Company: Cement Company of Northern Nigeria (CCNN)
Rating: Buy (Long Term)
Market Price at Earnings Release: N17.00
Current Market Price: N16.19
Highest Price 52wks: N27.50
Lowest Price 52wks: N14.00
Intrinsic Value: N45.27
Last Dividend Paid: N0.40
Production Capacity: 2 million MT/Annum
Equity Analyst: Jeariogbe Tunde Segun
Key Financial Tickers:
• This report observed the first quarter financial statistics of Cement Company of Northern Nigeria for the period ended 31st March 2019 and compared the same with the released scorecard for a similar period in 2018.
• Please understand that the report reflects the new state of the company after its merger with Kalambaina Cement Company Limited, which increased the shares outstanding and production capacity accordingly.
• We have observed that the company’s performance indices soared over that of 2018, due to the increased capacity, but, the increased shares outstanding brought down the earnings per share as against Q1-2018 estimate.
• We have also noticed the availability of funds yearning for utilization. For example, the Total Debt to Equity ratios is estimated at 6.35%, implying that the equity is far higher than debt. In our opinion, a better understanding of the company’s new status by the management will significantly enhance performance in the coming months.
• Further confirming the under-utilization of the company’s assets, is the profitability ratios that mildly differs from the 2018Q1 estimates, and in some cases stood below.
• Another pointer to the fact that the company could do better with time, is the efficiency ratios. Our estimates reveal that all observed efficiency ratios stemmed below 2018 estimates.
• Also notable is the large Non-Current Assets posted, compared to the Current Assets. This may suggest that the company inherited more properties from the merger process, compared to the liquid assets.
The Company’s Product/Strength
• A major strength of CCNN is its strong presence in the northwestern space. If it continues to consolidate on its near monopolistic advantage in Nigeria’s Northwest geopolitical zone, without playing for size with its bigger competitors, then its revenue is sustainable.
• Please understand that its supposed major competitor in the northern part of the country is now a major part owner of the business. This is an added advantage to its domination of the area
• Considering the increased shares in issue the above-mentioned merger brought into the company’s books and its increased production capacity, it will be necessary to observe at least two consecutive earnings from the company after the merger. This will enable one to arrive at conclusive growth expectation.
• Observing the new status of CCNN, especially the production capacity, we are of the opinion that it might need to step out of its northern shell so as to take full advantage of its production capacity.
Corporate Figures
• Turnover reported for the period stood at 211.68% over the comparable period of 2018. At the end of the first three months of 2019, Turnover stood at N16.88 billion as against the previous N5.39 billion.
• Operating Profit for the period stood at N5.39 billion, compared to the N1.56 billion achieved in the similar period of 2018.
• Finance Cost equally increased largely by 172.47% to N2.29 billion as against the N843 million reported at the end for 2018 first quarter business cycle.
• Profit after Tax is currently estimated at N5.34 billion as against N1.50 billion reported in 2018.
• Profit after Tax posted at the end of the quarter is N3.63 billion, this is 235.64% above the N1.08 billion earned through the first three months of 2018.
• Retained earnings improved slightly by 59.64% to N17.97 billion as against the N11.25billion estimated in 2018 first quarter.
• Non-Current Assets also soared over the comparable period to the current estimate of N358.54 billion compared to the previous N27.10 billion.
• Current Assets, on the other hand, stood at 110.49% over that of last year. It is currently valued at N29.57 billion as against the previous estimate of n14.04 billion.
• Non-Current Liabilities dropped against that of 2018 by 7.96% to stand at N2.58 billion compared to N2.80 billion in 2018 first quarter.
• Current Liabilities, on the other hand, is estimated at N18.83 billion against N8.80 billion in 2018.
• In line with the large valuation status of the Non-Current Assets, compared to the items in the liabilities column, the Net Assets stood at N333.12 billion compared to the previous estimate of N15.49 billion.
Liquidity/Risk Ratios
• Total Debt reported at the end of the first three months of 2019 stood is same as 6.35% of the Equity value, this is 60.29% below the Industrial Average of 16%.
• Confirming its financial strength to service its current liabilities as and when due is the estimated Current Ratio at 1.57x, even though this is below the industrial average of 43.11%.
• Also, the beta value at 1.73, confirms patronage/liquidity of CCNN shares on the floor of the exchange.
• To check the company’s ability to effectively service its interest yielding liabilities, we tested the Interest coverage which confirmed that the end of the quarter under analysis, it has over double capacity to settle the interest on its liabilities.
Profitability Ratios
• From our estimates, Cost of Sales Margin had not really changed from what the management of CCNN achieved in the past. The ratio stands at 54.47%, as against the 58.04% estimated last year.
• Similarly, Profit before Tax Margin stood at 13.54% above that of the comparable quarter of 2018. PBT margin is estimated at 31.67% against 27.89%
• Profit Margin equally inched above 2018Q1 estimate by 7.21% at the current estimate of 21.54%.
• Return on Average Equity stood at a far gap from the previous estimate at 1.08% against 6.99% achieved at the end of 2018 first quarter.
• In the same trend, Return on Average Assets is 1.01% against 4.00% estimated last first quarter.
Efficiency Ratios
• As noted above, all observed efficiency ratios dropped against the comparable period of 2018.
• Total Assets Turnover is currently estimated at 4.71% as against the 19.90% achieved in the similar period of 2018.
• Equity Turnover also dropped by 85.61% from what was achieved in 2018. Please note that Equity Turnover is now estimated at 5.01% as against 34.81% of 2018.
• In other words, the Net Assets was only multiplied 0.05x as against the previous 0.35 times. In our opinion, serious efforts should be engaged to ensure the improvement of this ratio.
• Following a similar trend, the Fixed Assets Turnover stood at 4.71% as against the 19.90% estimated in the corresponding period of 2018.
Investment Ratios
• As noted above, since the shares outstanding within the two periods under comparison are not the same, ratios estimated with shares outstanding dropped from last year despite the large growth in the company earnings.
• Earnings per Share is currently estimated at N0.28 as against the N0.86 estimated from the company’s earnings in 2018.
• Thus, the said earnings yielded 1.63% of the price of CCNN shares on the floor of the exchange as at the time this report was made available to the investing public.
• Reflecting the reduction in the EPS, the PE/ratio increased to 15.36x from the previous estimate of 5.93x.
• Nevertheless, the estimated P/Book Value ratio stood below unity, suggesting an underpriced status of each unit on CCNN shares on the floor of the Nigerian Stock Exchange.
• Further confirming the above is the estimated Book Value of N25.65 as against the N17.00 it sells for as at the released of this report.
Valuation
We have valued each unit of CCNN share price, assuming further growth in performance indices through 2019 financial year. It should be noted that the new shares were listed on the 31st December 2018, implying that the full utilization of the merger only commenced from the first quarter of 2019. As noted above, the management of CCNN might still have lots of un-utilized business opportunities. We are therefore of the opinion that, the full advantage of the merger has not been fully achieved. Thus, we rate it amongst the growth stocks, showing our expectation of brighter performance through the year.
Considering the above, we maintain our valuation for each unit of CCNN at N45.27 per share.
