Cordros Weekly Stock Recommendation – 060818


Monday, August 06, 2018 / 2:30PM / Cordros Capital

Cadbury Nigeria Plc (CADBURY) – Hold

The shares of CADBURY dropped by 8.88% to NGN9.75. CADBURY trades at a significant forward PE above its 5-year historical average of 24.9x.

CADBURY released Q2-18 result, with a loss after tax of NGN455 million. We had expected a loss of NGN740 million. The result shows welcome growth in revenue and double-digit decline in opex, offset by significantly lower gross margin.

The reported Q2-18 revenue was ahead of Q1-17 by 13.7% and beat our estimate by a marginal 0.3%. At current run-rate, we believe the company’s revenue is in line with our 8% growth forecast for the year. We believe the revenue growth was largely volume-driven, as we are not aware of any price increase during the reference period. Whilst noting the aggressive sales drive going on mainly at the retail level – for Bournvita especially – we believe Ramadan-related consumption may have also boosted sales volume during the period.

Domestic sales rebounded with a growth of 8% y/y (-0.5% y/y in Q1-18), while Exports grew by 59% y/y (vs. 102% y/y in Q1-18).

At 10.9% in Q2-18, the achieved record-low gross margin (lowest since Q3-16) came in way below our 17.4% estimate. The lower outturn confirms our stance since the beginning of the year, that CADBURY’s 2018E gross margin is unlikely to beat the 22.5% rate achieved in 2017FY. We consequently revise gross margin estimate for the year lower to 19.7% (from 22.5%), while reiterating (1) selling price competition and (2) rising cocoa prices (+20% YtD) as headwinds, and (1) stable FX and (2) soft sugar (-26% YtD) and dairy (-8% YtD) prices as tailwinds.

The balance of borrowings stood at NGN2.37 billion (vs. NGN4.3 billion in Q1-18), comprising solely drawn-down bank overdraft facility. This produced finance charge of NGN184 million, below the NGN195 million we estimated. And as expected, finance income grew q/q (+80%), but still trailing our expectation (NGN47 million vs. NGN73 million respectively). We made no changes to these lines. Capex stood at NGN232 million, much lower than the NGN699 billion spent as at H1-17.

The net impact of the changes to our model is a cut to both our EPS estimate to NGN0.06 (from NGN0.24 previously) and TP to NGN10.00 (NGN10.96), with HOLD rating. CADBURY’s stock has lost 26% since we updated on Q1-18 result, with a SELL rating. On our estimates, CADBURY is trading at forward (2018E) P/E multiple of 175.4x, a significant premium to its five-year historical average of 31.3x.

Dangote Sugar Refinery Plc (DANGSUGAR) – Hold

The shares of DANGSUGAR closed lower by 3.03% to NGN16.00. DANGSUGAR trades at forward PE of 7.0x, lower than its 5-year historical average of 7.5x.

We update on DANGSUGAR following the release of the Q2-18 result, wherein revenue and net profit came behind Q2-17s at strong double-digits. Compared to our estimates, both revenue and net profit were lower by 14% and 13% respectively. Stronger gross margin minimized the effect of still-weak volume and higher-than-expected opex, in what would have been a more disappointing quarter. We now expect 2018FY net profit will be lower by 31% vs. 2017FY (-20% previously), whilst noting possible upside from (1) continued resilient margin over H2-18 (even in the traditionally weak Q4) and (2) strong reduction of opex from the current surprisingly high level (Q2-18 figure highest since Q4-16).

At 312Kts in H1-18, DANGSUGAR’s sales volume is lower by 14% vs. H1-17. The difficult Apapa traffic condition remains a challenge, but more importantly, competition from smugglers importing fortified sugar (accounting for over 60% of DANGSUGAR’s sales volume) is apparently on the rise, amidst (1) globally soft raw sugar prices (-26% Ytd and -41% in 52 weeks), (2) relatively high domestic prices (+66% compared to two years ago), and (3) stable FX. DANGSUGAR’s sales volume are typically lower during the wet season in Q3, and sales in Q4- 18 are unlikely to beat H1 run-rate under the prevailing market conditions. Consequently, we have revised our 2018 volume estimate lower to 609Kts (previously 691Kts), representing c.-8% vs. 2017FY.

At 30.3%, the gross margin achieved in Q2 is slightly above the 29.5% we estimated. We believe margin was boosted by a further reduction of per tonne sugar cost (6% q/q) and marginal increase (2% q/q) in selling price. We increase gross margin estimate for 2018 slightly higher to 27% (previously 26%), while reiterating (1) better energy mix, (2) stable exchange rate, (3) stable outlook of global raw sugar prices, and (4) positive mix from growing contribution (4% of total sales volume, from 2% previously) of high margin Savannah, as tailwinds supporting our view.

Our EBITDA estimate reflects both our view on low revenue (-20% vs. 2017FY) and the increase in opex estimate to NGN8 billion (6.5% vs. 2017FY), following the surprise print in Q2.

We do not see the price increase mentioned above resetting revenue in H2, given the little size (basically to support revenue in Q3), amidst possible reversal in Q4. In addition to the aforementioned, our estimate of wider net profit decline adjusts for the huge (one-off) FX gain recorded in Q4-17.

