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Monday,
December 11, 2017 / 11:40AM /Cordros Capital
Cadbury Nigeria Plc (Cadbury) – Sell
The
shares of CADBURY appreciated by 22.87% last week to N15.90. CADBURY trades at
a significant forward PE above its 5-year historical average of 24.9x.
CADBURY
published Q3-17 result, showing revenue growth of 9.3% y/y and PAT of N702
million, from a loss reported in Q2. Also worthy of note is that the reported
profit is CADBURY's single-quarter largest since Q4-15, thanks to significant
expansion of gross margin.
While
top-line continued to grow, the slower growth pace compared to the last three
quarters, and notwithstanding the still low base prices of Q3-16, suggest that
sales volume may have been very low y/y. That said, revenue has grown 14.3% y/y
in nine months, with Non-Nigerian sales up 25%.
Gross
margin of 30% was reported, as the technical fees (included in cost of sales)
that significantly pressured margin in Q2 appears to have been fully settled.
We note also the positive feed-through from both the continued stable exchange
rate and softer cocoa prices (-6.83% Ytd and -4.82% compared to end-March in
the international market).
Although
there was no finance charge in Q3-16, the N60 million reported in the review
period was significantly lower than Q2's N212 million (including FX loss of
N105 million) which adversely impacted earnings during the period. Bank
overdraft – which CADBURY has resorted to in recent quarters as a result of the
devaluation impact on working capital – stood at N2.7 billion as at September
ending, from N2.3 billion in June.
CADBURY's
strong profit in Q3, following a negative surprise in Q2, leaves post tax loss
after nine months at N64 million, from N766 million in H1. Compared to other
quarters, CADBURY's results have been more stable in Q4. We look for the same
this year, suggesting – given a stronger than expected Q3 – the company's
earnings will likely close the year ahead of our previous estimate.
That
said, we do not expect investor will react accordingly to this result, given
doubts as to the consistency of CADBURY's performance. Our estimates are
under review.
Dangote Sugar Refinery Plc (DANGSUGAR) – Hold
The
shares of DANGSUGAR gained by 10.97% to N20.03. DANGSUGAR trades at forward PE
of 6.5x, lower than its 5-year historical average of 7.5x.
DANGSUGAR
recently released Q3-17 result, showing revenue declined 1% y/y while EBITDA
(226% y/y) and PAT (244% y/y) grew strongly. Continued stronger gross margin
and tamed opex, primarily, in addition to higher investment income, was the
lever for earnings growth.
The
decline in revenue, was driven by lower sales volume, which more than offset
the relatively higher price. Compared to 2016, sales volume has closed lower in
all three quarters this year in response to the sharp increase in price (+75%
in 9M-17 vs. 9M-16).
The
management reduced the per bag price of sugar by N1,000, effective in April, to
help support sales.
Despite
cuts to sales estimates, we raise DANGSUGAR's 2017F EBITDA and net profit by
50% each, and for 2018-2019F by 55% and 56% respectively. The upward revision
follows better margin outlook on declining per tonne production cost, which we
expect will offset price cuts. Our revised estimates translate to EBITDA and
net profit growth of 158% (+131% in 9M-17) and 155% (+162% in 9M-17)
respectively in 2017F, and 3% and 5% average growth in 2018-2019F.
We
cut revenue estimates for 2017-2019F by 10% average, on downwardly revised
volume (for 2017F only) and selling price estimates Sales volume (-17% in
9M-17) has been hit by weakened demand, and more recently, by both the influx
of smuggled sugar and the terrible condition of the road to the Apapa factory.
While retaining average growth of 10% in freight income, net impact is for 2%
growth in gross revenue over our forecast period.
We
raise gross margin estimate for 2017F by 983 bps to 27%, following the
significant formation over 9M-17 (+895 bps vs. 9M-16), particularly the last
two quarters (33% average) and also raise estimates for 2018-2019F by about
1,000 bps average, on the assumption that the expected cut in selling price
will trail decline in per tonne production cost.
Upside
risks to our per tonne production estimate (down consistently q/q to -34%
between Q3-17 and Q4-16) include (1) better energy efficiency and stronger
exchange rate, (2) stable outlook of global raw sugar prices, and (3) positive
mix from growing contribution of higher margin Savannah. Downside risks to our
margin estimate include (1) deeper-than-expected cut in selling price and (2)
an upturn in global prices of raw sugar (sugar prices for 2019 delivery are
higher by 4% for November contracts).
On
net, we raise TP for the stock by 39% to NGN19.03/share and upgrade our rating
to BUY. We roll forward our estimates and valuation by one year.
Flour Mills Of Nigeria Plc – Hold
The
shares of FLOURMILL grew by 4.48% last week to N35.000. FLOURMILL trades at
2018 PE of 11.7x, below its 5-year average of 19x.
FLOURMILL
published Q2-17/18 and H1-17/18 results showing high double-digit growth in
post-tax profit. The primary driver of the profit growth (as was the case in
Q1) is a net operating gain of N1.92 billion, against a loss reported in Q2-16.
That aside, gross profit was down 14% y/y while opex and finance costs
increased by 13% y/y and 31% y/y respectively. Revenue grew by 9.8% y/y, the
slowest pace since Q4-15/16, as pricing effect continues to taper.
The
y/y decline in gross profit was on the backdrop of faster increase in cost of
sales (14.1%) and 331 bps contraction of gross margin (GM).
