CCNN 2019Q3: Restructuring for Bigger Market Share, Improved Returns

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

Key Investment Ratios

• BUA Group possesses a strong capacity in cement manufacturing with 3 major subsidiaries and plants in Northern and Southern Nigeria as well as a 2 million 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 company CCNN recently merged with Kalabaina Cement to build its production capacity from 500,000 Mtpa to 2 million Mtpa. It is currently going through another plan with Obu Cement Company Ltd, a company which currently have 3.5 million Mtpa production capacities. At the end of the merger, which had agreed to take up Obu Cement it will have a production capacity of 5.5 million Mtpa
• In the merger proposal documents, the share allocation ratio from CCNN to OBU Cement is not clearly stated, but in our opinion, the firm will come up larger after the merger, this will invariably lead to higher turnover and income. Nevertheless, it should be noted that the share outstanding will be increased which will result in lower EPS.
• In our opinion, the new face will have to be aggressive in its marketing strategies in other to enjoy reasonable share from the cement market, this in our opinion will strictly determine the market valuation of each units of its shares on the floor of the exchange
• Please understand that we will closely view the recently released nine months financial of CCNN compare same to the figures released in the corresponding quarter of 2018 to establish the impact of the last merger with Kalabaina Cement.

Company figures

• The Turnover figure representing the first nine months business session of CCNN is valued at N42.51 billion, this is 117.22% above the N19.57 billion reported in the corresponding period of 2018
• Cost of Sales grew at the same pace as it is currently valued for N24.03 billion, 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 against 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

• Current Assets of CCNN is currently valued at N22.56 billion as against N16.00 billion in 2018, this is 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 estimate of N10.86 billion
• Net Assets of CCNN is currently worth N336.99 billion this is over a thousand per cent above the previously reported N16.85 billion in the corresponding quarter of 2018
• Retained Earnings now stood at N17.84 billion versus N12.61 billion in the previous third quarter report
• Due to the last merger with Kalabaina which brought in more share holdings, the shares outstanding of CCNN is now N13.14 billion as against N1.25 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 confirm reducing Debt over Assets
• Total Debt to Equity ratio is estimated at 0.05x as against 0.81x
• Total Equity value at the end of the quarter had been estimated to be 97% of the Assets value, this is lower than the 55% estimated from 2018 third quarter earnings figures
• CCNN can be said to be very liquid as the estimated beta value stands above the market beta at 1.58x

Profitability Ratios

• 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 with a downward difference of 6.11%
• Return on Equity is currently negative as shown in the below table
• Similarly Return on Assets is Negative

Efficiency Ratios

• Operating Expenses to Turnover value is same as 16.07%, this is 8.83% growth in efficiency from the 14.76% estimated from 2018
• Turnover to Total Assets Ratios stood at 11.97% against 64.08% when this is compared to ratio estimate in 2018 result, it is a 81.32% drop in efficiency. This simply means that the company can perform far better than what we have seen so far, by the time is Assets is fully utilised.
• 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 similar period of 2018
• We also tested the Working Capital Ratio, which confirmed that Current Assets is higher than current liabilities at the end of the period.

Investment/Valuation Ratios

• Due to the change in the shares 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 of CCNN now stood at N0.67 as against N3.19 in the previous quarter
• Our nine months 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 units of CCNN shares had been estimated to worth N25.64 in its book this is 91.20% improvement over the N13.41 book value estimate last nine months
• Confirming 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 below table for other investment ratios

Valuation

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