We revise target price lower to NGN16.27 (previously NGN17.42), with a HOLD rating. DANGSUGAR’s stock has lost 20% since we updated on Q1-18 result (with SELL rating). On our estimates, the stock is trading at forward (2018E) P/E and EBITDA multiples of 7.43x and 4.03x respectively, almost in line with its five-year historical averages, but below the Middle East peer averages of 13.2x and 8.6x respectively.

Flour Mills of Nigeria Plc – Under Review

The shares of FLOURMILL dropped by 0.74% to N27.00 . FLOURMILL trades at 2018 PE of 5.7x, below its 5-year average of 19x.

FLOURMILL released Q4-18 and 2018FY results, which showed revenue grew by a marginal 3.5% while net profit increased by 54.1% over 2017FY numbers. Both were behind consensus estimates by 7% and 12% respectively. For Q4-18, revenue was down 14.4% y/y and 10.8% q/q while net profit was lower by 76% y/y and 91% q/q.

Although Q4 contributes the least to FLOURMILL’s top-line, we were quite surprised by the much lower outcome this year - wherein sales came short of our estimate by 7% - considering (1) the strong trajectory over 9M-18 and (2) that prices were lowered in December 2017 to support sales in 2018. We note the surprise 6% q/q decline in Food revenue (vs. our 20% growth estimate), which bucked the quarterly growth trend of the last two years. Compared to Q3-18 also, Agro-allied revenue was lower by 32%, but better than we expected, considering the company had reported negative numbers on this line in the last two years.

Q4-18 gross profit margin came in at 11.1%, about 484 bps lower q/q. The margin is the lowest in 2018FY. Management had informed us in March that it was well on course to achieve minimum 13% gross margin in 2018FY, despite the price cuts implemented late last year. The 12.67% margin achieved in 2018FY is below the 13.7% we estimated. On the COGS line, we observe a significant increase in rent/rates in Q4 compared to previous quarters. EBIT margin in Q4-18 stood at 3.7%, significantly lower than the 10.3% average achieved as at 9M-18. Gross opex margin rose to 7.8%, from 9M-18 average of 4.1% while other gains stood at NGN436 million, 96% lower y/y and below the NGN1.8 billion average achieved over 9M-18.

In Q4-18, finance cost came in at NGN7.54 billion, 2% ahead of our NGN7.4 billion estimate, and lower by 49% y/y and 15% q/q. Gross outstanding loan stood at NGN153.2 billion, from NGN200.8 billion as at 9M-18. Long-term borrowing and bank overdraft facilities reduced by 53% and 42% respectively compared to previous balances. Management said during our last meeting that the proceeds of the recent rights issue would be deployed fully to debt repayment.

We expect negative reaction to the result on likely downward earnings revision. Apart from 2018FY net profit coming behind consensus forecast by c.12% (as stated earlier), the reported Q4-18 EPS of NGN0.27 (would have been a loss, excluding NGN3.3 billion tax credit) was also way-below the NGN1.30 expected by consensus.

Our estimates are under review.

Guinness Nigeria Plc – Sell

The shares of GUINNESS closed lower by 2.08% to N94.00. GUINNESS trades at 2018 PE of 24.4x, below its 5-year average of 27.7x.

GUINNESS reported 40% y/y increase in Q3-18 net profit (EPS: -4% y/y), coming off better-than-expected revenue growth, and relatively lower operating expenses and finance charges. Both masked a disappointing gross margin, which has now weakened for four quarters in a row. Compared to consensus, the reported net profit was head by 131%, and beat our estimate by 47%.

Following the Q3 and 9M-18 results, we raise our 2018E EPS estimate to NGN3.85 (previously NGN2.98), and for 2019E and 2020E to NGN4.71 (previously NGN4.30) and NGN5.14 (previously NGN5.12) respectively. The assumptions driving the single-digit increase in our 2019-2020E EPS estimates are the (1) increase in revenue growth forecast to 9% average (previously c.8% average) and (2) 400 bps downward revision of opex-to-revenue ratio estimate, offsetting the (3) 300 bps downward revision of gross margin estimate.

Q3-18 revenue grew 15% y/y and beat our estimate and consensus’ by 4%. Consistently for three quarters, GUINNESS has reported revenue growth that exceeded both our estimate and that of the market. Whilst noting the impact of pricing, we are aware that volume has also contributed to the impressive revenue performance thus far, thanks especially to

Guinness stout, mainstream spirits, and Dubic lager.

Both we and consensus have been consistently disappointed by the outcome of GUINNESS’ gross margin since the surprise surge to record 55% in Q3-17 (although now restated to 42%). The latest gross margin contraction ( -922 bps y/y and 32 bps q/q) is even more worrying, when the (1) marked softening in the prices of local sorghum (especially in February and March), barley (-11% YtD and -6% y/y in Q1-18) and maize (-16% y/y), and importantly, (2) the stability of the naira, are taken into consideration. Consequently, we have revised gross margin estimate for 2018E to c.33% (previously 34%) and for 2019-2020E to 34% (previously 37%), more so, that the outlook for drinks’ prices generally is now to the downside.

Outstanding borrowings as at end-March was NGN16.8 billion, comprising mainly of related party loans (48%) and letter of credit (42%), which we believe are quite cheap and have impacted little on finance costs thus far. Management had said it would retain some USD loans after the equity capital raise of last year. Capex as at 9M-18 was NGN8.4 billion, and at the run-rate, should equal 8% of revenue (same as for the last three years) by the end of the year.

