CCNN 2019Q3: Positioning For More Market Share, Bigger Profit, Juicier Returns

Company: Cement Company of Northern Nigeria Plc
Rating: Hold
Current Market Price: N16.4
Year High: N27.50
Year Low: N10.80
Fair Value: N16.43
Equity Analyst: Tunde Segun Jeariogbe

Key Investment Ratios
• BUA Group possesses a strong capacity in cement manufacturing with three major subsidiaries and plants in Northern and Southern Nigeria as well as a 2m metric tonnes per annum floating terminal serving niche markets. The Group also holds a stake in Damnaz Cement Company Ltd which is the Majority Shareholder in Cement Company of Northern Nigeria.
• Recall that the CCNN recently merged with Kalabaina Cement, building its production capacity from 500,000 metric tons per annum (Mtpa) to 2 million mtpa. It is currently going through another plan with Obu Cement Company Ltd, a company which currently has 6 million mtpa production capacity. At the end of the merger, which the emergent entity will have a production capacity of 8 million mtpa, with a plan for an additional 3 million mtpa which is underway after the ongoing merger.
• In the scheme of merger, the share allocation ratio between CCNN and Obu Cement is one-for-one, but in our opinion, the firm will come up larger post-merger, which will invariably lead to a higher turnover and income. Nevertheless, it should be noted that the share outstanding will be increased, resulting in lower EPS, until profitability triples to support high payout.
• In our opinion, the new face will have to be aggressive in its marketing strategies in other to enjoy a commensurate share of the cement market, which in our opinion will largely determine the market valuation of each unit of its shares on the floor of the Nigerian Stock Exchange.
• Understand that we will closely view the recently released nine-month financials of CCNN, and compared the same to the figures released in the corresponding period of 2018 to establish the impact of the last merger with Kalabaina Cement.

Company figures
• Turnover for the first nine months of CCNN is valued at N42.51 billion, which is 117.22% above N19.57 billion reported in the corresponding period of 2018.
• Cost of Sales grew at the same pace to N24.03 billion, the same as 119.66% above the N10.94 billion used in the similar quarter.
• Operating Profit used through the nine months is estimated at N11.77 billion, as against the N5.76 billion in the corresponding quarter.
• Operating Expenses for the period stood at N6.83 billion, compared to the N2.88 billion in 2018 nine months.
• Finance Cost used through the period is valued at N65.62 million, up from the previously reported N43.72 million.
• Profit before Tax is estimated at N11.68 billion against N5.72 billion in 2018.
• Having made allowance for Tax Expense, the Profit reported at the end of the period is put at N8.76 billion, as against N4.01 billion in the similar period of 2018.

• The current Asset of CCNN is valued at N22.56 billion as against N16.00 billion in 2018, representing a 40.98% improvement in its Asset valuation.
• Non-Current Assets stood at N332.61 billion, up from the previously reported N14.53 billion.
• Current Liability is valued at N15.81 billion as against the previous N10.86 billion.
• Net Assets of CCNN is currently worth N336.99 billion, which is over a thousand percent above the previously reported N16.85 billion in the corresponding quarter of 2018.
• Retained Earnings stood at N17.84 billion, versus N12.61 billion in the previous third-quarter report.
• Due to the last merger with Kalabaina which increased shares in issue, increasing it to 13.14 billion as against 1.25 billion before the merger.
Financial Strength/Solvency Ratios
• Total Debt Ratio is currently estimated at 0.05x, down from the previously estimated 0.45x, this confirms reducing Debt over Assets.
• Total Debt to Equity ratio is estimated at 0.05x, from 0.81x.
• Total Equity value at the end of the quarter has been estimated at 97% of the asset value, which is lower than the 55% estimated from 2018 third-quarter earnings figures.
• It is not out of place to say CCNN is very liquid, with its estimated Beta value above that market beta at 1.58x

Profitability Ratios
• The pre Tax margin is currently estimated as 27.48% as against 29.27% last year.
• Cost of Sales is fairly controlled through the two quarters under review, with a downward difference of 6.11%.
• Return on Equity is currently negative as shown in the table below.
• Similarly Return on Assets is Negative.

Efficiency Ratios
• Operating Expenses to Turnover value is the same as 16.07%, which is an 8.83% growth in efficiency from the 14.76% estimated from 2018.
• Turnover to Total Assets Ratios stood at 11.97%, as against 64.08% when this is compared to the ratio estimate in the 2018 result. It is an 81.32% drop in efficiency ratio. This simply means that the company can perform far better than what we have seen so far, by the time its Assets are fully utilized.
• Working Capital Turnover, a ratio that indicates a company’s effectiveness in using its working capital, was estimated at 6.29x as against the 3.80x estimated in the similar period of 2018.
• We also tested the Working Capital Ratio, which confirmed that the Current Asset is higher than current liabilities at the end of the period.

Investment/Valuation Ratios
• Due to the change in the share outstanding of CCNN within the two periods observed in this report, the growth observed in the profit line was swallowed as the estimated profit per unit share now stands at N0.67, as against N3.19 in the previous quarter.
• Our nine-month adjusted PE/ratio stood at 23.85x, as against 7.93x in the corresponding quarter of 2018.
• The above mentioned EPS is a 4.19% yield of the market price of CCNN on the floor of The Exchange as at the time this report was made available to the investing public.
• Above the market price of CCNN, each share has been estimated at N25.64 in its book, 91.20% improvement over the N13.41 book value estimate last nine months.
• Confirming the under-priced status of the stock is the Price to Book Value that stood below unity, as against the 1.89x estimated last year.
• See the table below for other investment ratios.

Our valuation approach had been more of judgmental since we do not have any document to value Obu Cement which will eventually assume CCNN’s status. Thus, we have done some comparative analysis with industrial peers, in addition to the stand of CCNN at the moment. We have, therefore, valued each unit of CCNN at N16.43 and have rated it Hold, given the short gap between our estimated fair value and the current market price.