We
revise 2018 forecasts for FLOURMILL following H1, wherein EBITDA and net profit
were impacted by strong FX-linked net operating gains and double-digit revenue
growth, which more than offset both weaker y/y gross margin and higher finance
costs. While we look for relatively (to H1-18) weaker earnings in H2-18, we
expect they would be stronger compared to H2-17. Overall, we raise our EBITDA
and net profit forecasts by 10% and 72% respectively for 2018F. Upward revision
to estimates was conservative (flattish and 2% respectively) for 2019-2020F.
We
increase revenue growth forecast for 2018 to 8.9% (previously 7.6%) on stronger
run rate of 17% in H1 and retain revenue growth forecast of 9.4% for 2019-2020,
on continued resilience of the Food division, and stronger growth in the
Agro-Allied and Packaging divisions, amidst the gradually recovering consumer
purchasing power and spending from general elections.
We
revise net operating gain forecast for 2018F to NGN7.7 billion (previously
–NGN1.4 billion), following the strong formation (NGN5.1 billion) over H1, on
the revaluation of liabilities (via FX hedges using NDFs and forwards) and
biological assets (the sugar plantation).
These
items are excluded from our estimates for 2019-2020. Notwithstanding the 331
bps q/q improvement in gross margin in Q2, we revise 2018 estimate lower by
69bps to 12.01% on slower-than-expected recovery (-237 bps in H1).
We
revise 2018F finance cost forecast lower by 4%, following the reduction of
borrowings to NGN188.2 billion, from end-2017FY NGN241.6 billion. FLOURMILL's
management recently announced plans to raise NGN70 billion via Medium Term
Notes. We have not factored this into our model, as management stated at the Q2
results analysts call that the signing will be in 2018, "depending on the
evolution of interest rates”. On net, we raise our TP for the stock by 35% to
NGN38.89.
Guinness Nigeria Plc – Sell
The
shares of GUINNESS lost by 4.93% last week to close at N92.70. GUINNESS trades
at 2018 PE of 21.80x, beloGUINNESS reported revenue growth of 30% y/y in Q1-18
and net profit of N41.4 million, from a loss in the corresponding period of
Q1-16/17, and the N4.5 billion profit reported in Q4 ended March 2017.
Compared
to our estimate, the reported revenue was ahead by 20% while net profit missed
by 96%. The significant deviation on the net profit line was on the back of (1)
lower-than-expected gross margin and (2) higher net finance costs. Gross margin
was lower by 153 bps y/y (on restated Q1-16/17 numbers) and 1,000 bps q/q,
reflecting, as observed partly in the case of NB, higher sorghum prices in
Nigeria during the period.
Despite
higher y/y EBITDA and net profit in Q1-18, we revise 2018 forecasts for GUINNESS
lower by 15% and 26% respectively, on negative surprises on gross margin and
finance cost lines, which more than offset better-than-expected revenue. The
realized net profit in Q1 was below consensus by 97%.
Estimates
for 2019-2020 were also revised lower by 3% and 5% average. We raise revenue
growth estimate to 20% (previously 5%), after realized Q1 sales came ahead of
our estimate by 20%.
We
cut gross margin estimate for 2018 by 405 bps to 39% and by 200 bps average to
41%, for 2019-2020. Our forecast for finance cost was increased by 68% to
NGN5.9 billion, following the sharp spike (249% q/q) at the beginning of the
year, however, we retained our lower finance cost forecasts for 2019-2020,
reflecting the significantly (1) deleveraged balance sheet and (2) reduced FX
headwinds from repaying large portion of FCY loans (-61% q/q).
Net
impact of the above changes is for EBITDA and net profit growth of 23%
(previously 45%) and 260% (previously 384%) respectively in 2018F, and
2019-2023 CAGR of 8% and 8.6% respectively. On net, we cut our TP for the stock
by 16% to NGN76.70/share.
Nigerian Breweries Plc – Hold
The
shares of NB closed higher by 9.60% last week to N145.00. NB trades at forward
PE of 24.7x, below its 5-year average of 31.5x.
NB
released Q3-17 result last week. In our view, NB's performance during the three
months period was broadly disappointing. Although revenue grew 12.8% y/y, it
was below our estimate by c.9%. PAT on the other hand, was down 75% y/y, and
97% below our estimate on (1) significantly weaker gross margin and (2) higher
opex and net financing costs.
The
PAT is NB's record low. For 9M-17 however, the strong performance in H1 held
net profit up 19% relative to 9M-16. The Board proposed an interim dividend of
N1.00 per share.
Having
shown consistent recovery from the trough of Q3-16, gross margin faltered in
the Jul-Sep 2017 period to 34.4%, from the average of 44% achieved between
Q4-16 and Q2-17. Compared to Q3-16 also, the recently reported margin is down
143 bps.
We
cut NB's 2017F EBITDA and net profit forecasts by 14% and 23% respectively, on
downwardly revised revenue growth and gross margin estimates, following the
surprise miss in Q3. We also cut forecasts for 2018-2019 by 8% and 13% average
respectively, specifically on the cut to revenue forecasts.
We
cut revenue growth estimate to 12% (previously 18%), after realized Q3 sales
came 9% behind our estimate, notwithstanding that price was increased at the
beginning of the quarter. Average growth estimate of 5% for 2018-2019 is
unchanged, as the effects of price hikes wane.
