•Ashaka Cement Plc reported H1 ’11 turnover growth of 20% YoY to N12.3bn in H1’12, ~ 0.7% higher than our forecast and significantly higher than the five year semi- annual average growth of 4%. Our estimates suggest revenue growth was due to a mix of increased capacity utilization (we estimate a 6ppts increase to 83% in H1 2012) and marginally higher average prices which we estimate rose ~3% over the period. As was the case with competitors, pricing for locally produced cement appear to have been supported by cessation of imports during this period.
•COGS rose 25% and 14% QoQ in Q1 ’12 and Q2 ’12 respectively also suggesting higher volume sales and utilization rates—were the bigger factor in revenue growth. However, while management reports increasing progress with a programme to substitute LPFO usage with coal (which now constitutes about half the company’s energy mix) its impact appears stymied. Global LPFO spot averaged $99/barrel in Q4 ’11 compared to averages of $111.66/barrel and $105/barrel respectively in Q1 ’12 and Q2 ’12, according to data obtained from Bloomberg.
•Significantly, though PPPRA maintains some measure of control on domestic pricing, the 12% rise in average global LPFO prices was matched by a 1% net rise in costs (over revenues) compared to a 14% net rise in COGS vs. a 5% decline in average LPFO prices in Q2 2012.
•Taken with a 200bps YoY drop in average contribution of Q2 to H1 sales in FY 2012—which also resulted from the 15% in YoY growth in Q2 2012 revenues falling well behind the corresponding 25% figure in Q1—sharper rise in COGS in Q2 may reflect some deterioration in utilization efficiency--and possibly also in energy substitution efforts--but was probably largely carryover of energy input stock from Q1. In line with growing practice in domestic manufacturing industry, the company maintains fuel stocks for as long as 3-4 months.
Modest operating gains as interest income boosts bottom line
•Improvements in distribution expenses over the period (down by ~22%) led to a marginal uptick (2%) in operating margins. We note that management had cited improvement in logistics and deployment strategies as one of its prime objectives from 2012 going forward; this drop implies positive results from initiatives. However, it was the substantial increase in other income which allowed for 600bps and 400bps increase in PBT and PAT margins to 29% and 20% respectively in H1 ’12.
Cautious optimism hinged on energy efficiencies
•Volume growth suggests that utilization improvements have tracked slightly ahead of our previous assumptions and that the the impact of security problems on distribution may not materialise to the extent we previously feared; hence we expect the current sales levels to be maintained in the next quarter. Thus, we revise our revenue forecasts slightly upwards from N22.3bn to N24.4bn. We maintain a moderately positive outlook in the medium term, while remaining mindful of the company’s somewhat weaker competitive position—and its implication for pricing--as bigger players like DCP expand their coverage areas to the North.
No sign of promised capacity increases
•While management has outlined plans to expand installed capacity to 1.3mmt by FY2012, there is no indication that it has made any progress in this direction given the 1% decline in PP&E and a 31% increase in cash holdings.
•We had previously forecasted that new capacity would come on stream by YE-2013, but its H1 balance sheet does not indicate that work has commenced and no financing plan has been announced meaning it could be as much as one year behind schedule. We had been conservative in reflecting the new capacity but have now shifted timelines one year outwards to FY2013.
•We revise our cost of sales upwards to reflect the slow substitution rate the company exhibited so far in the year coupled with the ~26% hike in PPPRA’s LPFO pricing template at the start of H2 ’12, thereby curtailing our expectations on the speed with which we had expected energy efficiency gains to have substantial impacts. As such we revise our FY ’12 cost of sales to N15.8bn from an initial N13.7bn.
•We are more optimistic on the effectiveness of the distribution initiatives been carried out by the company as supported by H1 figures, consequently we revise our distribution expenses downwards to reflect this. We also expect this to offset some of the rise in COGS, hence leaving our operating margin relatively stable at ~2% for FY ’12.
•We note that effective tax rate has risen by 5% since FY ’11 and revise our tax liabilities upwards to reflect this. The overall impacts of these changes are captured in our FY ’12 PAT forecasts falling ~8%.
Later than expected expansion crimps valuation but upside remains
•However the primary driver of valuation changes is the shift in timelines for planned capacity. While the company’s cash stock-pile leaves little doubt about its ability to push ahead with the project—along with other adjustments to our forecasts--the shift in timelines primarily drives the 8% decrease in our YE2012 TP, to N19.03 from the previous N22.15, a 38% premium to the current market price of N13.78. Ashaka cement currently trades at a P/E of 6.9x and a P/Bv of 1.3x.We therefore maintain our BUY rating on the stock.
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