Snapshot:

• Bottom line up 153% y/y to N2.6 billion, on track for a record FY PAT

• Continues to contain costs effectively despite crude price pressure

• Completes new plant, announces merger to consolidate operations

• Target price raised to N14.31 (Previous: N11.12)

Outperforms estimates; reports impressive bottom line growth

10 September 2018 : CCNN released its H1’18 results earlier, with bottom line growing 153% y/y - 29% ahead of analyst's estimate. Notably, the bottom line outperformance was supported by a strong topline growth as well as improved operating margins.

Particularly, revenue for the second quarter came in much stronger, up 61%

q/q, resulting in a 42% y/y growth for the H1’18 period to N12.1 billion –

ahead of analyst's N10.9 billion expectation. Analysts note that the topline boost was much in line with the impressive performance observed within the cement

industry, with H1’18 topline growing an average of c.13% y/y across the

other listed producers.

Furthermore, CCNN recorded improved efficiency within the period, with

operating margin expanding significantly (both q/q and y/y) despite the

company’s continued reliance on LPFO. Overall, EBIT came in at N3.7 billion,

154% and 38% ahead of H1’17 and analyst's expectation respectively.

Furthermore, following a 61% y/y drop in Net finance expense to a negligible

N31 million, Profit before tax stayed at N3.7 billion, rising 167% y/y. Overall,

PAT came in at N2.6 billion, ahead of analyst's N2.0 billion expectation and on

track to exceed FY’17 bottom line of N3.2 billion – which was a record PAT

at the time.

Merger with KCC could unlock trapped potential

In a recent publication, CCNN updated the market on its impending merger

with Kalambaina Cement Company (KCC) – a sister company and also a

subsidiary of BUA Group. According to the publication, the merger will be

executed through a share exchange, with CCNN expected to emerge as the

surviving entity. Analysts recall that KCC was the vehicle through which BUA

Group constructed an additional 1.5 million MT plant in Sokoto, intended to

supplement CCNN’s existing 0.5 million MT facility in the state. As detailed

in analyst's Company Update “Completes Sokoto plant expansion”, the expansion and subsequent consolidation of operations should support earnings

performance over the medium to long term as topline has previously been

constrained due to the erstwhile limited capacity. The combined operations

should therefore favorably position the company to take advantage of strong

cement demand outlook. Also, analysts anticipate stronger margins post-merger,

given that the new plant operates a diversified kiln (can run on multiple fuel

sources) and comes equipped with a 32MW captive power plant. Analysts have

not incorporated the impact of the merger in their forecasts and await further

information from the company.

Valuation revised higher on stronger-than-expected H1’18

Following the impressive H1’18 result and in line with their positive

expectations for the cement sector, analysts have revised their estimates across

most line items. Analysts raise their FY’18 topline estimate to N22.9 billion

(Previous: N21.4 billion), reflecting the H1’18 run rate albeit adjusting for

seasonally weaker demand in H2. Whilst analysts continue to monitor still-high

crude prices and the consequent pass-through to LPFO price, analysts revise their FY’18 operating margin 6 percentage points higher to 29% – taking account of H1’18 margins – translating to FY’18 EBIT of N6.7 billion (Previous: N5.0 billion). At a revised effective tax rate of 29%, analysts estimate a PAT of N4.8 billion (Previous: N3.8 billion) and a target price of N14.31 (Previous: N11.12). Despite the stock trading at a premium to their target price, analysts place a HOLD on CCNN in view of a potential upside from the upcoming merger.

Reporting for EasyKobo on Monday , 10 September 2018 in Lagos, Nigeria

Source: Onyeka Ijeoma from Vetiva Capital Management Limited