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NASCON 9M'20 Earning Reports Reinforce SELL Recommendation, Put Fair Value at N8.30
NASCON 9M'20 Earning Reports Reinforce SELL Recommendation, Put Fair Value at N8.30

Cost optimization strategy and FX gains boost bottom-line.


Performance highlight
In the recently released 9M’2020 results for NASCON Allied Industries Plc, the group recorded a topline growth of 4% YoY from N21.03bn in 9M’2020 to N21.87bn in9M’2020. Gross profit grew YoY by 75% from N5.13bn in 9M’2019 to N8.96bn in 9M’2020 majorly due to the reclassification of haulage cost. Similarly, operating profit grew by 19% from N3.07bn in 9M’2019 to N3.64bn in 9M’2020 on the back of foreign exchange revaluation gains. Profit before tax grew by 17% from N2.97bn posted in 9M’2019 to N3.47bn in 9M’2020. However, a higher effective tax rate of 51% in 9M’2020 (9M’2019: 47%) dampened bottom line growth, which grew at a slower rate of 13% to N2.29bn in 9M’2020 compared to N2.02bn recorded in 9M’2019. EPS for the period stood at N1.15k (9M’2019: N1.02k).

Market share recovery in the eastern region supports the group’s revenue growth

During the period under review, the group’s revenue grew by 4% YoY to N21.87bn in 9M’2020. The group’s market share grew across the geographical regions of the country, with the highest sales increase recorded in the East. Revenue grew markedly in the Eastern region by 24% from N1.26bn in 9M’2019 to N1.56bn in 9M’2020. Also, sales in the Northern region increased by 3% from N14.25bn in 9M’2019 to N14.66bn in 9M’2020. The western region saw revenue growth of 2% from N5.52bn in 9M’2019 to N5.65bn in 9M’2020. We posit that the sustained land border closure continued to bode well for the group due to the absence of cheap smuggled products, which had earlier suffocated penetration of the group’s products. In our view, the YoY increase in market activation cost by 35% underpinned the group’s effort in regaining market share, which propelled the robust sales growth in the East.

Discounting haulage cost, we see gains in production cost optimisation

In our previous report, we noted that the group reclassified haulage cost from cost
of sales to distribution expense, which, in effect, will lower production cost in the future. In our analysis, however, we adjusted for this impact. Excluding haulage cost from the prior period’s production cost, the group’s production expenses declined by 2% from N13.18bn in 9M’2019 to N12.91bn in 9M’2020 underpinning gains in the cost reduction effort of the group. The notable gains in period emanated from the decrease in manufacturing expenses, depreciation cost, as well as employees cost by 22%, 51%, and 6%, respectively. Consequently, gross profit surged by 75% from N5.13bn in 9M’2019 to N8.96bn in 9M’2020 primarily due to haulage cost reclassification.

We note the group’s resilient topline growth despite the challenging macroeconomic environment. The group’s H1’2020 topline growth was 12% but slowed to 4% as of 9M’2020. The decline in growth was due to weak Q3’2020 sales. Revenue in Q3’2020 declined by YoY 9%. We attribute the Q3 decline in sales to the weak purchasing power of consumers as the sustained general price increases continued to pressure consumers’ wallets. We also note the group’s effort towards gaining market share through its market activation spending. We also noted the higher distribution cost in Q3’2020 as the groups intensify market penetration effort. The group’s trade receivables increased year-to-date by 23%, which also suggests a relaxed credit policy to boost sales. However, net cash from operating activities grew significantly due to the increase in spontaneous financing. Given the sustained land border closure as well as FX scarcity, we expect a YoY increase in sales in Q4’2020.

Overall, we a revised forward EPS of N0.93k and a fair value of N8.30k on the stock. At the current market price of N13.10k, the stock trades at a 37% premium to our fair value estimate. Thus, we maintain our sell recommendation
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