Wednesday, August 19, 2015 09:15AM / FBN Capital Research
29% avg. increase to our 2015-17E EPS, upgrading to Outperform:
Following Ashaka Cement’s (Ashaka) Q2 2015 results which came in ahead of our estimates on almost every criterion, we have increased our EPS forecasts by 29% on average over the 2015-17E period and upgraded our recommendation from Neutral to Outperform.
Our new price target of N29.6 is 32% higher than our previous target and implies a potential upside of 29% from current levels. Although the shares have outperformed the index ytd (5.0% vs -13.1% NSE ASI),
we still find them attractive on a relative basis (2015E P/E of 7.6x for 13.1% EPS growth in 2016E vs. a sector average P/E multiple of 10.2x P/E for 12.0% EPS growth).
PBT up 91% driven by 1,018bp expansion in gross margin:
Ashaka’s Q2 2015 results showed that sales grew by 6% y/y to N6.2bn, while PBT and PAT expanded by 91% y/y and 67% y/y to N3.0bn and N2.7bn respectively.
A combination of factors including a strong gross margin expansion of 1,018bps to 44.2%, a positive result of N479m on the other income line (vs nil income in Q2 2014) and a 2.2x increase in net interest income were the major drivers behind the stellar growth in pre-tax earnings.
Further down the P&L, the growth on the PAT line narrowed to 67% y/y due to a higher tax rate of 11.8% vs.1.1% in Q2 2014. Sequentially, sales grew by 36% q/q.
Although opex increased by 52% q/q, a gross margin expansion of 842bps q/q and positive surprises on the income and net interest income lines completely offset the rise in opex and resulted in PBT and PAT advancing by 160% q/q and 199% q/q respectively.
Beyond Q2, we expect Ashaka’s sales to benefit from the improving security situation in north-east Nigeria.
We expect gross margins to expand by an average of 550bps to 45.5% in H1 2015 driven mainly by the increased substitution of coal for low-pour-fuel (LPFO) which is now north of 80%.
Consequently, we forecast 2015 sales and EPS growth of 8% y/y and 48% y/y to N22.8bn and N3.01 respectively.