We
cut gross margin estimate for 2017 by 220 bps to 43% and by 100 bps average to
44%, for 2018-2019. While we consider the surprise 1,100 bps decline in Q3-17
GM one-off (as we do not expect amount recognized for technical fees will
remain elevated), the slight downward revision to 2018-2019 estimates reflects
the upward price outlook of key production material inputs.
Net
impact of the above changes is for EBITDA and net profit growth of 15%
(previously 33%) and 27% (previously 64%) respectively in 2017F, and 2018-2022
CAGR of 6% and 6.6% respectively. On net, we cut our TP for the stock by 3% to
NGN123.16/share and roll forward our estimates and valuation by one year.
Nestle Nigeria Plc – Sell
The
shares of NESTLE appreciated by 7.23% to N1,410.08. NESTLE trades at 12-M PE of
36.2x, below its 5-year average of 43x.
NESTLE
reported revenue growth of 29% y/y in Q3-17 and a net profit of N6.4 billion,
from a loss in the corresponding period of 2016. The positives from the result
are (1) y/y and q/q revenue growth and (2) y/y and q/q expansion of gross
margin. The negatives are (1) continued double-digit increase in operating
expenses (although the amount was less than we expected) and notably, (2) the
significantly higher-than-expected net finance charges.
Following
Q3-17 result, we raise NESTLE's 2017F EBITDA estimate by 10% but cut net profit
by 9.7%, on net, equating to growth forecasts of 51% (previously 37%) and 290%
(previously 331%) respectively. While we cut sales forecasts for 2018-2019F by
0.4% average, we raise EBITDA and net profit by 15% and 14% respectively on (1)
better margin assumptions and (2) lower finance cost estimates.
We
raise gross margin estimates for 2017F by 141 bps to 41% and by 216 bps to 42%
in 2018-2019F on better-than-expected formation over 9M-17 (+85 bps vs. 9M-16).
Our 2018- 2019F gross margin estimate, at 200 bps discount to the 44% achieved
in Q3-17, factors in the key risk of potential pricing pressure from
competition – as stronger dollar liquidity encourages more imports – and is
therefore conservative.
We
raise our finance cost estimate for 2017F by 58% on higher-than-expected amount
recognized in Q3-17 (+190% vs. our estimate) and overall, 9M-17 (+49% vs. our
estimate). We are surprised that both net FX losses and interest charges on
borrowings realized over 9M-17 were way ahead of our estimates which assumed
(1) 20% NGN devaluation rate (on NGN366/USD vs. NGN305/USD) and (2) average
borrowing cost of 7%.
From
estimated 39% growth in 2017F, we forecast sales growth to moderate to 10%
average over 2018-2019F, as the impact of price hikes wanes. Our 2018-2019F
revenue growth forecast, 300 bps below NESTLE's five-year historical average
growth rate, is conservative. On net, we forecast average EBITDA and net profit
growth of 9% and 31% respectively in 2018-2019F.
On
our revised estimates, we value NESTLE at NGN843.54/share and reiterate SELL
rating on the stock. We roll forward our model estimates and valuation by one
year.
Pz Cussons Nigeria Plc – Sell
The
shares of PZ gained by 4.40% to N23.00. PZ trades at 2018 PE of 25.8x, below
its 5-year average of 37.3x.
PZ
released Q1-18 result showing a post-tax loss of N123.1 million, despite
revenue growing by 12.8% y/y. The loss after tax was much lower than the N1.59
billion loss reported in the same period of 2017.
Guidance
from our recent discussion with the management is for flat to slight earnings
growth in 2018F. The consumer environment is expected to remain challenging and
competition intense. Outlook for prices is dovish (there has been a marginal
price cut this year for Electrical goods, wherein increase was higher last
year), yet volumes are unlikely to recover strongly. Dollar liquidity has
improved, outlook is positive, and likewise, the expected impact on business
performance.
That
said, latest economic data (rising PMI, consumer confidence, and business
expectation) suggest that the pressure that Nigerian consumers face may be
over-exaggerated. With prices largely stable and economic activities improving,
we think consumers are actually better-off now, compared to a year ago.
From
the loss in Q1, we expect PZ will return to profit in the coming quarters, and
close 2018F with N3.52 billion net profit (vs. N3.69 billion in 2017FY). The
assumptions driving our forecast are (1) continued revenue growth, (2) modest
margin recovery, and (3) higher opex (ratio of revenue to increase by 70 bps)
and effective tax rate (to increase by 448 bps).
The
stock has accumulated 62% YtD , supported by the same positive investor
sentiment that has driven both the broader and consumer goods indices up by
31.6% and 28.3% respectively YtD. Following the upward review of our estimates,
we have increased our 2018F TP slightly higher to N14.86 (previously N14.26).
While we remain constructive of PZ, we believe the stock has outrun the level
supportive of its fundamentals. SELL.
Unilever Nigeria Plc – Sell
The
shares of UNILEVER depreciated by 0.36% to N41.61. UNILEVER trades at forward
PE of 24.5x, below its 5-year average of 61.8x.
UNILEVER
released Q3-17 result, showing revenue and net profit grew by 36.6% y/y and
142.7% y/y respectively. Finance costs increased by 48% y/y and 25% q/q, on the
repayment of short term USD intercompany loans, and compared to Q3-16, gross
margin (31%) was higher by 661 bps and beat our 30% estimate.
