Analysts downgrade NASCON to SELL on performance, valuation concern
Investors holding NASCON Allied Industries Plc stock have been advised to dump the stock on the overpriced concerns. Analysts think that the company’s fundamentals do not support its current share price. At market capitalisation which settled at ₦26.626 billion on Wednesday, NASCON share prices traded at ₦10.05 on the floor of the Nigerian Stock Exchange.
Analysts at WSTC Securities Limited stated that at the current market price of ₦10.05k, the stock is trading at a forward PE of 17x.
“This is demanding in our view. Given our fair value estimate of ₦6.26k, the stock is trading at 38% premium to our reasonable estimate”, WSTC stated.
In the first quarter of 2020, NASCON reported a topline growth of 1% year on year. The company’s unaudited financials show that gross profit grew by 21% due to a 6% decline in production cost. However, growth in operating profit slowed to 1% due to the spike in distribution expenses and an increase in administrative costs.
As a result, profit before and after tax decreased in tandem by 10% due to the disproportionate rise in finance costs, analysts explained. Revenue grew mildly by 1% from ₦6.82 billion in Q1 2019 to ₦6.88 billion in Q1 2020.
Analysts attribute the muted growth in revenue to a 100% decline recorded in income from services. A key development in the operation in the period was that NASCON’s revenue from services declined to zero from ₦1.09 billion in Q1 2019.
WSTC reckoned that the group’s revenue was however supported by robust growth of 20% in revenue from the sale of goods. The company’s audited result shows that revenue from sales of products grew from ₦5.73 billion to ₦6.88 billion in Q1 2020.
The significant driver of growth was from the sale of goods in the North, which grew year on year by 16%.
While income grew from ₦4.02 billion to ₦4.67 billion in the North, sales in the East and West declined profoundly by 28% and 19%, respectively. Nonetheless, the double-digit sales growth from the North was enough to offset the decline in revenue from services as well as the sale of goods in the East and West, analysts held.
Analysts at WSTC capped in the review that reclassification of haulage cost lowers production cost, thus bloated gross profit. Cost of sales decreased by 6% from ₦5.09 billion to ₦4.79 billion in Q1 2020. The decline in production expense was due to the reclassification of a cost component, analysts explained.
WSTC highlighted that external haulage cost of ₦669.55 million was reclassified from production cost to distribution expenses.
Safe for the reclassification, production costs could have grown by 7%. Notwithstanding, the significant driver for the cost of sales was raw materials consumed and Depreciation. In the explanation, analysts said raw material consumed increased by 18% from ₦3.13 billion to ₦3.69 billion in Q1 2020.
Also, depreciation grew by 43% from ₦419.57 million to ₦599.54 million.
“While management did not disclose information on volume sales, we attribute the increase in raw material consumed to rising prices, given an 11% decline in the group’s inventories”, WSTC stated.
Consequently, gross profit spiked by 21% from ₦1.73 billion in Q1 2019 to ₦2.09 billion in Q1 2020, no thanks to the reclassification.
WSTC stated that NASCON’s operating expenses spikes amid inflationary pressures and cost reclassification
The Securities firm stated that the group’s operating cost rose by 102% informed by the rising general cost amid the reclassification of a cost component. Then, distribution expenses spiked by 325% from ₦220.98 million to ₦939.50 million in Q1 2020.
The disproportionate rise in spending was due to the reclassification of external haulage cost of ₦669.55 million previously captured as a production expense, analysts remarked. When adjusted, distribution expenses grew by 22% driven by a 41% and 13% rise in selling and branding expenses, respectively.
On the other hand, administrative costs increased by 5% from ₦508.47 million to ₦533.62 million, driven by personnel expenses. Analysts observed that NASCON’s Management fees grew by 7%, while employee costs rose from ₦187.35 million to ₦220.60 million.
As a result, operating profit increased by 1% from ₦999.39 million to ₦1.01 billion in Q1 2020. It was also observed that higher leverage wanes on the group’s profitability as finance cost grew markedly by 407% from ₦18.84 million to ₦95.55 million in Q1 2020.
The sharp rise in finance expense was due to a 319% and 100% increase in interest on borrowings and lease interest, respectively. Interest on loans grew from ₦18.84 million to ₦78.90 million, which is consistent with the growth in the group’s borrowings.
NASCON borrowings grew from ₦38.57 million to ₦3.04 billion in Q1 2020. Also, the group incurred lease liabilities of ₦3.40 billion in Q1 2020. WSTC explained that due to the sharp rise in finance cost, pretax declined by 10% from ₦1.02 billion to ₦923.17 million in Q1 2020.
In a similar trend, PAT decreased from ₦694.92 million to ₦627.76 million in Q1 2020 with an EPS of ₦0.95k, dropped off from ₦1.05 in Q1 2019.
Analysts said: “We note the robust growth of 16% from the sale of goods, which we attribute to volume growth driven by the sustained land border”.
Explaining further, analysts said the closure of the land border has limited the influx of cheap smuggled substitutes and thus, lessened competition. Though sales grew by 16%, the group’s receivable increased by 33% from ₦9.44 billion to ₦12.87 billion in Q1 2020.
This suggests that the group may have relaxed its credit policy to drive topline growth.
“While it may be positive for the group in the short term, operating cash may be stretched on the medium term. We also acknowledged management’s effort to deepen product penetration from the increased spending in selling and branding expenses”, WSTC stated.
“Though we expect these costs to pay off in the medium to long term, we believe that sales growth may be muted given economic disruptions occasioned by the coronavirus pandemic. Furthermore, we believe there is limited scope for prices increases by the group”.
Given our fair value estimate of ₦6.26k, the stock is trading at a 38% premium to our reasonable estimate. Thus, we recommend a SELL.
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Analysts downgrade NASCON to SELL on performance, valuation concern