On our revised estimates, and with valuation rolled-forward to 2019E, we have a TP of NGN73.75/share (previously NGN68.59/share). The stock is trading on 2019F P/E and EV/EBITDA multiples of 21.8x and 8.6x respectively, which compares with SSA peers (20.6x and 9.5x respectively) – though we acknowledge that GUINNESS’ multiples are at considerable discounts relative to 5-year historical average (excluding 2016).

Nigerian Breweries Plc – Hold

The shares of NB fell by 0.96% last week to N103.00. NB trades at forward PE of 26.5x, below its 5-year average of 31.5x.

NB reported 33.1% y/y decline in Q2-18 EPS, impacted by sales and gross margin declines, as well as higher effective tax rate, which offset a significantly lower net finance cost. Both the achieved revenue and net profit trailed our estimates for the three months period by 6% and 39% respectively. And annualized, the H1-18 EPS of NGN2.31 is 8% behind consensus estimate for 2018E.

The reported Q2-18 revenue was less than Q2-17 by 0.03% and trailed our estimate by a wider margin. NB has now recorded y/y decline in revenue for three quarters in a row. At current run-rate (-5% in H1-18), and considering sales is typically slower in H2, we no longer expect NB to grow revenue in the 2018 fiscal year. Our revised revenue estimate of NGN337.7 billion is lower by 2% (vs. +7% previously) compared to 2017FY. And we also expect a downward revision of consensus’ estimate of NGN362.2 billion (+5% vs. 2017FY) following the latest result.

Heineken (NB’s parent) had guided in May to declining sales volume in Nigeria. On one hand, we believe unit volume was affected by Ramadan-related decline in beer consumption. But more broadly, we reiterate that NB’s market share is under pressure from the growing presence of competition – INTBREW (not covered) specifically – in the West and East markets. We should also mention the price hike in early June as possibly impacting volume.

Q2-18 gross margin came in at 42.4%, down by about 300 bps y/y and q/q, and at strong variance to the 46.4% rate we expected. Our assumption is that NB may have absorbed the additional costs associated with the newly approved excise duties for alcoholic beverages, effective June. For instance, we are aware that NB increased the prices of beer earlier in June (Star Radler, Life, Gulder, and Goldberg), but rolled some back by the end of the month. While we expect NB will eventually pass on the extra costs to consumers, we expect it will be measured and staggered, amidst increasing competition for market share (for instance, we understand INTBREW retained the prices of its product after the new excise duties took effect). Consequently, we revise our gross margin estimate for 2018E 150 bps lower to 41.5%, while retaining estimates over 2019-2020E at 43% average.

The net impact of the changes to our model is a cut to our 2018E EPS estimate to NGN3.89 (from NGN4.94 previously) and TP to NGN93.14 (previously NGN107.25), with HOLD rating. NB’s stock has lost 19% since we updated on Q1-18 result, with a SELL recommendation.

Nestle Nigeria Plc – Sell

The shares of NESTLE closed higher by 3.93% to N1,560.00. NESTLE trades at 12-M PE of 25.9x below its 5-year average of 43x.

NESTLE reported 56.9% y/y EPS growth in Q2-18, driven by strong revenue and margin growth, marginal increase in opex, and a net finance income (vs. loss the previous year).

Compared to our estimate, the achieved Q2 EPS was ahead by 8%. Annualized, the H1-18 EPS of NGN27.07 is c.3% ahead of consensus estimate for 2018E.

The reported Q2-18 revenue was ahead of Q2-17 by 11.6% and beat our estimate by a marginal 1%. At current run-rate, we believe NESTLE’s revenue growth (10.97% in H1-8) is in line with our 10% forecast for the year, hence we make no changes. Compared to both Q2-17 and Q1-18, we estimate volume grew at low single-digit during the reference period, supported by both Ramadan-related consumption as well as the recent introduction of new SKUs – Maggi Naija Pot, Golden Morn Puff, and Milo-Ready-to-Drink – for which adverts and promotions have been aggressive thus far this year. Food revenue grew 11% y/y while Beverages grew by 13% y/y in Q2. We are aware of rising competition in the FMCG space with new entrants, but should also note that NESTLE’s RTM is aggressive, hence we expect revenue will maintain the H1 trajectory in the remaining half of the year.

From the decline to 38.2% in Q1-18, NESTLE’s gross margin recovered strongly to 43.96% in the review period, exceeding both Q2-17’s 40.9% and our estimate of 41.6%. We revise our gross margin estimate for 2018E slightly higher to 42.5%, and while noting downside risk relating to the rising price of cocoa (+20% YtD), elsewhere, we believe NESTLE’s margin will be supported more by the stable exchange rate, soft sugar (-26%YtD) and dairy prices (-8% YtD), continued sourcing of cheaper local inputs, and importantly, stable selling prices.

Our revised forecast brings gross margin closer to the average of 43% achieved between 2012-2014FY (average gross margin was 40% prior), but still below the peak of c.45% achieved in 2015FY.

Net finance income of NGN300 million was recorded in Q2-18. FX gain of NGN590 million more than offset interest expense of NGN550 million, as the balance of borrowings reduced by a further NGN630 million to NGN17.5 billion (vs. NGN24.2 billion in 2017FY and NGN42.99 billion in H1-17). Following the result, and with the risk of FX fluctuation muted, we now model finance cost will be much lower at NGN2.6 billion in 2018E, from. NGN4.6 billion previously (vs. NGN15.1 billion in 2017FY).