Following
UNILEVER’s 9M-17 results, we raise 2017F sales estimate by 1.4%, but cut EBITDA
and net profit estimates by 1.2% and 9% respectively, on the back of lower
other income and higher opex and finance costs. While also lowering our
2018-2019F EBITDA estimate by 0.6% average, we raise net profit estimates by
17% and 15% respectively in 2018F and 2019F, reflecting majorly, our
expectation of significant moderation of finance costs over the periods.
We
reiterate that volume will be crucial to sales growth going forward, and look
for better efficiency in promotional activities/RTM initiatives as well as new
products launches, especially amidst stronger outlook for competition. In the
H1 earnings call, the management hinted on ongoing innovations in the HPC
product segment, some of which will be launched in 2018.
The
slight reduction of our EBITDA estimates is on the back of (1) increase in
operating expenses forecasts – +39% y/y and +20% q/q was recording in Q3-17
following 8% contraction in H1 – reflecting pressure on marketing and
distribution spend, on expected resurgence of competition and (2) the reduction
of other income estimate, also evident in 9M-17’s -100%. Our revised EBITDA
forecasts imply that UNILEVER will achieve an EBITDA margin of 15.8% in 2017F
(previously 16.2%), and modest increase to 16% average in 2018-2019F
(previously 16.3%) amidst possible pricing pressure.
We
raise estimate for finance costs by 40% in 2017F, evident in the sharp spike
experienced in Q2 and Q3-17 following the drawdown of expensive short term
loans. Our cut to the 2018F and 2019F estimates however reflects the sizeable
reduction of short term borrowings (63% YtD by end-September 2017) following
the completion of the Rights Issue (programme of NGN58.9 billion). Management
said it is targeting a debt-free balance sheet by the end of the RI, suggesting
finance costs could be lower than we estimated.
Net
impact of the above changes is for EBITDA and net profit growth of 79%
(previously 81%) and 122% (previously 144%) in 2017F, and 8% and 36% growth in
2018F, respectively.
That
said, we cut our TP for the stock by 40% to NGN21.70. The drivers of our TP are
increases in (1) shares outstanding by 52%, following the recent listing of
additional 1.96 billion shares and (2) cost of capital (WACC) by 158 bps, on
the significant deleveraging of the balance sheet.
Dangote Cement Plc – Hold
The
shares of DANGCEM was flat last week at N245.00. DANGCEM trades at forward PE
of 16.1x, below its 5-year average of 17.2x.
In
its recently released Q3-17 result, revenue (27.4% y/y), EBITDA (95.1% y/y),
and PAT (63.1% y/y) all grew strongly at the Group level. Compared to Q2-17,
decline was recorded across all line items – revenue (-6.7%), EBITDA (-10%),
and PAT (-33%). The y/y revenue growth was underpinned by higher average prices
(40% y/y), which more than compensated for the decline in volume (9% y/y).
Compared to Q2-17, volume was lower by 12% while price increased by 6%.
Notwithstanding
the lower-than-expected Q3 earnings, DANGCEM's performance over the nine months
of 2017 was very strong, and consistent with the broadly expected impressive
year for the Group.
Following
Q3-17 results, we revise both DANGCEM's 2017 and 2018-2019 EPS slightly
downward by 1% and 0.5% respectively relative to previous estimates. While we
look for continued strong margins on stable Nigerian prices and energy
efficiency (including the eventual resolution of power challenges in Tanzania).
We
cut group sales volume forecast for 2017 by 2%, and over 2018-2019 by 1.7%
average, primarily on the back of expected lower output in Nigeria. Amidst
continued high selling prices, we believe the recovery of private sector cement
consumption will be very modest. And we are in a wait-and-see mode on public
sector demand which has failed to make an impact in two years of Nigeria's huge
infrastructure budget.
Specifically
for DANGCEM, we are mindful of the impact of competition, (1) upon delivery of
the speculated BUA's 1.5Mts capacity in Sokoto next year and (2) with LAFARGE
likely to experience less production challenges.
We
left volume forecast for Rest of Africa (RoA) unchanged, having previously
factored Congo into our model. Broadly in this segment, selling prices (+19%
q/q in Q3-17) have also been increasing (both directly and through reduced
discounts, as confirmed by management) and utilization rate is above 70% in
more than half of the markets.
Overall,
we forecast Group sales volume will decline 5.2% in 2017 and grow by 7% average
over 2018-2019. Over the latter period, we forecast volume will grow in mid
single-digits of 8% and 5% respectively in Nigeria and RoA.
On
net, we forecast net profit of N258.8 billion in 2017F (previously NGN261.4
billion), and NGN281.3 billion and NGN311.11 billion in 2018 and 2019
respectively (previously NGN283.4 billion and NGN312 billion). On net, we
reduce TP for the stock by 1.3% to NGN215.56/share. Over the medium term, we
continue to see value in DANGCEM.
Lafarge Africa Plc – Sell
The
shares of LAFARGE closed lower by 3.61% to N48.00. LAFARGE trades at forward PE
of 66.7x, above its 5-year average of 11.8x.
