April 3, 2023/Cordros Report
In this report, we review our estimates and update our views on NASCON for 2023E. Over 2022FY, NASCON outperformed our expectations with the food producer maintaining the pace of top- and bottom-line growth it started the year with. Furthermore, we like that the food producer maintained margins despite the weak operating environment and intense competition from Royal salt in the retail segment. Going into 2023E, we reduce our NASCON TP by 8.6% to NGN25.44/s (previously: NGN27.84/s) and maintain our “BUY” rating. The cut to our TP is based on our expectations of a slower pace of revenue growth as we project slower pace of increases to its salt pricing, while sustaining its low-price strategy in the seasonings segments to maintain the pace of volume expansion in the seasonings segments (c. 43.0% y/y). We believe the aforementioned aligns with NASCON’s goals of accelerating and gaining share in the refined salts segment and building a competitive seasoning portfolio in the Northern region. In addition, our revised TP factors in cost pressures that we expect to remain prevalent in 2023E, stemming from consumers’ price sensitivity and inflationary pressures on production inputs and operating expenses. We estimate DPS of NGN1.61 in 2023E, translating to a dividend yield of 13.2%. On our estimates, NASCON is trading on a 2023E P/E of 3.7x and EV/EBITDA of 2.4x.
Stronger pricing boosts earnings expectation: While we project salt volumes will remain depressed, we expect higher selling prices to support revenue from the salt segment. With salt volumes relatively flat, we estimate a c.35.0% increase in salt prices will shore up salt revenue growth. On seasonings, we expect NASCON to maintain the use of its low pricing strategy as its differentiating marker and value driver. For context, our channel checks reveal that NASCON’s Dan-Q seasoning (400g) retailed at a 52.6% discount compared to its pricier counterpart – Maggi Chicken. Overall, we forecast a 33.0% y/y growth in 2023E revenue and model an average growth of 7.0% in 2024-2027E. We project a 197bps y/y increase in NASCON’s 2023E EBITDA margin on the higher salt pricing pass-through. Consequently, we forecast that NASCON will deliver an EPS print of NGN3.31 (+60.9% y/y) and project an EPS CAGR of 7.6% over 2023-2027E.
FCF to remain strong: We like that NASCON has maintained a positive FCF generation through its capex cycle, highlighting the food producer’s ability to achieve cash conversion at the operating cash level. We note that NASCON’s FCF margin has averaged 8.9% over the last ten years (2012-2022FY), and we estimate a sustenance in this trend. On our estimates, we project a 10.9% average FCF margin over 2023E-2027E. We expect this to continue to drive NASCON’s payment of strong cash dividends (2012-2022FY DPR: 66.0%) to shareholders.
Valuation: Our 12M target price is NGN25.44/s, derived from a 40/60 blend of sector relative valuation estimates (P/E & EV/EBITDA) and a DCF valuation. On P/E, we utilised the Middle East & African (MEA) peer average 2023E multiple of 7.3x as gotten from Bloomberg. Applying this to our 2023E EPS estimate of NGN3.31/s gives a FV of NGN24.31/s. Similarly, for EV/EBITDA, we also utilised the 2023E MEA peer average (5.0x) gotten from Bloomberg and derived a fair value estimate of NGN28.04/s. The combination of both multiples results in a multiple-based FV of NGN26.18/s. Our DCF FV is NGN24.95/s assuming a 27.3% WACC and 3.0% terminal growth rate.
