Cement Company of Northern Nigeria Plc.: Impressive 2017FY; SELL Reiterated


Update: CCNN published Q4-17 and 2017FY results which were in line with our estimate. 2017FY revenue of NGN19.6 billion (+39%) beat our estimate by 4% while the net profit of NGN3.2 billion (+157%) was short by 2%. In Q4-17, revenue grew 23% y/y and 17% q/q while net profit increased by 123% y/y and 18% q/q. Both were respectively ahead by 5%, and down 2%, compared to our estimates. For the full year 2017, the board has proposed a final dividend of NGN1.25/s (49% payout) – way ahead of the NGN0.26/s (12% payout) we expected – equating to a yield of 7% on the last traded price.

Higher-than-expected volume in 2017FY drive upward revision: Disclosed full year volume was 468,000 tonnes, only 4% below the volume achieved in 2016FY. We were quite surprised (quarterly volumes were not disclosed) that CCNN achieved 94% utilization rate, amidst reported 46% increase in selling price. We note that the price of NGN41,966/tonne disclosed by the company for 2017FY is lower than DANGCEM’s by 3% and ASHAKACEM’s 9M-17 price by 4%. In addition, improved security condition in the North, and the low presence of competitors in the markets where CCNN supplies cement may have also supported the higher-than-expected utilization rate achieved. CCNN’s volume performance beat both DANGCEM’s -16% (reported) and the -18% volume changes we estimate for LAFARGE in 2017FY.

With cement prices largely expected to be stable this year, economic and infrastructure spending outlook broadly better, and FX (having a strong link with CCNN’s energy cost) condition improving, we revise our sales volume estimate for 2018E to 491,000 tonnes (previously 426,000 tonnes) and maintain NGN46,000/tonne selling price estimate. On our assumptions, we have 2018E revenue of NGN22.6 billion (previously NGN19.6 billion), equating to 15% growth over 2017FY.

Strong margins achieved in 2017FY will be tested in 2018: The gross and EBITDA margins of 39% and 25% reported in 2017FY were record highs, reflecting largely, the impact of price increase which outpaced the 23% increase in per tonne production cost. We note specifically, the 35% increase in per tonne energy cost, which in our view, mirrored the 21% increase in average crude oil price in 2017. Hence, with cement prices sticky upwards, and energy cost (accounting for about 60% of gross production cost) expected to reflect the surging price of crude oil (+4% YtD), we believe the margins delivered last year will be tested, and consequently, forecast both gross and EBITDA margins to soften to 36% (previously 35%) and 22% (previously 23%) respectively. 2018E EBITDA and net profit, on our revised estimates, are NGN5 billion (previously NGN4.5 billion) and NGN3.1 billion (previously NGN2.7 billion), respectively.

Valuation: On our revised estimates, we have a TP of NGN15.64 (previously NGN9.52) for CCNN and maintain SELL rating, on 107% YtD return. The stock is trading at forward (2018E) P/E and EV/EBITDA multiples of 7.5x and 4.2x respectively, broadly in line with its five-year historical averages of 7x and 3.8x.

Cordros Research…