LAFARGE
released Q3-17 result, showing revenue growth of 28.2% y/y, and a loss after
tax of N18.8 billion which almost erased the N19.73 billion profit reported as
at H1. Given the largely stable cement prices across markets, we attribute the
higher-than-expected revenue to both higher (than expected) sales volume in
Nigeria and the stronger performance of the aggregate and concrete business.
Further
impacting earnings was other operating loss of N9.3 billion, attributed to the
net forex loss of N9.9 billion reported during the period. In addition, finance
charge increased 85.7% y/y and 24.7% q/q, driven by interest on borrowings
which increased 27% q/q and 185% y/y. Compared to Q2 closing balance,
borrowings increased by 12.5% when it stood at N245 billion (from N147 billion
in Q1).
We
revise forecasts for LAFARGE following 9M-2017 results, and adjust our TP for
the stock for the Rights Issue (RI). We cut net profit forecasts by 85% for
2017F and by 3% average for 2018-2019F, increase shares outstanding (NOSH) by
57% to 8.6 billion, and roll-forward valuation to 2018F.
The
broad industry challenge aside, LAFARGE's sales volume, among our universe,
lags expectation the most. Margin recovery outlook is relatively less assuring.
And there is an underlying FX risk on the outstanding sizeable quasi-equity USD
borrowings (USD286 million). On the positive, proceeds of the RI will partly
address the Group's debt overhang condition and allow management focus on
profitable operations.
Following
Q3-17 result, we raise 2017F volume forecast slightly to 6.2Mts (previously
6.1Mts), representing 18.6% contraction (previously 19.3%), on
better-than-expected Nigerian volume (precisely Mfamosing). For 2018 and 2019
however, we revise volume forecast lower to 6.7Mts (previously 7.2Mts) and
6.9Mts (previously 7.6Mts), after cutting expected utilization rates for the
West (2,000bps) and North (500 bps) of Nigerian operations.
Volume
forecast for the South African operation, struggling with high competition and
weak infrastructure spending, is unchanged. We retained estimated end-2017
selling price of NGN32,340/bag for the Group (Nigeria: NGN44,800/bag) for
2018F.
LAFARGE's
unsteady gross margin between Q4-16 and 9M-17 (compared to DANGCEM's) does not
make for strong reliance on management's claims of strong contribution from
coal, pet-coke, and alternative fuels in cement production. Overall, we cut
2017F EBITDA forecast by 25% and 2018-2019F by 7% on higher OPEX and lower
gross margin than previous estimates. Our revised EBITDA forecasts imply EBITDA
margin of 18% in 2017F and 23% in 2018F and 2019F.
The
slight cut to 2018-2019 net profit forecast, notwithstanding the above
revisions, reflects the potential gain from the part refinancing of debts using
RI proceeds. From 9M-17's NGN267.4 billion, we estimate gross debt will reduce
to NGN135.7 billion in 2018F, and consequently reduce finance costs to NGN16.1
billion, from our previous estimate of NGN 23.1 billion, and NGN24.4 billion
potentially in 2017F.
On
net, we reduce TP for the stock by 55% to NGN38.98/share (NGN80.04/share on the
old NOSH). LAFARGE's RI price of NGN42.5/share is trading close (9% premium) to
our TP.
Cement Company of Northern Nigeria Plc – Hold
The
shares of CCNN depreciated by 3.75% to N9.50. CCNN trades at forward PE of
5.3x, below its 5-year average of 7.1x.
In
Q3-17 result, revenue (86.1% y/y), EBITDA (553% y/y), and PAT (1,500% y/y) all
grew strongly. Compared to Q2-17, strong double-digit growth was also recorded
across all line items – revenue (23%), EBITDA (90%), and PAT (95%).
We
assume that price increase during the quarter entirely accounted for the
surprised strong q/q growth in revenue. At 43% (+2,100 bps y/y and +900 bps
q/q), the gross margin reported over the three months period was a positive
surprise.
We
revise forecasts for CCNN following impressive 9M-17 results, and roll forward
estimates and valuation to 2018. The revision to our estimates was driven by
improved EBITDA and EBITDA margin (+113% and +774 bps respectively in 9M-17) on
(1) higher realized sales volume and stronger selling price and (2) improved
energy cost (-10% YtD and -35% q/q cost/tonne in Q3). On net, we raise our
EBITDA and net profit forecasts by 33% and 38% respectively for 2017F, and by
14% and 16% average respectively for 2018-2019F.
We
increase sales volume and price forecasts for 2017 by 6% and 9% respectively,
equating to -16% (previously -20%) and +58% (previously 44%) from 2016.
Following the contraction in 2017, we forecast sales volume will grow by 2% in
2018 and flattish in 2019 on estimated 85% plant utilization rate.
Compared
to Q2-17, we estimate that CCNN achieved 35% decline in per tonne energy cost
in Q3-17. Outlook for the price of CCNN's type of energy is positive, on
significantly reduced demand from the bigger consumers in the cement industry
and positive feed-through from stronger one-year naira outlook.
Downside
risk, however, is the potential increase in the unregulated LPFO price, on
rising crude oil price; hence, our EBITDA margin estimates of 23% average for
2018-2019F (albeit above 5-year average of 17%), vs. 27% for 2017F (on the
backdrop of the 33% margin achieved in Q3).
Media
reports have recently quoted top management member of CCNN reiterating progress
on expansion work (additional 1.5Mts/year to increase capacity to 2Mts/year) in
Sokoto and guiding to delivery in 2018.
