November 11, 2022/Cordros Report
In this report, we review our estimates and update our views on NASCON for 2022FY. This is as the food producer has generally outperformed our expectations for 2022FY so far, with revenue outturn as of 9M-22 (NGN40.61 billion) tracking ahead of our initial expectation (NGN32.73 billion) for the period by 24.1%, despite the weak operating environment and intense competition from Royal Salt in the retail segment. Considering the resilience witnessed so far in 2022, we expect the company to see out the year positively, maintaining robust expansions in its top and bottom lines. Nonetheless, over the medium term, we remain cautious about NASCON’s ability to maintain the pace of growth as we still see little scope for volume expansion in both the seasoning and salt segments. Following the revisions to our estimates, we raise our target price to NGN19.09/s (previously: NGN12.63/s) and revise our rating on the stock upwards to a “BUY” from “HOLD”.
Sturdy Topline Expansion Supports Earnings Growth: NASCON’s revenue grew by 62.8% y/y in 9M-22, mainly driven by the product price increases, especially on its salt products. Across its business regions, revenue from the North (69.1% of revenue) remained the largest contributor to the total sales outturn, growing by 93.2% y/y, while revenue from the Western (+15.3% y/y | 24.6% of revenue) and Eastern (+45.3% y/y | 6.2% of revenue) regions maintained the momentum witnessed so far in 2022. However, gross (-201bps y/y to 38.1%) and operating (-681bps y/y to 15.5%) margins recorded declines, reflecting the overwhelming cost pressures in the year, most predominantly in H1-22. Notwithstanding, EPS grew by 18.9% y/y to NGN1.45 in the period, buoyed by the sturdy sales growth.
Lower Resilient Earnings Amid Cost Pressures: For 2022FY, we have raised our revenue estimate, reflecting the positive outturn recorded so far in the year. We now project a 59.2% y/y revenue growth in 2022E (prev.: 29.8% y/y). However, over the medium term (2023-2026E), we model a slower average annual revenue growth of 15.4% y/y, given our concerns about the sustainability of the current pace of growth. Specifically, despite our overall lofty expectations for agro-allied companies in the Nigerian market, we still believe significant volume growth will be unlikely, given Royal Salt’s dominance of the refined salts segment. For the seasonings segment, we expect the current momentum to be sustained, with NASCON maintaining its low-price strategy. We expect a 200bps y/y increase in the 2022E gross margin, reflective of the price increases instituted in the period. Nonetheless, we forecast EBITDA margin will decline markedly by 383bps y/y to 16.9%, stemming from a 40.9% y/y increase in operating expenses, highlighting the challenging operating environment. Consequently, we forecast that EPS will increase by 32.9% y/y to NGN1.49 in 2022FY (+10.4% y/y in 2021FY). Further out, we forecast an EPS CAGR of 11.2% in 2023-2026E.
Valuation: The net impact of our changes is an upward adjustment in our price target to NGN19.09/s (previously: NGN12.63/s) – implying a potential upside of 101.0% and a 106.6% total expected return after incorporating its 2022E dividend yield of 5.6%. On our estimates, NASCON trades at a 2022E P/E and EV/EBITDA of 6.4x and 1.7x, a discount to its MEA peer average of 7.4x and 5.6x, respectively.