The net impact of the changes to our model is an increase to our 2018E EPS estimate to NGN60.14 (from NGN58.30 previously) and TP to NGN942.23 (previously NGN851.48), while maintaining SELL rating. NESTLE’s stock has lost 6% since we updated on Q1-18 result, with a SELL rating. On our estimates, the stock is trading at forward (2018E) P/E and EV/EBITDA multiples of 25x and 16.2x, a significant discount to its five-year historical averages of 45x and 21.1x respectively.

Pz Cussons Nigeria Plc – Hold

The shares of PZ dropped by 7.59% to NGN14.00. PZ trades at 2018 PE of 27.0x, below its 5-year average of 40.0x.

PZ published 9M-18 and Q3-18 results which fell well-short of broad expectations, in line with management guidance two weeks ago. Management had guided that trading conditions have been unusually challenging thus far in H2, and expects its profits over the period, and indeed for the year ending May 2018, to fall short of expectations. Reported Q3-18 revenue and net profit fell short of our estimates by 15% and 49% respectively.

Q3 revenue was lower by 7% y/y and 0.4% q/q. This is the company’s first q/q revenue decline, in a seasonally-supportive quarter, within the period of available data (February 2013).

The key factors that management recently informed us are responsible for the current revenue challenge include (1) weak consumer’s discretionary income, with subdued buying levels, (2) increased local competition, amidst improved dollar availability to importers, and (3) lower cross border sales, affected by Sudan (inflation recently hit 54%), wherein currency devaluation impacted adversely on discretionary spending.

Gross and EBIT margins also weakened on y/y (412 bps and 602 bps respectively) and q/q (148 bps and 49 bps respectively) bases. Management mentioned in a recent trading update that intense competition is resulting in lower prices and margins in some product categories. We should state that compared to UNILEVER, PZ’s margins are yet to recover from the 2015/16 and 2016/17 FX induced pressures.

Compared to our estimate, the published Q3-18 gross and EBIT margins are lower by 149 bps and 285 bps respectively. Although opex was lower than we estimated, the ratio was

higher, owing to lower revenue outturn.

We have rolled forward our model estimates and valuation to 2019E. Hence, impact of the above changes to estimates was insignificant on the stock’s TP (NGN15.13, vs. NGN15.19 previously).

Unilever Nigeria Plc – Sell

The shares of UNILEVER inched lower by 0.29% to NGN52.40. UNILEVER trades at forward PE of 27.0x, below its 5-year average of 57.1x.

UNILEVER published H1-18 result, with the first quarter numbers restated. For the three months ended June (Q2), revenue grew 7.5% y/y, while EBIT was down 24% y/y. PAT grew by 36% y/y, thanks to net finance income of NGN1 billion (vs. loss of NGN780 million in Q2-17).

UNILEVER’s Q2-18 revenue of NGN24.65 billion is in line with our estimate for the period (0.3% variance). And at NGN48.13 billion, achieved revenue in H1-18 is 12.9% higher vs.

H1-17, and tracks ahead of 2017FY’s NGN90.8 billion, both (1) when annualized and (2) considering a seasonally stronger second half. But that said, we revise 2018E revenue estimate to come in 3% lower than previously expected, given the downward revision of the Q1-18 figure (by 9%). The revised result shows that Food revenue was actually lower by 6% y/y in Q1-18 (previously +16% y/y) while HPC growth was unchanged. In Q2, Food revenue grew 19% y/y while HPC was lower by 2%.

Over H1-18, gross margin came in at 31.8%, +70 bps vs. H1-17. In addition to the upward revision of Q1-18 gross margin (+51 bps) under the restated result, the margin of 35.3% achieved in Q2-18 was higher 213 bps y/y and beat our 31% estimate. This is consistent with our strong view on margin for 2018E, confirmed by the decision to retain our prior estimate of 32% for the year even during the sharp q/q contraction in Q1 (before restatement). Following the latest result, we revise 2018E gross margin estimate slightly higher to 32%, while reiterating key supporting factors as stable FX and selling prices, and importantly, management focus on cost containment leveraging local sourcing of inputs.

Opex grew at a surprise 49.4% y/y in Q2-18, and despite revising the Q1 figure lower (by 12%), growth in H1-18 stood at 26.8%. This particularly exerted pressure on EBIT, which grew by a marginal c.2% y/y in the six months period. We expect slightly lower opex in H2 – in line with historical trend – overall, equating to 13.8% growth (fastest since 2013) over


Net finance cost of NGN1.3 billion was reported in H1-18. Asides from finance charges dropping significantly (-90% in H1-18) following the reduction of borrowings to record-low levels

(NGN4.3 million in H2, lowest since the NGN4.5 million balance in 2012FY), finance income was equally strong (+300% in H1-18), benefiting from cash formation following the rights issue concluded in H2 last year. On balance, while EBIT is forecast to grow by c8% in 2018E, we forecast EPS to grow at a faster rate of c.50%.

Our model produced a TP of NGN38.44 (previously NGN32.78) for UNILEVER, even as we cut risk-free rate to 13.6% (from 14.1%). Compared to the current market price of NGN52.55, our revised TP implies potential downside of 26.9%. Maintain SELL.

Dangote Cement Plc – Hold

The shares of DANGCEM fell by 2.14% to N229.00. DANGCEM trades at forward PE of 16.3x, below than its 5-year average of 15.8x.

