Tuesday, November 1, 2016 12:58 PM / FBNQuest Research
Event: Ashaka Cement (Ashaka) reports Q3 2016 results
Implications: Likely downward revisions to consensus 2016E PBT forecast likely
Positives: Slight y/y fall in opex which surprised positively
Negatives: Ashaka reported a pre-tax loss of –N648m, driven by elevated COGs and a -16% y/y decline in sales
Later yesterday, the NSE published Ashaka Cement’s (Ashaka) Q3 2016 results which showed that the company delivered pre-tax and after tax and losses of –N648m and –N202m respectively. Similar to Q2 2016, the pre-tax loss was mainly driven by a 10% y/y rise in COGs to –N3.2bn (which resulted in a negative gross margin of -1.0%) and a 16% y/y decline in sales to N3.2bn.
To a lesser extent, a 98% y/y spike in other expense also contributed. These negatives completely offset a 2% y/y reduction in opex to –N532m and a 124% y/y increase in net interest income to N168m. Thanks to a tax rebate of N446m, the post-tax loss narrowed to –N202m. Sequentially, sales fell by 21% q/q.
However, the pre-tax and after-tax losses compare with PBT and PAT of N1.2bn and N1.4bn in Q2 2016. Relative to our forecasts, sales missed by 24%. Our PBT and PAT forecasts of N410m and N287m were significantly ahead of the pre-tax and after-tax losses reported by the company.
In addition to the weaker-than-expected sales, the variance between our PBT and PAT forecasts versus actual was due to the negative surprise on the COGs line.
Moving back to the topline, the y/y decline in sales was driven by the combination of a 7% y/y decline in unit volumes to 0.15 million metric tonnes and a 9% y/y reduction in average realised prices to N27,808 (US$89) per tonne. Although Ashaka utilises a higher proportion of cheap coal to run its kilns, its US$ linked cost is still substantial because its power plant runs on expensive low-pour-fuel-oil (LPFO).
Although LPFO is refined locally, mainly by the Kaduna and Warri refineries, the low capacity utilisation of the refineries makes it imperative to supplement domestic produce with imports. Management disclosed that its independent power plant which will be coal fired is on track to be commissioned by H1 2017.
When annualised and adjusted for seasonality, Ashaka Cement’s 9M 2016 PBT tracks behind consensus 2016 PBT forecast of N3.1bn. As such, we expect to see marked downward revisions to consensus earnings forecast and a negative reaction from the market over the next few days. Ashaka shares have underperformed the index this year. They have shed -51.0% ytd vs. the -5.0% return delivered by the ASI.
We rate the shares Neutral. Our estimates are under review.
Ashaka Cement Q3 2016 results: actual vs. FBNQuest Research estimates (N millions)