While
noting the significance of the delivery of additional volume on EBITDA
formation going forward, we are still reluctant to factor the expansion into
our model, given that the company's recent financials (balance sheet and cash
flow statements) are yet to capture the movement of capital to support
management's claim. On net, we raise our TP for the stock by 28% to
NGN9.52/share.
Access Bank Plc – Hold
The
shares of ACCESS gained by 15.50% last week to N11.55. ACCESS trades at forward
PE of 4.4x, above its 5-year average of 2.9x.
ACCESS
recently released its Q3-17 results, wherein gross earnings (9.31% q/q and
18.26% y/y) came in lower relative to Q2-17. This follows lackluster
performance across income lines - interest income grew lower than expected
(1.69% q/q and 21.84% y/y) and non-interest income declined 28.25% q/q (+10.35%
y/y).
However,
following significant declines in loan loss provision and opex, PBT (+0.12% q/q
and -5.08 y/y) grew marginally, while PAT (26.04% q/q and -3.81% y/y) grew
double-digit, supported by a lower effective tax rate during the quarter.
Overall,
over 9M-17, gross earnings grew double-digit (by 33.05%). While PBT grew
marginally by 1.26%, PAT declined slightly by 1.23%. The impressive growth in
gross earnings over the period broadly reflects robust interest income, on
impressive yield on interest earning assets (+190 bps to 12.92%), and the surge
in foreign exchange trading income, which supported 27.91% growth in NIR. The
bottom-line contraction was due to opex increasing by 34.49% y/y, with cost to
income ration expanding 665 bps y/y to 64.32%.
We
update our model with a cut in gross earnings growth forecast to 27.68%
(previously 28.26%) for 2017F to N486.88 billion, on expected lower growth in
interest income and NIR. We also revise cost of funds and opex estimates
higher, but lower cost of risks.
On
net, we now forecast PBT and PAT growth of 7.00% and 7.50% (previously 22.57%
and 23.59% respectively) to N96.66 and N76.80 billion respectively. As a
result, our 2017F EPS of N2.65 is now 12.96% lower than the previous estimate.
In
line with the persisting high yields on interest earning assets over 9M-17
(+190 bps y/y to 12.90%), we maintained 2017F assets yield estimate of 12.60%.
However, we lowered interest earning assets portfolio by 0.31%, resulting in
interest income growth of 36.44% y/y (previously 36.71%) to N337.41 billion.
We
believe the high interest rates environment will keep yields on fixed income
securities at current levels and drive interest income over Q4. On the other
hand, we have lowered NIR growth to 11.62% (previously 13.40%), reflecting the
loss on net trading income in Q3.
Similarly,
we believe the high interest rate environment will impact funding cost (rose
180 bps y/y to 5.8% in 9M-17). As a result, we raised our 2017F cost of fund
estimate by 16 bps to 5.74% (previously 5.58%), resulting in 53.47% growth in
interest expense to N165.96 billion. Overall, we look for 12 bps y/y decline in
net-interest margin to 6.12%, on faster increase in interest expense over
interest income.
Over
9M-17, NPL ratio rose 41 bps y/y to 2.51% (3 bps above the 2.48% in H1-17). We
have raised our forecast NPL to 2.55% (previously 2.20%) following the
shrinking loan book, but lowered cost of risk estimate to 1.12% (previously
1.32%), resulting in a 3.85% y/y decline in loan loss charges to N21.12billion
in FY-17. While we expect opex to moderate in Q4, we raise estimate for 2017F
(26.41% growth, vs. 20.05% previously) to N202.65 billion following the
sizeable increase over 9M-17 (34.49%).
Our
current 12-month TP implies upside potential of 16.85% from current levels;
consequently, we recommend a HOLD on the stock.
FBN Holdings Plc – Sell
The
shares of FBNH gained by 26.33% last week to N9.02. FBNH trades at forward PE
of 6.0x, below its 5-year historical average of 6.3x.
FBNH
released unaudited Q3-17 last week, wherein gross earnings grew marginally by
1.85% q/q and 0.40% y/y, while PBT and PAT rose 28.01% q/q (71.19% y/y) and
24.44% q/q (145.47% y/y), respectively. The growth in earnings is broadly
supported by (1) growth in funding income (by 7.73% q/q and 17.43% y/y), which
more than subdued the 6.57% and 37.91% y/y contraction in NIR and (2) decline
in opex by 3.51% q/q (+2.27% y/y).
Specifically,
over 9M-17, gross earnings grew by 5.17% while PBT declined 3.52%, PAT grew by
7.81%. The marginal growth in gross earnings over the period broadly reflects
the impressive yield on interest earning assets (+210 bps to 12.28%) and
consequently, robust interest income, which more than offset the significant
decline in NIR (47.08%).
While
the performance over 9M-17 is broadly in line with our estimate, we have now
revised estimate for Q4 and FY-2017 upward to reflect the relative consistency
over the first three quarters of 2017, compared with same periods in 2016. We
revise gross earnings growth forecast slightly higher to 0.81% (previously
-4.63%) in 2017F to N586.54 billion, on expected higher growth in interest
income and a lower contraction in NIR.
While
we maintained our 2017F costs or risk estimate, we have lowered net loan growth
estimate by 8.76%. As a result, we now forecast PBT and PAT growth of 107.87%
and 214.18% (previously 51.78% and 51.74%) to N65.92 billion and N53.85 billion
respectively. As a result, our 2017F EPS of N1.50 is now 107.06% higher than
the previous estimate of N0.72.