DANGCEM published Q2-18 result, showing Group revenue grew 18% y/y, while net profit was lower by 24% y/y. Revenue beat our estimate by 2% while net profit was much lower (52% variance), on higher (Nigeria) effective tax rate. Following changes to our tax rate assumption, we revise 2018-2019E EPS estimates lower by 17% average, whilst noting possible upside in the event that the Group receives the pending approval for pioneer tax incentive in Nigeria. However, the impact of the EPS cut on target price is offset by the significant cut to our 2018-2019E capex estimates (25% average) following the very low outturn (-37% vs. H1-17) over H1-18.

We revise 2018 Group EBITDA estimate higher by 3% to NGN472.1 billion (2017FY: NGN388.1 billion), equating to 49.7% margin (2017FY: 48.2%). That reflects mainly the upward revision of (1) volume estimate to 24Mts (previously 23.7Mts) and (2) gross margin to 58% (previously 57%), both representing c.8% and 79 bps increases over 2017FY. Our view of the Nigerian operation remains constructive.

Following the better-than-expected sales in H1-18 (+14% y/y), we now expect the local market to deliver 14.9Mts volume (2017FY:12.7Mts) in 2018E, whilst retaining gross and

EBITDA margin estimates at 73% (2017FY: 71%) and 65% (2017FY: 63%) respectively, on continued energy efficiency gain and stable exchange rate. Elsewhere, we cut our Non- Nigerian volume (-4% y/y in H1-18) estimate further by 6% to 9.1Mts (2017FY: 9.2Mts), reflecting our more conservative view of outputs from Congo, Ethiopia, South Africa, and Tanzania. We model full year Non-Nigerian gross and EBITDA margins at 25% (2017FY:24%) and 16% (2017FY: 15%) respectively.

Effective tax rate further increased to 47% in Q2, which management had said it expected to receive the awaiting approval for pioneer tax incentive in Nigeria. Consequently, our 2018-2019E tax rate estimate is now higher at 28% average (previously 14%), on the assumption that the tax incentive fails to come through. That said, we should also guide to potential strong re-rating of EPS and TP in the event that the tax incentive comes through in H2-18. Our 33% tax rate assumption beyond 2019 is unchanged, in line with earlier guidance provided by management for possible 30% rate in Nigeria when all plants exit tax holidays.

We revise our DCF-based target price higher to NGN216.00 (previously NGN195.58) – as we cut 2018-2019E capex by 25% average and reduce risk free rate to 13.6% (previously 14.1%) – and upgrade rating to HOLD (previously SELL). On our estimates,

Lafarge Africa Plc – Under Review

The shares of LAFARGE rose by 1.82% at NGN28.00. LAFARGE trades at forward PE of 10.2x below its 5-year average of 11.8x.

LAFARGE published Q1-18 result, showing 0.8% y/y decline in revenue and loss after tax of NGN2 billion. The published revenue and net loss were improvements over Q4-17 (+6.8% q/q and -94% q/q).

It is our view that the slight decline in revenue y/y was due to lower sales volume, given that average cement prices are currently higher by about 9% compared to Q1-17, on our estimate. We estimate about 7-8% growth in volume vs. Q4-17, consistent with the guidance provided by most producers during the 2017FY call. Revenue break-down shows "cement" and "other" revenues declined by 2% y/y and 26% y/y respectively while "aggregate and concrete" revenue grew by 8% y/y.

From a negative in Q4-17, gross and EBIT margins of 22.3% and 7.8% were reported in Q1-18. The margins are lower than the 25.7% and 16.5% respectively reported in Q1-17.

Compared to Q4-17, CoGS was lower by 24%, owing to the non-occurrence of the significant one-off charges that were recognized in the final quarter of 2017 and impacted Interest income grew by 20.5% y/y and 29.21% q/q to NGN95.59 billion, while asset yield declined by 10 bps y/y to 12.40%, despite a 28.27% jump in our computed interest-earnings assets – implying a lower yielding mix of assets. However, interest earned on customer loans (which makes up 77.6% of total interest income) rose by 28.66%, even as customer loans rose slower by 10.99% y/y (+0.34% q/q).

On the other hand, Interest expense recorded an upturn of 39.20% y/y (+59.18% q/q), owing to 30.44% y/y increase in interest paid on customer deposits (NGN33.37 billion) and adversely on earnings. Gross profit was lower y/y (14%), reflecting both lower margin and volume. EBIT and the margin were lower by 53% y/y and 872 bps y/y respectively, owing to (1) lower volume and gross margin and (2) and higher opex and the margin (41% y/y and 432 bps y/y). On opex, administrative spend increased by 36% y/y while campaign and innovation spend was more than 6x higher compared to Q1-17.

Though the net finance charge of NGN9.2 billion reported was much lower than the NGN24.5 billion reported in Q4-17, the amount is higher by 133% vs. Q1-17. Asides from the bump in Q4-17, the reported net finance charge is also high, in historical context. Interest on borrowings (NGN7.6 billion) alone was higher by 78%, reflecting the relatively higher borrowing of NGN269 billion (vs, NGN142 billion in Q1-17) in the balance sheet, following the reclassification of related party loans from quasi-equity, in H2-17. Net FX loss of NGN640 million was also reported during the quarter (nil in Q1-17).

