Ashaka Cement Other Income Line Grows by 212% YoY in Q2'16; Shares Rated Neutral


Friday, August 05 2016 2:01pm /FBNQuest Research

Event: Ashaka Cement (Ashaka) reports Q2 2016 results

Implications: Likely downward revisions to consensus 2016 PBT forecasts

Positives: Other income line grew by 212% y/y

Negatives: PBT fell by 59% y/y driven by a 35% y/y decline in sales

This morning, the NSE published Ashaka Cement’s (Ashaka) Q2 2016 results which showed that PBT declined by 59% y/y, despite being boosted by a positive result of N1.8bn on the other income line. Excluding the other income the firm reported a pre-tax loss of c.-N550m.

Moving away from the PBT, virtually all the key headline items declined on a y/y basis. Sales were down by 35% y/y to N4.0bn. The reclassifications of costs from opex to COGS explains the negative gross margin of -3.2% (and gross profit of -N130m) and the 23% y/y decline in opex.

While other income increased markedly by 212% y/y to N1.8bn, the y/y weakness on the topline and the bloated COGS+opex combined proved more significant and were the major drivers behind the y/y decline in PBT. Further down the P&L, PAT fell by a narrower margin of 47% y/y, due to a tax credit of N170m. Sequentially, sales grew by 12% q/q. 

However, PBT and PAT grew faster by 324% q/q and 538% q/q due to positive result of N1.8bn (vs nil Q1 2016) on the other income line. Compared with our forecasts, sales missed by 20%. However, thanks again to the stellar growth on the other income line, PBT and PAT beat by 11% and 57% y/y respectively.

The strong PAT was due to the tax credit of N170m compared with the income tax expense of -N224m that we had modelled. In terms of the H1 trends, sales fell by 29% y/y to N7.8bn. The combination of the weak topline and a gross margin contraction of -3,667bp to 3.9% completely offset a positive result on the other income line and resulted in PBT and PAT declining by wider margins of 63% y/y and 54% y/y to N1.5bn and N1.6bn respectively. 

We estimate that the weak topline in Q2 was driven by a combination of an 11% y/y decline in unit volumes to about 0.17million metric tonnes and benign cement prices of around N24,217 per tonne (c.US$76 per tonne), compared with over N30,000 per tonne in Q2 2015. We note that in US dollar terms, prices have declined even more (-50% y/y) due to the depreciation of the naira to about N318 per US dollar following the CBN’s adoption of a more flexible exchange rate regime. 

However, we would be looking to get more clarity from management as to the reclassifications, the severe gross margin contraction in H1 2016 and the marked growth of the other income line in Q2 2016.

When annualised and adjusted for seasonality, Ashaka Cement’s H1 2016 PBT tracks behind consensus 2016 PBT forecast of N4.0bn. As such, we expect to see marked downward revisions to consensus earnings forecast and a muted to slightly negative reaction from the market over the next few days. Ashaka shares have underperformed the index this year. They have shed -20.2% ytd vs. the -3.1% return delivered by the ASI.

We rate the shares Neutral.  Our estimates are under review.

Ashaka Cement Q2 2016 results: actual vs. FBNQuest Research estimates (N millions) 

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