We
revise asset yield estimate for 2017F higher to 12.45% (previously 11.65%), on
expected continued elevated yields on interest earning assets over Q4 (expanded
210 bps y/y to 12.28% in 9M-17). Overall, we look for interest income growth of
17.88% (previously 12.38%) to N477.76 billion.
On
NIR, we believe the growth in net insurance revenue, dividend income, and other
operating income will persist for the rest of the year. However, we expect a
significant contraction in foreign exchange – reflecting the limited legroom
for revaluation gains in 2017 with the relative stability of the NGN –, as
such, we have lowered the expected contraction in NIR to 45.41% (previously
51.63%).
We
have revised our 2017F cost of funds estimate higher by 16 bps to 3.85% (+62
bps y/y), translating to 31.54% growth in interest expense to N132.64 billion.
However, with the upward review of the high yields on interest earning assets,
we believe the impact of the expansion in cost of funds will be muted, thus, we
estimate net interest margin to decline 13 bps to 8.72% (previously 8.49%).
Over
9M-17, asset quality deterioration persisted, albeit with some respite as NPL
ratio moderated 190 bps to 20.10% compared to H1-17. Following the moderation
in NPL and the 90.08% y/y growth in net recoveries from loans previously
written off (with an additional recovery of N1.32 billion over Q3), we have
revised our forecast NPL to 19.55% (previously 21.65%), but maintain our 6.65%
estimate - translating to additional provisioning of N45.85 billion for Q4 and
total credit loss provision of N143.47 billion for 2017F.
Our
current 12-month TP implies upside potential of 2.07% from current levels;
consequently, we recommend a HOLD on the stock.
Guaranty Trust Bank Plc – Hold
The
shares of GUARANTY lost by 2.33% to N42.00. GUARANTY trades at forward PE of
7.2x, above its 5-year average of 6.2x.
GUARANTY
published Q3-2017 result wherein gross earnings declined by 19.85%y/y and
12.03% q/q, with PBT (-1.06% y/y and -3.51% q/q) and PAT (-1.34% y/y and -72
bps q/q) consequently coming in lower. The key driver of the decline in
earnings was a significant contraction in NIR (down 72.80% y/y and 52.75% q/q),
which more than subdued the 14.21% y/y (and 74 bps q/q) growth in interest income.
We
have cut our gross earnings growth forecast to 3.40% for 2017F to N428.70
billion, on expected deeper contraction in NIR. That said, following a downward
revision of costs of risk and opex, amid upward adjustment to cost of funds, we
now forecast PBT and PAT growth of 24.31% and 30.39% to NGN205.28 and NGN172.49
billion respectively. As a result, our 2017F EPS of N5.86 is now 1.75% higher
than the previous estimate.
Reflecting
the lower than expected FX revaluation gains which drove a steep contraction in
NIR, we have raised our expected contraction in NIR by 38.72% and estimate NIR
contribution to gross earnings to drop to 21.25% in 2017F. We maintained our
2017F asset yields estimate of 13.60%, however, following a 2.84% cut back in
our forecast average interest earning assets, we now expect interest income to
grow by of 27.62% y/y to NGN334.99 billion – reflecting the persisting high
yields on interest earning assets.
We
raised our cost of fund estimate by 15 bps to 3.30% for 2017F (34 bps y/y uptick
from 2.81% in FY-16), resulting in 19.13% y/y (previously 19.77%) growth in
interest expense to N79.93 billion, reflecting the relatively tight domestic
system liquidity – which has driven upward repricing of deposits – as well as
the impact of the US Feds rate hike. However, we expect the impact of the
higher funding cost will be marginal on net interest margin, wherein we
forecast a 134 bps y/y expansion to 10.35% (previously 10.43%).
While
NPL increased by 27 bps (compared to the level in FY-16) to 3.93%, credit loss
provision at N8.38 billion in 9M-17 was 85.36% below the amount reported same
period in the previous year, following the recovery of a previously written off
loan worth N4.55 billion. Hence, we lowered forecast cost of risk to 1.15% (previously
2.15%), translating to a 73.19% y/y decline in impairment charge to NGN17.50
billion in 2017F.
We
raised our target price marginally by 86 bps to N42.81 (previous: N42.45) and
rolled forward our valuation to 2018. Our current 12-month TP implies downside
potential of 0.44% from current levels; consequently, we recommend a HOLD
on the stock.
United Bank for Africa Plc – Hold
The
shares of UBA appreciated by 10.00% last week to close at N11.00. UBA trades at
forward PE of 4.6x, above its 5-year average of 3.2x.
In
its recently released Q3-17 results, UBA recorded decline in gross earnings
(8.46% q/q), driven largely by 38.60% q/q decline in NIR (+26.55% y/y), which
muted the growth in interest income (6.33% q/q and 10.01% y/y).
However,
over 9M-17, gross earnings grew by 25.75% (against our 29.20% y/y growth
estimate), driven by growth across income lines – interest income (+30.11%, in
line with our estimate) and non-interest revenue (+18.84%, below our 29.75% y/y
growth estimate).
