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CCNN 2018FY results show enlarged post-merger financial stability

Published 2018 full year (FY) results of the of the Cement Company of Northern Nigeria (CCNN) at the floor of the Nigerian Stock Exchange (NSE) has reflected its tenacity and resilience as the enlarged post-merger financial positions shows strength and stability after all.
The feat is following the completion of its merger with Kalambaina cement.
The audited statements of the combined companies showed improvement across key lines, with revenue, PBT, and PAT expanding, on a year-on-year basis, by 62%, 81%, and 78% respectively. However, on account of material dilution arising from the merger, EPS declined sharply by 83% y/y to NGN0.44 (2017FY: NGN2.57). The board proposed a final dividend of NGN0.40/s (2017FY: NGN1.25/s), which translates to a yield of 2.0% on its last closing price.
Fourth quarter of 2018 revenue was higher by 103.8% from a year ago as the company began production from the Kalambaina cement plant.
Prior to now, CCNN’s 500kMT plant had operated close to 100% capacity utilization, averaging 96% between 2016FY and 2017FY.
Thus, the additional 1,500kMT Kalambaina plant took the company’s production capacity to 2,000kMT, following its merger last year. Over 2018FY, the company reported 62% y/y jump in revenue, driven by higher volumes and favourable pricing environment.
For emphasis, owing to capacity expansion from its merger, the company reported 64% y/y volume growth to 765kMT, with capacity utilization rate at 38.2% (2017FY: 93.2%). Furthermore, average cement price rose by 1.8% y/y to NGN42,739/ton.
Analysts say at 45.9% in Q4-18, gross margin was higher compared to both Q3-18 (42.3%) and Q4-17 (39.9%), as revenue growth ran ahead of CoGs (+83% y/y). Over 2018FY, while CoGs expanded by 46% y/y, cost to sales ratio moderated significantly by 6 percentage points to 55.2%. To our mind, the moderation in cost-to-sales ratio owed much to cost synergy arising from the aforementioned merger.
Besides, cost per ton moderated by 9.6% y/y in the period. Against the backdrop of improved cost-to-sales ratio, gross profit expanded by 87% y/y, with related margin notching higher by 6 percentage points to 44.8%.
However, OPEX jumped by 213% y/y and 89% y/y in Q4-18 and 2018FY, respectively, on the back of a surge in Admin expenses, which was in turn, driven by a merger fee (NGN534 million) and the surprise technical and management fees (NGN2.28 billion) paid to Damnaz Cement Co. Nonetheless, EBITDA expanded by 153% y/y and 108% y/y in Q4-18 and 2018FY, respectively. The company achieved EBITDA margin of 32.2%, relative to 25.1% reported in the prior year.
While net finance cost printed a marginal NGN283 million (2017FY: NGN279,959), the company reported PBT and PAT growth of 81% and 78% to NGN7.59 billion and NGN5.73 billion, respectively.
It was gathered that the approved share exchange ratio of 19,811,372:100,000 between Kalambaina and CCNN led to a material share dilution, as 6.61 billion new shares were created, taking the number of shares outstanding to 13.14 billion (2017FY:1.26 billion). Against that backdrop, EPS declined by 83% y/y to NGN0.44 (2017FY: NGN2.57).
On the other hand, Business Hilights Intelligence Unit (BHIU), an independent market rsearch arm of Business Hilights is of the view that “While we acknowledge the improved performance across key lines, especially in the light of capacity expansion, the steep decline in EPS could spike a negative reaction to the company’s share price in today’s session”.
“More so, the stark difference between the actual post-merger results released and the pro-forma statement used during the shareholder approval process, could raise questions on the profitability of the combined entity going forward.
Recall that CCNN currently trades at a P/E and EV/EBITDA of 6.0x and 32.5x, compared to its Middle East and Africa peers of 42.2x and 16.8x. Our estimates are under review.