May 8, 2024/Cordros Report
In this report, we update our views on NASCON Allied Industries Plc (NASCON) for 2024E. Despite robust top-line growth (+39.5% y/y), earnings declined (-25.0% y/y to NGN1.23 billion) due to a significant net FX loss (NGN3.06 billion: Q1-23: Nil) and higher operating expenses (+43.3% y/y to NGN6.43 billion) recorded in Q1-24. Over the rest of 2024E, we anticipate revenue growth fueled by price hikes and continued volume increases, especially in the salt segment. Thus, we maintain a positive outlook and our HOLD recommendation but revise our target price downwards to NGN46.72/s (previously: NGN52.66/s), accounting for the impact of currency devaluation and elevated cost pressures on the company’s operations. Over the medium term, we are optimistic about NASCON’s growth strategy, which is hinged on capacity expansion, market penetration and leveraging brand loyalty, which are significant factors driving its continued market dominance. We project a DPS of NGN1.70 for 2024E, equating to a dividend yield of 3.2% based on the current price. On our estimates, NASCON trades at a 2024E P/E of 9.9x and an EV/EBITDA of 3.6x.
Favourable price/volume mix to support earnings: We anticipate that NASCON will sustain strong revenue performance in 2024E due to increased selling prices and volume growth from enhanced market penetration initiatives. However, we acknowledge the intense competition in the salt market remains a potential risk to this outlook. In the seasonings segment, we expect NASCON’s seasoning to grow due to its relatively lower pricing strategy and focus on the Northern Nigeria market, with a market share of c. 6.0% (as of 2023FY). Thus, we forecast a 35.1% y/y revenue growth in 2024E and an average growth of 17.3% over 2025-2028E. Due to anticipated elevated cost pressures, we expect a slight dip (-37bps y/y) in gross margin to 54.5% for 2024E (2023FY: 54.8%). Coupled with anticipated OPEX growth (+38.3% y/y) and an expected net FX loss of NGN3.83 billion (vs net FX gain of NGN0.23 billion in 2023FY), we project a 585bps y/y decrease in EBITDA margin to 23.3% for 2024E. Our 2024E EPS forecast stands at NGN5.42, reflecting a 4.5% y/y increase from 2023FY print (NGN5.18).
Strong liquidity position expected in 2024E: NASCON has shown efficient management of its liquidity, as reflected in its increasing quick and current ratios over the years. Between 2019FY and 2023FY, these ratios improved from 0.9x to 1.1x and from 1.2x to 1.4x, respectively, signifying the company’s capacity to meet short-term obligations using its current assets, leading to a significant enhancement in its liquidity position, which grew from NGN3.66 billion to NGN25.61 billion during the same period. We anticipate this positive trend will continue as NASCON effectively manages its working capital funding gap. Therefore, we expect current and quick ratios of 1.5x (2023FY: 1.4x) and 1.2x (2023FY: 1.1x), respectively. Over 2025-2028E, we project an average current ratio of 1.8x (5-year historical average: 1.2x) and a quick ratio of 1.6x (5-year historical average: 0.9x).
Valuation: We arrived at our TP of NGN46.72/s through a 40/60 blend of sector-relative valuation estimates (P/E & EV/EBITDA) and a DCF valuation. On P/E, we applied the MEA peer average 2024E multiple of 7.1x, resulting in a fair value (FV) of NGN38.44/s based on our 2024E EPS estimate of NGN5.42/s. Similarly, utilising the MEA peer average EV/EBITDA multiple of 4.5x, we derived a fair value estimate of NGN56.42/s. The combined multiples yielded a multiple-based fair value of NGN47.43/s. Our DCF’s fair value estimate is NGN46.25/s, assuming a 23.7% WACC and a 4.0% terminal growth rate.