Loss before and after tax of NGN2.95 billion and NGN2 billion were reported respectively. A deferred tax credit of NGN1.86 billion was recognized, resulting on net, to a tax credit of NGN944 million during the quarter.

Our estimates and valuation are under review.

Cement Company of Northern Nigeria Plc – Sell

The shares of CCNN fell by 1.44% tot NGN30.90. CCNN trades at forward PE of 10.7x, above its 5-year average of 7.1x.

CCNN started 2018 on an impressive note, reporting EPS growth of 111% y/y to NGN0.86, which when annualized, is almost 2x market expectation. The EPS is only 9% below the company’s single-quarter best of NGN0.95 recorded in Q4-17. The impressive Q1-18 performance is broad-based, and in our view, is one of the company’s best yet, when the significant difference in prices in the recent past quarters is adjusted for.

Revenue grew by 24% y/y during the three months period, the best we have seen among the quoted companies from Nigerian operations. Compared to Q1-17, industry cement prices are higher by single digit on average, suggesting that most of CCNN’s Q1-18 revenue growth is volume driven. The company achieved 94% utilization rate in 2017FY, despite reported 46% increase in selling price. We remain bullish on volume in 2018E and retain our 5% growth forecast on (1) relatively competitive selling price (disclosed 2017FY price was lower than DANGCEM’s by 3% and higher than ASHAKACEM’s by only 1%), (2) improved security condition in the North, and (3) the low presence of competitors in the markets – including cross border – where the company supplies cement. We are yet to hear from CCNN’s management, but we consider the NGN50/bag price increase recently implemented by DANGCEM (effective April) a tailwind for other smaller cement producers 'revenues in 2018.

Gross margin of 42% was achieved in Q1-18 and is also a major driver of the earnings outperformance in the review period. The gross margin beat our estimate for the quarter by 916 bps and is immune to the energy cost pressure we had expected with the rallying price of crude oil. CCNN’s management said it is managing the risk associated with the volatile price of its kiln fuel LPFO (linked to both FX and the price of crude oil, and accounts for 6065% of production cost) by exploring other alternate energy generation, although without detailed disclosure. We believe the stability of the naira is also supportive of the resilient margin.

Also noteworthy from the result are the 1200 bps average increase each in EBIT and PBT margins and 364% increase in RoAE. Operating expense was lower by 8% y/y while the ratio to revenue decreased by 543 bps y/y. An amount of NGN961 million was reported as capex in Q1-18, which annualized, is ahead of last year’s record NGN2.6 billion. About 48% of the spending (NGN468 million) was for the addition/repair of trucks, in continuation from the NGN750 million spent in 2017FY – this could be to support distribution.

Compared to our previous estimate, we revise 2018E net profit higher by 16% to reflect the changes on the gross margin line. On 2017FY results, our revised net profit estimate is higher by 13% (previously -3%). On our revised estimates, we have a DCF-based TP of NGN17.82 (previously NGN15.64) for CCNN.

Access Bank Plc – Under Review

The shares of ACCESS closed lower by 0.5% last week to N10.05. ACCESS trades at forward PE of 3.1x, above its 5-year average of 2.9x.

Access Bank plc released Q1-2018 results, showing a decline in its pre and post-tax profits from the same period in the previous year, by 0.57% and 1.30%, to NGN27.44 billion and NGN22.12 billion, respectively. Notably, following revision in operating expenses in the previous year, 2017's PBT and PAT were restated lower. Ex the revision, Q1-2018's pre-tax and post-tax profits would have been much lower, by 12.08% y/y and 15.00% y/y respectively. Quarter-on-quarter, the bank recorded significant increase in PBT (+283.09%) and PAT (+259.29%), from the low based Q4-17 performance (which was its worst quarterly performance since Q4-2012).

Notably, customer deposits and borrowings in the quarter were higher by 24.39% y/y (11.63% q/q) and 11.89% y/y (+10.43% q/q) respectively. On balance, net interest income was higher (4.48% y/y and 6.37% q/q) at NGN44.65 billion. Also, cost of funds was 70 bps higher y/y at 5.80%, causing the NIM (whilst also noting the decline in asset yield) to shed 90 bps to 5.80%.

Growth in NIR (+14.578% y/y, +105.59% q/q) was also positive at NGN41.80 billion, driven largely by the 399.44% y/y (+253.83% q/q) surge in net trading income. Gains on derivative instruments was 4.3x its value last year at NGN26.67 billion, while returns on fixed income instruments turned positive (NGN959.50 million), from a loss position (-NGN620.14 million) in the previous year. Net fee and commission income also grew 34.60% y/y (-11.27% q/q) to NGN15.86 billion, following a 55.12% y/y rise in credit related fees and commissions.

These muted the significant 140% drop in forex income to a deficit of NGN6.82 billion, owing to a 30.43% decline in forex trading income.

Unlike its tier 1 peers so far (GUARANTY: -51.96% to NGN1.64 billion, ZENITHBANK: -42.01% to NGN4.57 billion, and UBA: -53.14% to NGN1.45 billion), ACCESS’ impairment charges increased y/y by 55.19% but was 77.08% lower than the high-based Q4-17 value at NGN4.96 billion. Coupled with the slower rise in customer loans, by 10.99% y/y, cost of risk also increased 20 bps to 0.90%.

