NASCON Allied Industries Plc: High Cost weigh on Profitability

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NASCON Allied Industries Plc recorded double-digit growth in revenue of 12% from N18.76bn  in  9M  2018  to  N21.03bn  in  9M  2019, driven by an impressive Q3  2019 standalone performance.  However,  operating profit declined markedly by 40%  on the back of higher manufacturing cost. In a similar trend, profit before tax (PBT), as well as profit after tax (PAT), decreased YoY by 47%.

Minimum pricing amid inflationary environment compresses margins

The group’s revenue grew YoY from N18.76bn  to  N21.03bn  in  9M  2019, driven by robust growth of 36% YoY in Q3 2019 standalone performance. Revenue rose from N5.93bn in Q3 2018 to N8.05bn in Q3 2019, informing the double-digit YoY growth of 12% as at 9M 2019 from the muted 2% growth recorded in H1 2019. A breakdown of the revenue by location reveals that revenue grew by 36% in the West, 9% in the North, and declined by 20% in the East. We attribute the robust growth in Q3 2019 standalone performance to the border closure, which has significantly reduced the influx of smuggled goods,  thus providing headroom for volume growth by the group.

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On the other hand, cost of sales increased at a faster pace YoY by 26%  when compared to revenue growth of 12%. Manufacturing cost grew from N12.58bn  to N15.90bn in 9M 2019 on the back of 36% growth in raw materials consumed. Raw materials consumed grew YoY from N7.34bn to N10.00bn in 9M 2019 on account of minimum pricing in an inflationary environment as the group was constrained by competition to pass cost increases to consumers.  As a result, gross profit declined YoY by 17% to N5.13bn in 9M 2019 (9M 2018: N6.18bn) with a gross profit margin of 24% (9M 2018: 33%).

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Historical Performance

N’mn                            9M  2015     9M  2016     9M  2017     9M  2018    9M  2019
Revenue10,19212,79520,71218,75821,029
Cost of  sales(6,954)(8,557)(13,085)(12,583)(15,896)
Gross profit3,2384,2387,6276,1755,134
Operating  profit2,3802,7575,8935,0903,070
Profit before tax2,3802,5935,9625,5742,973
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Recommendation

We expect the interim border closure to support topline growth in Q4  2019 and if sustained, to provide headroom for price increases given the rising manufacturing cost.

We  expect the group to intensify promotion and marketing activities to drive market penetration amid the benign competitive landscape.

Overall, we have a revised EPS of N1.07 and a fair value estimate of N13.76. At the market price of N14.85, the stock is trading at 7% premium to our fair value estimate. Thus, we revised our recommendation on the stock to a HOLD.

Financial statement summary

NASCON Allied Industries Plc: High Cost weigh on Profitability

WSTC Securities Limited

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