Dilution effects, mask profit surge

Cement Company of Northern Nigeria (CCNN) recently released its FY’18 results, reporting a record profit of ₦5.7 billion, 77% higher than 2017 figures and ahead of our estimate (₦5.5 billion). Notably, this is the first earnings release since the completion of the merger with Kalambaina Cement Company. While the merger was completed in Q4’18, management elected to report the performance of the merged entities as if the merger took place at the start of the year. Thus, whilst Net profit soared y/y, EPS shrunk 83% to ₦0.44, given that shares outstanding jumped over nine times to 13.1 billion units. Management proposed a dividend payout of 92%, representing ₦0.40/share (2017: ₦1.25).

Cement Company of Northern Nigeria PLC (CCNN) produces and markets cement for various construction purposes in Nigeria. Following a strategic re-orientation, Heidelberg Cement Group (formerly a core investor) divested its CCNN shares in 2008 to Damnaz Cement Company Limited (a Nigerian company). In 2010, BUA International Limited acquired Damnaz Cement Company Limited and became indirectly the majority shareholder in CCNN and its technical partner. CCNN currently operates as a subsidiary of BUA International Limited.

Revenue ramped up as exports, domestic sales surge

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Revenue for the enlarged entity printed at ₦31.7 billion, 62% higher y/y and ahead of our ₦26.5 billion estimates for FY’18. The impressive topline figure came as a result of increased domestic sales and exports. Overall, CCNN produced 0.76 million MT of cement and sold over 0.74 million MT (Vetiva: 0.58 million MT), up 59% y/y. Interestingly, whilst the sale of cement in Nigeria rose by 49% y/y to ₦28.9 billion, export figures jumped from ₦0.2 billion in 2017 to ₦2.9 billion in 2018. This follows management’s plans to take advantage of the plant’s closeness to the Niger border to ramp up exports to the region. Notably, management has also said that it plans to extend product distribution to the North East and North Central as it does not expect the North West (current geographical region) to absorb its enlarged capacity of 2 million MT. Furthermore, even after accounting for a rise in depreciation provisions (from the new plant) as well as technical fees and costs related to the merger, EBIT still rose 86% y/y to ₦7.9 billion (Vetiva: ₦7.8 billion). Meanwhile, contrary to expectations, Net finance costs rose 1% y/y to ₦283 million, dragged by lower than expected interest income. Thus, PBT rose 81% y/y to ₦7.6 billion (Vetiva: ₦7.8 billion).

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PAT to grow 17% y/y in FY’19

Given the impressive FY’18 results, we have made a number of adjustments to our FY’19 and forward estimates. First, we have adjusted our volume forecast to 0.82 million MT (Previous: 0.67 million MT), a 10% increase from 2018 as we expect a ramp up in volume offtake from the new plant. Based on our expectation of increased competition in 2019, we forecast a 1% drop in average revenue/tonne to ₦42,312. Thus, we project a higher revenue of ₦34.5 billion (Previous: ₦30.2 billion). Also, given that the new plant is more cost efficient due to its diversified kiln and dedicated power generator, we expect that management would shift the bulk of production to it. Thus, after accounting for merger-related costs in FY’18 and improved efficiency, we arrive at a higher EBITDA margin of 34% (2018: 32%) and an FY’19 EBITDA of ₦11.9 billion. After adjusting for interest and tax expenses, we arrive at a PAT of ₦6.7 billion (Previous: ₦6.7 billion), up 17% from 2018. Post-2019, we forecast a 14% PAT CAGR to ₦11.2 billion in 2023, driven by a higher earnings potential from a larger and more cost-efficient plant. Based on a 5-year earnings projection and a WACC of 22%, we value CCNN at a One-year target price of ₦26.58/share (Previous: ₦23.87) and place a BUY recommendation on the stock.

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Pioneer tax: Another potential upside from the expansion

Further to our base projections, we highlight that CCNN can see significant upside to its Net income in 2019 and beyond upon approval of Pioneer status by the NIPC. Whilst cement had been taken off the pioneer status list in 2017, we note that Lafarge Africa and Dangote cement were granted approval (for up to three years in the case of Lafarge) on select lines at the end of 2018. Therefore, we see a moderate chance of CCNN receiving approval on the new line. However, whilst management has spoken about exploring this option, no application had been made as at December 2018 (according to NIPC records).

© 2019 Vetiva Capital Management Limited

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