cement company of northern nigeria plc - morgan...
TRANSCRIPT
August 11, 2014
Cement Company of
Northern Nigeria PLC EQUITY ‖ NIGERIA ‖ BUILDING MATERIALS
Investment Summary & Highlight
CCNN: is regional game play the game changer?
A sequel to our Q1 2014 Report http://morgancapitalgroup.com/pdf/morgan_capital_equity_research_ccnn_q1_2014.pdf
ZENITHBANK: CRR, clog to growth or
MorganCapital Research
African Frontier Market
LEAD ANALYST
Chuks Anyanwu [email protected]
+234-08066397836
Biodun Salaudeen [email protected]
+234-8147216437
REGULATORY COMPLIANCE
Taiwo Balogun [email protected]
MD/CEO
Ayoleke O Adu FCS, CFA [email protected]
Key Ratios & Statistics
Current Stock Price: N14.80
Fair Value: N18.84
Outlook: POSITIVE
Market Capitalization: $117.91M
Year End: December
Price-to-Earnings (PE)
2013Trailing: 13.09X
2014Forecast: 6.27X
2015Forecast: 4.58X
Earnings-per-Share (EPS)
Current: (FY 2013) N1.13
2014 Forecast: N2.36
2015 Forecast: N3.23
Dividend-per-Share: N0.70
Return-on-Equity: 16.00%
Return-on-Asset: 9.00%
Outstanding Shares (m’n) 1,256
Year-to-Date: 27.83%
Latest Result H1-2014
H1 -2014 Result @ a glance
N (m’n) N (m’n) %
H1 -2014 H1 -2013
Revenue 9,395 8,811 7.00
PBT 2,336 1,223 91.00
PAT 1,588 832 91.00
EPS 1.26K 0.66K 91.00
Stock Rating
BUY
Industry View
In-Line
H1-2014: Revenue rose by 7%, while net income
spiked by 91% YoY triggered by sustained
reduction in controllable cost line.
Cement Company of Northern Nigeria (‚CCNN‛ or the
‘’Company) on Friday 25th July 2014 released its unaudited H1
2014 result. Revenue rose by 7% to N9.39billion ($58.72M) from
N8.81billion ($55.07M) While Profit after Tax expanded by 91%
to N1.59billion ($9.92M) from N832.06million ($5.20M) YoY.
On a quarter on quarter assessment, Revenue dropped by 7% to
N4.51billion ($28.20M) from N4.88billion ($30.52M) between Q1
and Q2 2014, while the Net income widened by 27% to
N889.62million ($5.56M) from N699.02million ($4.37M) over the
same period.
The Company continues to leverage on the impressive reduction
in its controllable cost line. Operating expenses was down by
44% in H1 2014, sustaining the trend from Q1 2014. Like we
highlighted in our Q1 2014 report of the Company
(http://morgancapitalgroup.com/pdf/morgan_capital_equity_research_ccnn_q1_2014.pdf),
CCNN’s focus on its area of comparative advantage (North
West) as against an aggressive push for market size into the
North Eastern and North Central regions was compensated by
the steep reduction in operating expenses ( distribution expense)
and accounts for the impressive growth in the Company’s Net
Income in H1 2014. The Company also managed a 19%
reduction in direct cost of sales quarter on quarter, although
direct cost was flat between H1 2014 and H1 2013.
The Company also strengthened its profitability margins in H1
2012. Gross profit margin was up to 39.21% from 34.78% YoY
while Operating margin improved as expected given the decline
in Operating expense. Operating margin settled at 25.11% up
from 8.13% over the review period.
Bloomberg Ticker: CCNN: NL
NSE Symbol: CCNN
Listed on the Nigerian Stock Exchange
(NSE)
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CCNN Quarterly comparative profitability margins for Q1 2014 & Q1 2013 CCNN Quarterly comparative profitability margins for FY 2013 & FY 2014
ROE & ROA recorded improvements between FY 2013 and FY 2012
Cement is a homogenous product and as much as we acknowledge the input of the respective cement manufacturers in ensuring that
standards are maintained (which in any case is enforced by the Standard Organization of Nigeria, Council for Regulation Engineering in
Nigeria, Nigerian Institute of Builders, etc) and brand identities are established, it is our opinion that product availability and price plays
a key role in cement consumption.
Sector Overview
Nigeria has an abundant deposit of limestone, which makes the local manufacturing of Cement a natural occurrence in the Country. This
in addition to the over170million people and the huge infrastructure gap present an attractive perspective to the cement manufacturing
business in Nigeria, with the only major snag being the cost of power which accounts for up to 40% of the total production cost.
