Wednesday July 11, 2018/05:32 PM / ARM Research
Our constructive view on Cement Company of Northern Nigeria (CCNN) just got clearer and now move to the finals – full information – following management’s notice of a merger of CCNN and Kalambaina Cement Company Limited (Kalambaina). To recall, we published a report in May 2018, wherein we noted our optimistic view on CCNN on the back of capacity expansion by BUA in Sokoto of 1.5MT to complement CCNN’s current existing plant of 500KT which now operates just about full capacity (98%).
Considering that the new plant is fully-owned by BUA (CCNN’s parent company), we accessed the possible structure on how the plant would be integrated into CCNN, which we assumed three scenarios: (1) a debt related structure (finance lease); (2) contract manufacturing services (operating lease); and (3) consolidation of BUA cement plants into a single entity as well as our TP on the scenarios.
Putting more clarity to our scenarios, management of CCNN announced a merger of CCNN and Kalambaina – a wholly owned subsidiary of BUA wherein the new cement plant (1.5MT) in Sokoto sits. The consideration for the merger is based on 100,000 shares of Kalambaina for 19,811,372 shares of CCNN (1:198) using the 30-day volume weighted average (VWAP) closing price of N25.99. Additional details on the number of shares to be issued by CCNN or outstanding shares of Kalambaina is yet to be disclosed. We await more information post AGM on the 26th of July 2018.
We are playing one more scenario analysis on CCNN, focusing on the dilutive impact of the additional shares to be issued by CCNN for the acquisition of the asset which is estimated at $350 million, based on discussion with management of BUA.
Table 1: Key details of the existing and new plant
We valued the plant of $350 million using prevailing exchange rate of N360/$ (Scenario 1) and average exchange rate over the 3-year construction period of N251/$ (Scenario 2) which translates to asset value of N126 billion and N87.9 billion respectively. Juxtaposing the asset value to the 30-day VWAP of N25.99 translates to additional shares of 4.84 billion and 3.38 billion units accordingly. Consequently, outstanding shares should come to 6.10 billion and 4.64 billion units for Scenario 1 and 2 in that order.
Table 2: Impact of an asset value conversion
Secondly, we assumed an increase in current shares outstanding by the multiple of the increase in plant size of 3x plus a 20% premium to account for the differences in market value of the assets and the installation of a coal power plant (Scenario 3). This implies CCNN will issue additional shares of 4.52 billion with total outstanding of 5.78 billion.
Our model is Under Review pending full information from management.
Table 3: Combined entity estimated performance
While we believe cement production in Kalambaina started in May, with our discussion with dealers in Sokoto suggesting that delivery time has significantly improved, we do not expect a consolidation of such production in CCNN’s soon to be released Q2 numbers with revenue expected solely from CCNN 500KT plant. Our discussion with dealers in Sokoto suggests that delivery time has significantly improved. Over Q2, we estimate 18.3% YoY (-8.85 QoQ) increase in volume to 117k tonnes, overlaid on per tonne ex-factory price of N41,980 translates to revenue of N4.93 billion (+18.5% YoY and -8.6% QoQ).
On cost, despite shutdown in operation at the Kaduna refinery and higher LPFO price (fallout of the increase in crude oil prices) over most part of Q1 2018, cost to sales ratio still contracted 204bps QoQ to 58.0%, helped largely by the relative exchange rate stability.
Accordingly, with our estimate of lower volume over Q2 18 and slightly improved activity at Port Harcourt refinery, we expect lower FX exposure relative to Q1. As such, we estimate input cost to print at N2.72 billion (-1.7%% YoY and -13.3% QoQ) which should sustain gross margin at 44.9% (vs. 33.6% in Q2 17) – gross profit to rise 58.6% YoY to N2.21 billion.
Further down, we expect the company to achieve efficiency in terms of its distribution, with a slower increase in operating expense (+8.2% YoY vs. +53.2% YoY in Q2 17), which should support expansion in operating margin to 30% (vs. 17.3% in Q2 17). Coalescing the above positives, we therefore forecast PAT at N1.15 billion (+122.4% YoY) which translates to EPS of N0.91 using existing shares outstanding.
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