Thursday, April 14, 2011 5:47 PM, Vetiva Research
Cement Company of Northern Nigeria (CCNN) Plc FY'10 Earnings Release Reporthighlights:
Analysis of result
CCNN’s FY’10 turnover came in at
N11.18 billion, closely in line with our forecast of N11.20 billion (0.17% variance). On a yearly comparison, top-line declined as expected by 6%. We believe turnover was held steady by volume as prices most likely remained stable in the year. Given the closeness of our turnover forecast with the actual performance, we surmise that the company recorded an average utilisation rate of 77% in 2010 (as against 82% in 2009). Furthermore, reported figures show that CCNN’s cost of sales ( N7.067 billion) is 6% higher than our forecast ( N6.664 billion); hence, as against our expectation of about 41% gross profit margin, FY’10 gross profit margin came in at 37%. However, pre-tax profit ( N1.752 billion) came in significantly ahead of our forecast of N1.147 (52% variance).
Despite the positive surprise in CCNN’s FY’10 bottom-line performance, we maintain a cautious outlook given that the fundamental business case is still unchanged.Essentially, the company’s capacity constraint, unclear expansion plans, huge energy costs and the resultant low margins are our biggest areas of worry as regards CCNN’s long term potential. In addition, the aggressive expansion and wide distribution of Dangote Cement would continue to pose major threats to CCNN’s historic dominance of the North West Region – hence increasing pressure on the company’s market share is inevitable.
Revisions to our forecasts
Though our fundamental assumptions on CCNN remain the same, we have duly adjusted our forecasts to incorporate future occurrence of increasing non-operating income. Though we are yet to ascertain the cause of the boost in FY’10 bottom-line from the company’s management, we surmise that it likely comes from other non-operating income which historically (between 2006 and 2009) has been a constant feature and averaged about 8% of sales. Hence our revised FY’11 turnover remains unchanged at
N11.93 billion but after tax profit has been revised upwards to N1.353 billion (previous: N827 million)
After adjusting for FY’10 numbers, we obtained a new target price of
N8.17 and an implied range of N7.40 – N9.10. At CCNN’s current price of N10.23, the stock is trading at a significant premium (c.21%) to our new target price. Thus, we maintain aSELL rating on the stock.