Sticky cost structure mars Nascon Allied Industries’ profit margins

Flattish Growth amidst Mixed Sales Performance: NASCON’s Q1:2019 financial result showed some marginal improvement as its revenue grew by 0.77% to N6.82 billion relative to N6.78bn in Q1:2018. The company recorded impressive growth in its Western and Eastern markets’ sales, which rose by 47.26% and 12.74% respectively.

The recorded growth was driven by its diversification to corporate clients rather than retail customers. However, sales from its Northern market, which currently accounts for 58.90% (vs 69.90% in Q1:2018) of revenue, declined by 15.90% (N4.01 billion vs N4. 73 billion).

The company has resumed vegetable oil production at its Ota Plant with locally-sourced crude palm oil. It is planning to resume tomato paste production by the end of Q2:2019. In the near term, we expect these collective factors coupled with the location of its new 250,000mt salt factory at Apapa, which gives it access to industrial salt users in the region, to steer topline growth, as such we maintain our revenue forecast of NGN27.05bn in 2019FY, a growth of 5.00% over 2018FY.

Steady Increase in Cost of Sales Stifles Profitability: Profits margins remain strained, largely due to the mounting cost of sales which rose by 8.38% (N5.09 billion vs N4.69 billion in Q1:2018). The minimal increase in revenue did not impact the cost to sales as it weakened to 74.46% (vs 69.42% in Q1:2018).

We note that the cost of raw materials rose by 4.69% due to the company’s exposure to foreign exchange rate and other associated costs. Operating expenses also maintained its upward trend, rising by 9.57% while the OPEX to Sales settled at 10.70%. Accordingly, gross profit and net profit dropped by 16.49% and 34.59%, settling at N1.73 billion and N0.69 million, respectively.

Drop in Net Margin Dampens ROE: Return on Equity settled lower at 32.19% in Q1:2019 (vs 44.86% in Q1:2018). Although asset turnover and financial leverage declined to 0.84 and 2.46 (vs 0.87 and 2.49 in Q1:2018) respectively, much of the pressure came from the weak net margin, which dipped to 15.69% from 20.64% a year ago. In line with our expectations of higher revenues, we forecast a marginal increase of 2.41% in the company’s 2019FY net profit to N4.02 billion from N3.93 billion in FY 2018.

Recommendation: The company’s performance is in line with our projections, as such, our expected EPS and target PE are unchanged at NGN1.52 and 11.75x respectively, which leaves our target price for Dec 2019 at NGN17.86. This gives an upside potential of 5.06% to its closing price of NGN17.00 on May 23, 2019. We, therefore, recommend a HOLD.
Company.

Source: Nairamatrics

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