We
have raised our gross earnings growth forecast slightly higher to 49.73%
(previously 49.44%) in 2017F to N471.40 billion, on expected higher growth in
interest income. That said, following an upward revision to our 2017F cost of
funds, downward revision of NIR, and the expectation of a higher opex, we now
forecast PBT and PAT growth of 66.29% and 13.24% (previously 74.51% and 14.28%)
to N104.69 and N81.83 billion respectively.
However,
following the adjustment of our weighted average number of shares to reflect
the complete cancelation of the 2.08 billion shares under the Staff Share
Investment Trust scheme, our 2017F EPS is now 4.94% higher than previous
estimate at N2.38.
We
revise asset yield estimate for 2017F higher to 12.35% (previously 12.15%) and
we look for interest income growth of 27.25% (previously 22.18%) to N335.89
billion. On NIR, we believe the gains on FX trading (due to FX related gains
and derivative transactions) and growth in fixed income securities trading will
persist for the rest of the year, we have revised growth estimate lower to
14.03% (previous 24.90% y/y), equating to N120.55 billion for 2017F.
On
funding cost, we have reviewed our 2017F cost of funds estimate higher by 11
bps to 4.22%, translating to an interest expense growth of 31.24% (previously
27.82%) to N129.63 billion. However, we believe the high yields on interest
earning assets will outweigh the expansion in funding cost, thus, we estimate
net interest margin to advance 118 bps to 7.48% (previously 7.02%).
In
Q3-17, UBA made additional provisioning of N3.47 billion for credit loss, which
raised total provision for 9M-17 to N12.91 billion. At 4.2% in 9M-17 (the same
as H1-17), NPL was already ahead of 2017FY's c.4.00% guided by management. We
maintain our 4.80% NPL forecast, but lower cost of risk estimate by 45 bps to
1.55% for 2017F, translating to additional provisioning of N11.92 billion for
Q4 and total credit loss provision of N24.83 billion for 2017F.
While
noting the (1) flattish growth in funding income over the last three quarters,
(2) limited room for any significant growth in FX trading and revaluation gains
with the relative stability of the naira, and (3) impact of the adoption of
IFRS 9 from 2018F, we now expect PAT to grow lower than previously estimated
over 2018-2019F, as FX related and revaluation gains taper and NIR contribution
to gross earnings contract significantly. Accordingly, we cut target price by
19.63% to N10.14 (previous: N12.62) and roll forward our valuation to 2018.
Our
current 12-month TP implies upside potential of 4.54% from current levels;
consequently, we recommend a HOLD on the stock.
Zenith Bank Plc – Hold
The
shares of ZENITH grew by 7.94% to N26.91. ZENITH trades at forward PE of 5.0x,
at par with its 5-year average of 5.0x.
In
Q3-17, ZENITH report declines across most line items – gross earnings declined
35.19% q/q and 8.89% y/y – following higher than expected contraction in
interest income (-30.96% q/q and +4.54% y/y) and a steep decline in
non-interest revenue (42.07% q/q and 16.29% y/y). However, decline in Opex
Supported 42.57% q/q Growth in PAT, resulting in 41.32% growth in annualized
EPS to N1.71.
Specifically,
over 9M-17, ZENITH's gross earnings is up 39.68% (supported by 26.6% and 79%
increase in interest and non-interest incomes) while PBT and PAT are both ahead
by 25.79% and 29.14% respectively.
We
have cut our gross earnings growth forecast to 35.21% (previously 39.97%) for
2017F to N686.40 billion, on expected lower growth in interest income. That
said, following a downward revision of cost of funds and cost of risks, and the
expectation of lower opex, we now forecast PBT and PAT growth of 28.39% and
30.36% (previously 9.61% and 8.28% respectively) to N201.85 and N169.01 billion
respectively. As a result, our 2017F EPS of N5.38 is now 20.43% higher than the
previous estimate.
While
we maintain 12.98% (119 bps expansion from 11.79% in FY-16) estimated assets
yield, we now expect loan growth to contract 7.09% y/y (previously estimated to
grow by 9.41%) in 2017F, equating to 25.42% y/y (previously 36.38% y/y) growth
in interest income. On the other hand, we have raised NIR growth to 65.73%
(previously 51.16%), buoyed by strong trading income and revaluation gains.
On
funding cost, we have revised our 2017F cost of funds lower by 55 bps to 4.85%
(+70 bps y/y) translating to 47.44% growth in interest expense to N212.88
billion. Our forecast y/y growth in interest expense reflects the impact of the
elevated domestic interest rate environment and the high refinancing costs of
maturing FCY obligations via the recently issued Eurobond (at a coupon rate of
7.375%, a 113 bps premium over the first tranche) and borrowings secured during
the year. Overall, we look for 9 bps decline in net-interest margin to 7.46%,
on faster increase in interest expense over interest income.
Over
9M-17, asset quality deterioration persisted, with NPL ratio rising 200 bps to
4.20% (albeit below the 4.30% in H1-17). While we acknowledge the restructuring
(with oil & gas accounting for a larger proportion) and declassification of
some power exposures, however, following the classification of some
transportation and general commerce exposures as NPL, we maintain our 2017F NPL
estimate of 4.50% and cost of risks of 2.02% (previously 2.68%) – translating
to a credit loss provision of N53.56 billion in 2017F.
Hence,
we revise our target price on the stock higher to N30.15 (Previous: N27.18),
translating to 20.60% from current level and recommend a BUY on the
stock.
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