The Federal Government of Nigeria under the administration of President Olusegun Obasanjo, in its bid to encourage local production of
cement, came up with a policy that granted only those with local production capacity the import license to import the shortfall between
local production capacity and the total consumption. The idea behind this policy was to direct investment into local cement
manufacturing in other to make the country self-sufficient in cement production. This vision was actualized, as the policy attracted many
indigenous and foreign investors. Dangote Cement with a combined installed capacity of 20.25MMTPA is the largest cement manufacturer
in Nigeria, accounting for almost 70% of the total cement market. Dangote’s Obajana cement plant is arguably the single largest cement
plant in Africa and contributes 51% to the total installed capacity of Dangote Cement. Lafarge Wapco, Ashaka Cement, and CCNN are the
other major cement companies in the country.
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Geographical Segmentation of the Cement Market in Nigeria
Having already established Power as one of major challenges confronting cement manufacturers in Nigeria, another equally major
challenge is distribution. The poor road network makes the distribution of cement from the limestone quarries where they are
manufactured to the six geo political zones in Nigeria an uphill and very expensive venture. In other to mitigate this challenge, cement
manufacturers usually establish their plants in areas close to limestone dumps and carve a market nitche for themselves in the same
geographical location which is an efficient way of managing distribution expenses and boosting comparative cost advantage. This trend is
also a global phenomenon with major cement manufacturers.
However, with the recent spate of expansions in the sector, the likes that have seen companies like Dangote Cement and Lafarge Wapco
add huge capacities to their production lines; the need to find new markets which results to movements into other geo-political zones arises
with the already established distribution cost challenges.
Source: MorganCapital Research
Matters Arising
The major challenges in the sector in recent times are as follows
Increased competition following the huge investment in capacity by major cement manufacturing companies.
Reduction in sales volume (particularly in the North-East because of the rising insurgence of the Boko Haram sect which has
slowed down construction activities in that region)
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Our Opinion of the Sector
The sector has huge growth potentials. The infrastructure gap in the country is evident in the poor road network, insufficient housing
units for the rapidly growing population and inadequate infrastructure. The abundance of the sectors primary raw material in the
country is also a major incentive.
The map above shows the country’s six geo-political zones and the geographical locations of the four major cement manufacturing
companies in the country. The South Western zone is clearly a hot spot with the two largest manufacturers of cement in the country
(Dangote and Lafarge) slogging it out for market share.
The North Central zone is another hot spot with Dangote’s Obajana plant (with its installed 10.25MMTPA capacity) competing for market
dominance with the likes of Ashaka Cement. Unfortunately however, beyond the competition from Dangote’s Obajana plant, Ashaka
Cements hub (North Eastern zone) is also the strong hold of the Boko Haram Sect and has consequently reduced cement consumption
volume in the zone.
The most interesting zone from the geographical arrangement of the map above is the North Western zone. The zone is far away enough
from other cement manufacturers for distribution cost to be a major challenge for them if they consider encroaching into this market. The
only cement manufacturer in this zone is CCNN and despite the general fears of people concerning the insurgence of the Boko Haram sect
in the North, the zone has been very peaceful.
Given the above, it is our opinion that if CCNN continues to consolidate on its near monopolistic advantage in the North Western
space, without playing for size with its bigger competitors, then the company’s revenue is sustainable. Furthermore the current owner
of the company has also commenced the construction of a new cement plant in the South -South zone; though it is yet to be
determined if the earnings from the new cement plant will be consolidated with the earnings from CCNN, we like the strategy of
building new smaller plants in different locations to meet the local market needs than install a huge production capacity in one plant
which will increase distribution cost if the company wants to break new market grounds beyond its immediate location
It is our opinion that building excessive capacity in one plant may become an inefficient strategy in the long run because of the
abundance of limestone deposits in different parts of the country which can give rise to smaller more efficient plants springing up in
different locations and producing enough to become major threats to the bigger plants, who may be burdened by high operating
expenses. We also think that the strategy of building smaller plants in different locations may eventually lead to the actualization of
the much anticipated reduction in cement prices in the country because of the heightened competition that it will create, considering
that the impact of distribution cost will reduce significantly
Earnings Projection (FY 2014)
Our FY 2014 revenue estimate for CCNN is N17.37billion ($108.54M) which translates to a 10% improvement relative to FY 2013, while
our net income estimate is N2.96billion ($18.52M) and equates to 109% improvement relative to FY 2013. This yields an EPS of N2.36 and
a forward P/E of 6.27X (based on the price at report date).
The sector is a growth sector with huge potentials because it is tied to the infrastructural development of the country. Despite the rising
competition in the sector, the pie is big enough for all players in the sector.
Overall, we expect a slight improvement in revenue growth YoY because the company has not invested in capacity expansion like most of
its peers in the sector, we think that the company should focus more on its niche and strive to gain more grounds in that space. On the
other hand, we expect the net income to rise at a much faster pace compared with the revenue because the trend of strong reduction in
distribution and finance charges to continue going forward.
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DISCLOS
COMPARATIVE METRICS OF FOUR CEMENT MANUFACTURING COMPANIES @ DEC 2013
Source: MorganCapital Research: Stock Price is as at 31st of December 2013 to have a uniform time frame for all companies.
