Nascon Allied Industries: High Operating Costs Erode Topline Gains

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NASCON Allied Industries Plc - Impressive H1 2020 performance amidst COVID-19 challenges

Nascon Allied Industries Plc, in its recently released Q2 2021 results, reported a 21% YoY revenue growth to N9.23bn. We attribute the revenue growth to a consolidation of the Company’s efforts in expanding market share.

Notably, we posit that Nascon continued to benefit from the lower smuggling activities – which had hitherto caused a market erosion for the Company in previous quarters.

Based on geographical segments, the Western market recorded the highest growth in Q2 2021, with revenue growth of 58% YoY to N3.10bn. In the previous quarter, the Western market also recorded the highest growth (+49% YoY to N2.59bn in Q1 2021). The Eastern market recorded the second-highest growth of 21% YoY to N555mn in Q2 2021; while in the Company’s biggest market – the Northern market revenue grew by 7% YoY to N5.57bn in Q2 2021.

NASCON Allied Industries Plc - Impressive H1 2020 performance amidst COVID-19 challenges

FX-Induced Rise in Costs Partially Offset Topline Growth

The cost of sales grew by 31% to N5.71bn in Q2 2021, majorly due to higher raw material costs during the period. Raw material costs increased by 37% YoY to N4.81bn in Q2 2021, thus accounting for 73% of the total increase in the cost of sales in Q2 2021.

Cost margin, therefore, increased by 500 basis points to 62% in Q2 2021; and gross profit growth stood at 7% YoY to N1.07bn in Q2 2021.

Increase in Operating Expenses Further Erode Margins

Operating profit declined by 24% YoY to N1.07bn in Q2 2021, resulting from higher operating expenses. Administrative expenses grew by 34% YoY to N690mn while selling and distribution expenses rose by 16% YoY. We link the higher expenses incurred to the persistent inflationary pressure in the economy and high transportation costs.

Also, the Company incurred a N165mn net FX loss in Q2 2021. Operating profit margin declined by 700 basis points to 12% in Q2 2021 from 19% in Q2 2020.

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Profit before tax declined by 21% YoY to N1.07bn in Q2 2021, on account of the incurred costs and expenses mentioned above, while profit after tax declined by 15% YoY to N727mn in Q2 2021 due to a lower effective tax rate in Q2 2021 (32% versus 37% in Q2 2020).

H1 2021 Performance

  • Revenue grew by 21% YoY to N17.57bn in H1 2021 (Q2 2021: +21%; Q1 2021: +21%).
  • Operating profit grew by 13% YoY to N2.29bn in H1 2021 (Q2 2021: -13% YoY; Q1 2021: +72% YoY).
  • Profit before tax declined by 6% YoY to N2.13bn in H1 2021 (Q2 2021: -21% YoY; Q1 2021: +15% YoY).
  • Profit after tax declined by 3% YoY to N1.45bn in H1 2021 (Q2 2021: -15% YoY; Q1 2021: +15% YoY).

Outlook

The performance of the Company in Q2 2021 was slightly above our estimates. Our fair value estimate for the Company remains unchanged, as the performance of the Company is in line with our projections.

Our fair value estimate for the Company is N8.88 (previous: N8.81). At the current market price of N14.45, the stock trades at a forward price-to-earnings ratio of 13.82x  significantly above our estimated justified price-to-earnings of 8.49x. By implication, the total return of the stock stands at -35%.

Therefore, we retain our SELL recommendation.