary pressures. We expect these pressures to remain drags on NASCON’s margins in the near term. As a result, we estimate gross margin will decline slightly by 50bps to 35.4% in 2022E, with the expected price increases providing some support. Based on our expectations for a lower gross margin and a 13.9% y/y expected increase in operating expenses, we estimate EBITDA margin will decline by 337bps to 17.3% in 2022E. Accordingly, we forecast a 11.1% y/y decline in 2022E EPS to NGN1.05. Further out, we forecast an EPS CAGR of 15.2% for 2023E-2026E. Our 2022 EPS forecast is 18.8% lower than the Bloomberg consensus estimate of NGN1.29.
Valuation: The net impact of our changes is a downward adjustment in our price target to NGN14.86/s (previously: NGN21.02/s) – implying a potential upside of 10.1% and a 12.9% total expected return after incorporating its 2022E dividend yield of 2.8%. On our estimates, NASCON trades at a 2022E P/E and EV/EBITDA of 14.4x and 4.3x.
Click here to read full PDF copy of report