Valuation & Valuation Analysis
Our valuation analysis shows that the stock of CCNN is currently trading at a 27.29% discount to our fair value estimate of N18.84, with a
12month investment horizon. Our fair value computation is based on our financial performance expectation for FY 2014. Our dividend
estimate is N1.30 and amounts to a 55% payout ratio and a 6.9% dividend yield from our fair value.
We reviewed our Revenue, Net income and dividend estimates upwards given the considerable push in the revenue in H1 2014 and the
improved management of the Company’s controllable cost-line which yielded a strong bottom line improvement. We expect the
Company to sustain this momentum in H2 2014. The target price for CCNN was reviewed upwards from N15.40 in our Q1 2014 report
to N18.84, after the share price hit our fair value estimate (returning 59.09% within 3 months from the price as of May 20th 2014, the
date our Q1 2014 report on the company was published) in August 2014 with about 9months of our investment horizon to spare. The
sustained improvement in the Company’s net income growth gave impetus for the upward review in our target price.
Our fair value for CCNN shares was calculated using the Dividend Discount Model comprising our expected dividend estimate for the
company and a MorganCapital customized tweak to adjust for the risk of investing in the Nigerian Building Material Sector. Our
Required Rate of Return (RROR) factors in a risk premium of 7% and the yield for the most recently issued 20-Year FGN Bond was
applied as the risk free rate of return.
KEY RATIOS AND VARIABLES CCNN DANGOTE CEMENT WAPCO ASHAKA CEMENT
REVENUE GROWTH 4% 29% 12% -1%
GROSS PROFIT MARGIN 32% 63% 32% 29%
COST/INCOME 265% 62% 25% 290%
PBT MARGIN 12% 49% 28% 13%
ROE 16% 37% 30% 6%
ROA 9% 24% 18% 4%
FIXED ASSETS/TOTAL ASSETS 47% 82% 78% 72%
SHARE PRICE (N) 11.75 218.99 115.00 20.99
SHARES OUSTANDING 1,256,677,766 17,040,507,405 3,001,600,004 2,239,453,125
CASHFLOW PER SHARE 1.65 16.53 12.31 0.91
EARNINGS PER SHARE (N) 1.13 11.85 9.42 1.26
PRICE/CASFLOW PER SHARE(X) 7.13 13.25 9.34 23.01
PRICE/EARNINGS (X) 10.40 18.48 12.21 16.66
DEBT/EQUITY 9% 33% 28% Nil
PBT GROWTH 19% 40% 30% -48%
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In our analysis, Fair value is our opinion of the actual fundamental worth of a stock, irrespective of what the market is
willing to pay for the stock.
A BUY rating from us in our opinion, prompts investors to purchase the stock guided by their risk appetite
A SELL rating from us in our opinion, prompts investors to exit the stock.
A HOLD rating from us in our opinion, prompts investors to desist from buying the stock if they do not already have the
stock, and not sell if they already have the stock.
MorganCapital Securities Ltd
The Pent Floor
3, Biaduo Street, Off Keffi Street, S/West Ikoyi.
P.O.Box 75691 Victoria Island, Lagos.
+234-1-2714713-4, www.morgancapitalgroup.com
Investment Conclusion
An undervalued stock based on our research, with focus on our FY 2014 estimates. The potential for huge investment in
infrastructure in Nigeria given the current acute shortage/decay is an incentive for the sector. The near monopolistic advantage of
CCNN in the North-West will protect the company from the size advantage of its competitors. The company currently trades at the
lowest P/E multiple compared to the other listed cement manufacturers and although this situation may have been on account of the
fact that the company has not invested in capacity expansion like the others, it is our opinion that if the company maintains its
stronghold in the North West, the company’s H1 2014 performance can be sustained all through the year.
We place a BUY rating on the shares of CCNN, which is csurrently trading below our fair value with focus on FY 2014. Our fair value
estimate for CCNN shares is revised upwards to N18.84 from N15.40, up by 22%.
CEMENT COMPANY OF NORTHERN NIGERIA2011 2012 2013 2014(F) 2015(F)
MARKET CAPITALIZATION (N'm) ($) 35 42 92 144 173
GROSS REVENUE (N'm) 13,915 15,126 15,787 17,370 18,412
PROFIT B/F TAX 3,294 1,653 1,970 4,117 5,970
TAX 990 457 547 1,157 1,910
PROFIT AFTER TAX 2,304 1,196 1,423 2,960 4,060
EARNINGS PER SHARE (EPS) 1.83 0.95 1.13 2.36 3.23
PRICE-EARNINGS RATIO 2.37 5.57 10.37 7.99 6.99
SHARE CAPITAL 628 628 628 628 628
OUSTANDING SHARES (M'n) 1,256 1,256 1,256 1,256 1,256
OWNERS' EQUITY 7,008 7,639 9,062 9,320 10,718
CASH DIVIDEND 45K Nil 70K 1.30 1.78
SCRIP DIVIDEND NIL NIL NIL
RELEASE DATE 12/06/12 26/03/13 26/04/13
AGM DATE
CLOSURE DATE
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