CAR dropped by 170 bps to 19.30%, following IFRS 9 implementation, wherein NGN78.32 billion was deducted from Retained earnings’ opening balance. However, the CAR remains well above the CBN’s 15% requirement, but ranks behind GUARANTY’S 24.57% and slightly below ZENITHBANK’s 19.9%.

Our estimates are under review.

FBN Holdings Plc – Under Review

The shares of FBNH rose by 10.50% last week to N10.00. FBNH trades at forward PE of 10.4x, above its 5-year historical average of 6.3x.

FBN Holdings Plc released Q1-2018 result, showing an unimpressive top and bottom line performance y/y; even though improvement in opex (-10.07% q/q) and a reduction in impairment provisions (-52.05% q/q) buoyed growth in PBT and PAT on a q/q basis.

Gross earnings dipped by 1.55% y/y and 11.04% q/q to NGN138.86 billion, as both NII (-5.67% y/y, and -1.85% q/q) and NIR (-4.79% y/y and -42.73% q/q) also contracted in the quarter to NGN75.75 billion and NGN21.40 billion, respectively. A positive in the income line was the resurfaced growth in the insurance business, as the significant growth in insurance premium revenue by 100.72% y/y (+58.69% q/q), muted the increase in reinsurance expenses by 113.20% y/y (+98.14% q/q), and translated to a 98.87% y/y (+53.83%) upturn in net insurance premium.

The decline in NII, follows a 2.83% y/y (-2.30% q/q) drop in interest income to NGN110.90 billion, and a 3.92% y/y (-3.25% q/q) increase in interest expense to NGN35.15 billion. Yield on assets dropped 120 bps y/y, despite 6.68% y/y increase in our computed interest yielding assets. This is likely attributable to our estimated 208 bps y/y drop in the annualized

yields earned on bank loans, wherein interest income was 66.53% lower y/y, despite a 50.66% y/y increase in loan to banks.

Despite the 3.92% y/y rise in interest expense, the annualized cost of funds declined by 10 bps to 3.30%, following a reduction in our estimated annualized cost of bank deposits (-272 bps y/y to 1.90%) and borrowings (-211 bps y/y to 3.63%), which is largely comprised of the FBN Eurobonds issued in 2013 and 2014, with call dates of July-2018 and July-2019, respectively. These muted the 46 bps increase in the annualized costs of customer deposits to 3.48%.

Provision for loan losses was lower 12.09% y/y and 52.05% q/q at NGN25.34 billion -- similar to all Tier 1 peers save for ACCESS. There was also improvement in the cost of risk by 30 bps to 4.50%, as loans to customers declined at a slower pace than impairment charges. Also, worth stating is the drop in loan-to-deposit ratio to 67.3%, from 77.80% in similar period last year. The NPL ratio – which has been a key issue in the group’s books -- improved significantly in the quarter (-450 bps y/y and 130 bps q/q) to 21.50% but remains much higher – highest among Tier I and Tier II banks together – than the 5% regulatory requirement.

Our estimates are under review.

Guaranty Trust Bank Plc – Under Review

The shares of GUARANTY was higher by 1.14% to N40.05. GUARANTY trades at forward PE of 6.6x, above its 5-year average of 6.2x.

Guaranty Trust Bank Plc released its Q1-2018 result, showing positive performance in the top and bottom lines. Compared to Q1 last year, Gross Earnings, PBT and PAT were 4.65% (-1.00% q/q), 4.43% (+4.81% q/q), and 7.70% (-0.49% q/q) higher than their restated values at NGN108.97 billion, NGN52.62 billion, and NGN44.67 billion respectively.

Interest income (constituting 74.12% of total Gross Earnings) dropped by 3.97% y/y (+2.16% q/q) to NGN80.77 billion from the record high recorded in the same period last year, depicting the significantly lower interest rate environment compared to last year. Specifically, interest earned on financial assets held for trading, loans and advances to customers, and available for sale financial instruments recorded significant y/y declines of 54.58%, 7.68%, and 1.91% to NGN849.37 million, NGN48.65 billion and NGN22.06 billion respectively.

These muted the 111.87% y/y surge in interest via bank loans and advances, which makes up a meagre 0.10% (NGN84.17 million) of total interest income.

An upturn in interest expense (+17.27% y/y, -4.02% q/q) – driven by the 27.16% y/y increase in interest paid on customer deposits – together with the decrease in interest income, caused decline in net interest income by 9.74% y/y to NGN59.69 billion. On annualized basis and compared to FY 2017, the net interest margin dipped 82 bps to 9.52%. This follows a marginal deterioration in the cost of funds by 1 bp to 3.29%, and a faster drop in asset yield by 112 bps to 12.60%.

NIR grew by 41.28% y/y to NGN27.46 billion, following the surge in other income (+305.51% y/y, -69.46% q/q), as well as increase in gains on financial instruments (+40.14% y/y, +268.13% q/q). Net fee & commission income was higher by 10.63% at NGN14.49 billion, from the previous year’s restated sum of NGN13.09 billion (previously NGN16.34 billion), as 11.29% growth in fee and commission income, outweighed the 25.89% increase in fee and commission expenses.

Interestingly, loan impairment charges came in lower by 57.01% y/y (-57.00% q/q), away from expectations of an increase following the implementation of IFRS 9. The total loan book also declined by 6.55% to NGN1.35 trillion, against the NGN1.45 trillion recorded in FY-2017, while total deposit increased by 7.70% by NGN2.31 trillion. As a result, loan-to-deposit ratio dropped to 58.56%, from 67.49%. Accordingly, the annualized cost of risk tapered 10 bps to 0.74%, while the ratio of non-performing loans to total loans dropped by 151 bps to 6.15%.

