•Ashaka Cement Plc reported an 8.5% rise in FY 2011 turnover to N20.8 billion, in line with our N20.3 billion forecast.
•The result translates to a Q4 2011 turnover of N4.99billion, a 7.3% and 11% YoY and QoQ dip likely reflecting lower sales during the quarter. This suggests that much of the full year turnover growth largely reflects stronger volumes sold and higher cement prices in Q2 and Q3 2011, which contributed 54% to 2011’s revenue, well ahead of the 44% average contribution of the preceding two years.
Cost of goods sold reflect constant efficiency
•FY 2011 cost of goods sold rose 8% YoY to N12.9 billion in line with YoY revenue growth. These gains were nevertheless lower than anticipated. We had expected greater impact from energy efficiency gains that came off the heels of its 2010’s coal initiative, which kicked in Q4 2010. Instead, FY 2011 gross margin was flat at 38%, relative to 2010’s 37.8% level (see Figure 1).
•COGS rose 25.5% YoY in Q4 2011 to N2.9 billion, despite the 7.3% revenue dip translating to a gross margin of 42%, a 15.2ppt YoY dip from Q4 2010’s levels.
Figure 1: Gross, PBT and PAT margin trends
Source: Company financials, ARM Research
PAT margins supported by lower taxes
•FY 2011 PBT grew 8.5% YoY to N4.8 billion in line with top line performance (YoY: 8.5%), nearly matching our N4.9 billion forecast. In addition, PAT grew 18.9% YoY to N3.57 billion, 4% above our N3.44 billion forecast. This rise in PAT corresponds to a lower tax rate of 25% compared to 31.5% recorded in 2010, which our assumptions were premised on. This result translates to PBT margin of 23%, similar to 2010 levels and a PAT margin of 17.2%, 150bps higher than 2010’s levels, also the company’s 5-year high as shown in figure 1.
We still maintain our positive outlook
•Overall, in light of the recent performance and its 500,000 MT expansion programme which, according to management, is scheduled for completion in 2012, we believe that Ashaka is in line to meet our growth targets despite modest deterioration in efficiency in Q4 2011. We had already made adjustments to forecast 2012 tax rates in anticipation of the new capacity and maintain our assumptions around this factor. Our forecasts imply a CAGR of 11.1% through 2014 for revenue on the back of the proposed expansions.
Valuation estimates unchanged….
• The stock currently trades at a trailing P/E of 6.91x and P/B of 1.30x—a discount compared to industry averages of 9.72x and 2.52x respectively—and an estimated 2012 P/E of 6.73x.
• We maintain our 12M TP of N22.15 a significant premium to the current market price of N10.60- along with our BUY recommendation for the stock.
ARM ratings and recommendations
ARM now employs a two-tier rating system which is based on systemic importance of the security under review and the deviation of our target price for the stock from current market price. We characterize systemic importance as a function of a stock’s ranking among the group of top 20 stocks by NSE market capitalization over a trailing 6 month period (minimum) to the review date. We adopt a 5 point rating system for this category of stocks and a 3 point rating system for stocks outside this group. The choice of top 20 stocks arises from the consideration that this group of stocks constitutes >75% of overall market capitalization and stocks outside this group are generally less liquid and individually account for <<1% of market capitalization. For stocks in both categories, the basis for ratings subject to target price deviation is outlined below:
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