Analysts at WSTC Securities Believe NASCON Share is Overpriced
At ₦13.10, equity analysts at WSTC Securities Limited expressed believe that NASCON Allied Industries Plc.’s share is overpriced.
As a result, analysts maintain sell recommendation on the company’s share, hinted that current price is 37% above its reference price.
At market capitalisation of ₦34.708 billion on 2.649 billion shares outstanding, Dangote Industries owns 62% of NASCON, Stanbic Nominee 7% and others 31%.
In the recently released results for NASCON Allied Industries Plc, the group recorded a topline growth of 4% year on year from ₦21.03 billion to ₦21.87bn in 9M-2020.
Analysts said due to reclassification of haulage cost, gross profit rose 75% from ₦5.13 billion in 9M-2019 to ₦8.96 billion in 9M-2020.
Similarly, operating profit grew by 19% from ₦3.07 billion in 9M-2019 to ₦3.64 billion in 9M-2020 on the back of foreign exchange revaluation gains.
NASCON profit before tax grew by 17% from ₦2.97 billion posted in 9M-2019 to ₦3.47bn in 9M-2020.
However, there was a higher effective tax rate of 51% in 9M-2020 that dampened bottom line growth compare with 47% in the comparable period.
The result indicated that bottom line grew at a slower rate of 13% to ₦2.29 billion in 9M-2020 compared to ₦2.02bn recorded in 9M-2019.
The resulted a moderate growth in EPS for the period to ₦1.15k from ₦1.02k in the comparable period in 2019.
WSTC Securities said market share recovery in the eastern region supports the group’s revenue growth.
During the period, the group’s revenue grew by 4% year on year to ₦21.87 billion in 9M-2020 as market share grew across the geographical regions of the country, with the highest sales increase recorded in the East.
Analysts revealed that NASCON revenue grew markedly in the Eastern region by 24% from ₦1.26 billion in 9M-2019 to ₦1.56 billion in 9M-2020.
Also, sales in the Northern region increased by 3% from ₦14.25 billion in 9M-2019 to ₦14.66 billion in 9M-2020.
The western region saw revenue growth of 2% from ₦5.52 billion in 9M-2019 to ₦5.65 billion 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 year on year 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”, WSTC Securities said.
Discounting haulage cost, analysts said they see gains in production cost optimisation.
WSTC Securities had noted that the group reclassification of haulage cost from cost of sales to distribution expense, in effect, will lower production cost.
Excluding haulage cost from the prior period’s production cost, analysts said the group’s production expenses declined by 2% from ₦13.18 billion in 9M-2019 to ₦12.91 billion 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, WSTC stated.
Consequently, NASCON gross profit surged by 75% from ₦5.13bn in 9M-2019 to ₦8.96bn in 9M-2020 primarily due to haulage cost reclassification.
“We note the group’s resilient topline growth despite the challenging macroeconomic environment”, WSTC stated in the equity note.
The group’s H1’2020 topline growth was 12% but slowed to 4% as of 9M-2020, which analysts attributed to weak Q3’2020 sales.
Revenue in Q3’2020 declined by 9% year on year.
“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”, WSTC explained.
The company’s financial statement showed that the group’s trade receivables increased year-to-date by 23%, which also suggests a relaxed credit policy to boost sales.
So, 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, analysts said they expect year on year increase in sales in Q4’2020.
Overall, analysts at WSTC Securities revised forward earnings per share of ₦0.93k and a fair value of ₦8.30k on the stock.
At the reference market price of ₦13.10k, WSTC said NASCON stock trades at a 37% premium to its fair value estimate.
Thus, the financial service firm maintained sell recommendation on NASCON shares.
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Analysts at WSTC Securities Believe NASCON Share is Overpriced