Our estimates are under review.

United Bank for Africa Plc – Under Review

The shares of UBA fell by 2.58% at N9.45. UBA trades at forward PE of 3.8x, above its 5-year average of 3.2x.

United Bank for Africa plc released results for Q1 2018, showing growth in Gross earnings (+17.89%), PBT (+4.26% y/y), and PAT (+6.20%), from the previous year, to NGN119.37 billion, NGN26.56 billion, and NGN23.74 billion respectively. Quarter-on-quarter, however, Gross earnings and PAT were lower by 6.49% and 1.43%, while PAT was 34.33% higher, following a significantly favourable ETR of 10.62% in the quarter, against high base of 34.41% in Q4-2017.

Interest income (+17.68% y/y, +3.16% q/q) posted solid growth in the quarter to NGN90.33 billion, following a 78.62% growth in interest income via cash and bank balances -- comprising money market placements and unrestricted balances with CBN which grew 55% and 49.72% respectively – as well as a 4.9x surge in interest earned on loans to banks (NGN948 billion).

Interest expense increased at a faster pace than interest income by 46.10% y/y (+14.12% q/q) to NGN36.78 billion. This was largely attributable to the 55.14% upturn in interest paid on customer deposits (which constitutes 65.57% of total interest expense: NGN24.12 billion), and the 87.12% increase in interest paid on borrowings (NGN7.66 billion). Funding cost, on an annualized basis, inched 2 bp higher to 3.72% in the quarter, from 3.70% in FY2017. The dip in asset yield, coupled with the increase in the cost of fund, translated to a 70 bps drop in the NIM to 6.91%, from 7.61% in FY-2017.

NIR, against similar period in the previous year, posted 14.41% positive growth, while it declined by 30.09% q/q to NGN24.00 billion. Growth in net fee and commission income (making up the largest chunk of NIR: 62.48%) grew by 15.40% y/y (-22.28% q/q) to NGN15 billion and coupled with the 859.07% y/y (+408.50% q/q) surge in other income, muted the 13.09% y/y (-53.85% q/q) decline in other income to NGN2.27 billion.

Impairment charges, as has been the case in tier 1 banks’ Q1-18 result released so far (GUARANTY: -51.96% y/y to NGN1.64 billion; Zenith: -42.01% y/y to NGN4.57 billion), plunged by 53.14% y/y to NGN1.45 billion in the quarter, against expectation of increased provisions, following implementation of IFRS 9. Total loans and advances also came lower by 1.55%

In its implementation of IFRS 9, UBA deducted NGN34 billion (vs. NGN138.13 billion in Zenith and NGN82.15 billion in GUARANTY) from its retained earnings as at beginning of the year. However, the effect was muted following a transfer of same sum from regulatory credit risk reserve to the retained earnings.

Our estimates are under review.

Zenith Bank Plc – Under Review

The shares of ZENITH closed higher by 0.63% to NGN23.85. ZENITH trades at forward PE of 4.7x, below its 5-year average of 5.0x.

Zenith Bank plc released its Q1-2018 results, showing improved performance across key line items. Gross earnings was higher by 14.52% y/y (-20.91% q/q) at NGN169.19 billion, while PAT and PBT also grew by 22.17% y/y (+6.07% q/q) and 25.55% y/y (-3.32% q/q) to NGN54.0 billion and NGN47.08 billion respectively.

The increase in Gross earnings was largely supported by strong upticks in interest income (+20.77% y/y, +26.39% q/q) and other income (+177.20% y/y, -30.57% q/q), which muted the declines in fee and commission income (-1.38% y/y, +8.97% q/q), and trading income (-75.76% y/y, -97.75% q/q).The positive growth (contrary to GTB’s performance) in interest income was driven by increased earnings in treasury bills trading (+88.86% y/y, +100.15% q/q), which outweighed the drop in interests earned on customers’ loans and advances (- 2.19% y/y, +4.58% q/q).

On the other hand, the significant decline in interest paid on borrowed funds (-19.02% y/y, -43.98% q/q) – which constitutes 56.93% of total interest expense paid – drove the 1.62% y/y (-17.07% q/q) dip in interest expenses for the quarter. Accordingly, net interest income grew by 35.83% y/y and 69.73% q/q. In the same vein, the annualized net interest margin improved by 160 bps y/y to 9.30% (slightly below GTB’s 9.52%), following improvements in asset margin (+62 bps y/y to 7.92%) and cost of funds (-90 bps y/y to 4.10%).

Provision for loan impairment was 42.01% y/y (-91.06% q/q) lower at NGN4.57 billion during the quarter. That, similar to GTB’s result, doused expectation, considering the implementation of IFRS 9. The decline in impairment charge, as well as the significant drop in gross loan and advances by 9.5%, drove improvement in cost of risk by 40 bps y/y to 0.90%. The ratio of non-performing loans to total loan book increased to 4.30% from 3.2% in the previous year.

IFRS 9 adjustments weighed on the bank’s CAR, which dropped 210 bps, following transfer of NGN138.13 billion from retained earnings.

Our estimates are under review.

Proshare Nigeria Pvt. Ltd.


Proshare Nigeria Pvt. Ltd.

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