Thursday, April 23, 2015 9:17 AM / FBN Capital Research
Retaining Neutral rating despite 6% increase to PT:
Although Ashaka Cement’s (Ashaka) Q4 2014 results came in behind our forecasts, we have increased our EPS forecasts by 3% on average over the 2015-16E period, mainly because of a reduction in our tax rate assumption to 25% (from 30%). Our sales forecasts are unchanged because we view the attacks on Ashaka’s manufacturing facility which weighed on Q4 results as a one-off event. However, our new price target of N24.4 is 6% higher due to a 50bp reduction in our risk free rate assumption to 14.5% to reflect the downward movement in FGN bond yields. Our new price target implies a potential upside of 19% from current levels. As such, we retain our Neutral rating on the stock.
Q4 2014 pre-tax loss of -N436m driven by weak topline:
Ashaka Cement’s Q4 2014 results showed a pre-tax loss of -N436m. A 22% y/y decline in sales to N3.8bn and a significant gross margin contraction of -1975bps to 25.3% were the key drivers behind the pre-tax loss. These negatives more than offset a 17% y/y growth in interest income to N1.3bn. Although its impact was less significant, a 10% y/y rise in other expense to –N676m also contributed to the loss on the pre-tax line. However, thanks to a tax credit of N637m, the company reported a positive result of N201m on the PAT line, although this was down by 70% y/y. Sequentially, the trends mirrored those of the y/y comparables, with sales declining by 22% q/q. The pre-tax loss of -N436m in Q4 compares with a PBT of N1.3bn in Q3 2014. PAT was down by 76% q/q..
Expecting a rebound in 2015 on improved security conditions:
Following improvements in the security situation in north-east Nigeria, we expect to see Ashaka’s unit volumes return to normalised levels in Q1 2015. In addition, we believe that the firm’s high substitution of coal for LPFO would lead to a recovery in gross margin. Consequently, we forecast unit volume growth of 29% q/q to 0.2 million tonnes (mt) in Q1. Regardless, we see Q1 sales and PAT declining by 7% y/y and 19 % y/y to N6.0bn and N1.6bn respectively due to exceptionally strong comparables in Q1 2014. We forecast 2015 sales and EPS growth of 11% y/y and 34% y/y to N23.6bn and N2.73 respectively.
Recommendations and movements in price target
1. ASHAKACEM Schedules Annual General Meeting for May 5th