CCNN: Improved Performance Required to Measure up to High Shares Outstanding

Company: Cement Company of Northern Nigeria (CCNN)

Rating: Buy (Long Term)

Market Price at Earnings Release: N17.00

Current Market Price: N16.19

Highest Price 52wks: N27.50

Lowest Price 52wks: N14.00

Intrinsic Value: N45.27

Last Dividend Paid: N0.40

Production Capacity: 2 million mt/annum

By: Jeariogbe Tunde Segun (Equity Analyst)

Key Financial Tickers:

This report observed the first quarter financial statistics of Cement Company of Nothern Nigeria for the period ended 31^st March, 2019, compare same with released score card for similar period in 2018.
Please understand that the report reflects the new state of the cement company after its merger with Kalambaina Cement Company Limited, which both increased the shares outstanding and production capacity accordingly
We have observed that the company performance indices soared over that of 2018, due to the increased capacity, but, the increased shares outstanding brought down the earnings per share as against Q1-2018 estimate
We have also noticed the availability of funds yearning for utilization. For example, the Total Debt to Equity ratios is estimated at 6.35%, implying that the equity is far higher than debt. In our opinion, at better management understanding of the company’s new status, performance will look brighter
Further confirming the under-utilization of the company’s assets, is the profitability ratios that mildly differs from 2018 first quarter estimates and in some cases stood below.
Another indicator to the fact that the company could do better with time, is the efficiency ratios. Our estimates had revealed that all observed efficiency ratios stemmed below 2018 estimates
Also notable is the large figure posted for the Non Current Assets as against the Current Assets. This may suggest that the company inherited more properties from the merger process as compared to liquid assets.

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The Company’s Product/Strength

One major strength of CCNN is its Strong presence in the North Western space, If it continues to consolidate on its near monopolistic advantage in Nigeria’s North West geo-political zone, without playing for size with its bigger competitors, then its revenue is sustainable
Please understand that its supposed major competitor in the northern part of the country is now a major part owner of the business. This is an added advantage to its domination of the area
Considering the increase the above mentioned merger brought into the share outstanding of CCNN and the production capacity increase, it will be necessary to observe at least two consecutive earnings from the company after the merger, to arrive at conclusive growth expectation.
Observing the new status of CCNN especially the production capacity, we are of the opinion that it might need to step out its northern shell so as to take full advantage of its production capacity.

Corporate Figures

Total Turnover reported for the period stood at 211.68% over the comparable period of 2018. At the end of the first three months of 2019, the Turnover is estimated at N16.88 billion as against the previous N5.39 billion
Operating Profit for the period stood at N5.39 billion compared to the N1.56 billion achieved in similar period of 2018
Finance Cost equally increased largely by 172.47% as it now stood at N2.29 billion as against the N843 million reported at the end for 2018 first quarter business cycle
Profit after Tax is currently estimated at N5.34 billion as against N1.50 billion reported in 2018
Profit after Tax posted at the end of the quarter is N3.63 billion, this is 235.64% above the N1.08 billion earned through the first three months of 2018

Retained earnings improved slightly by 59.64% to currently stand at N17.97 billion as against the N11.25billion estimated in 2018 first quarter
Non Current Assets also soared over the comparable period at the current estimate of N358.54 billion compared to the previous N27.10 billion
Current Assets on the other hand stood at 110.49% over that of last year. It is currently valued at N29.57 billion as against the previous estimate of n14.04 billion
Non Current Liabilities dropped against that of 2018 by 7.96% to stand at N2.58 billion compared to N2.80 billion in 2018 first quarter
Current Liabilities on the other hand is estimated at N18.83 billion against N8.80 billion in 2018
In line with the large valuation status of the Non Current Assets, compared to the items in the liabilities column, the Net Assets stood at N333.12 billion compared to the previous estimate of N15.49 billion

Liquidity/Risk Ratios

Total Debt reported at the end of the first three months of 2019 stood is same as 6.35% of the Equity value, this is 60.29% below the Industrial Average of 16%
Confirming its financial strength to service its current liabilities as at when due is the estimated Current Ratio at 1.57x although this is below the industrial average of 43.11%
Also the over unity beta value (1.73) confirmed patronage/liquidity of CCNN shares on the floor of the exchange.
To check the company’s ability to effectively service its interest yielding liabilities, we tested the Interest coverage which confirmed that the end of the quarter under analysis, it have over double capacity to settle the interest on its liabilities.

Profitability Ratios

From our estimates, Cost of Sales Margin had not really change from what the management of CCNN had achieved in the past. The ratio stands at 54.47% as against the 58.04% estimated last year
Similarly, Profit before Tax Margin stood at 13.54% above that of the comparable quarter of 2018. PBT margin is estimated at 31.67% against 27.89%
Profit Margin equally inched above 2018Q1 estimate by 7.21% at the current estimate of 21.54%
Return on Average Equity stood at far gap from the previous estimate at 1.08% against 6.99% achieved at the end of 2018 first quarter
In the same trend, Return on Average Assets is 1.01% against 4.00% estimated last first quarter

Efficiency Ratios

As noted above, all observed efficiency ratio dropped against the comparable period of 2018.
Total Assets Turnover is currently estimated at 4.71% as against the 19.90% achieved in the similar period of 2018
Equity Turnover also dropped by 85.61% from what was achieved in 2018. Please note that Equity Turnover is now estimated at 5.01% as against the 34.81% of 2018
In other words the Net Assets was only multiplied 0.05times as against the previous 0.35 times. In our opinion serious efforts should be engaged to ensure the improvement of this ratio
Following similar trend, the Fixed Assets Turnover stood at 4.71% as against the 19.90% estimated in the corresponding period of 2018

Investment Ratios

As noted above, since the shares outstanding within the two periods under comparison are not the same, ratios estimated with shares outstanding dropped against last year despite the large growth in the company earnings
Earnings per Share EPS is currently estimated at N0.28 as against the N0.86 estimated from the company’s earnings in 2018
Thus, the said earnings yielded 1.63% of the price of CCNN shares on the floor of the exchange as at the time this report was made available to the investing public
Reflecting the reduction in the EPS, the PE/ratio increased to 15.36x from the previous estimate of 5.93x
Nevertheless, the estimated P/Book Value ratio stood below unity, thereby suggesting an underpriced status of each units on CCNN shares on the floor of the Nigerian Stock Exchange
Further confirming the above is the estimated Book Value of N25.65 as against the N17.00 it sells as at the released of this report

Valuation

We have valued each units of CCNN share price, assuming further growth in performance indices through 2019 financial year. It should be noted that the new shares were listed on the 31^st December, 2018, implying that the full utilisation of the merger only commenced from the first quarter of 2019. As noted above, the management of CCNN might still have lots of un-utilized business opportunities. We are therefore of the opinion that, the full advantage of the merger has not been fully achieved. Thus, we rate it amongst the growth stocks, showing our expectation of brighter performance through the year.

Considering the above, we maintained our valuation for each unit of CCNN shares at N45.27.