NASCON Earnings Dip as Increased Costs Pepper Performance
Salt maker, NASCON Allied Industries Plc, earnings dip as the rising costs profile peppered the company performance in the second quarter of the financial year 2021. On the Nigerian Exchange, investors currently value the company at N39.742 billion.
The company’s earnings underperformed expectations due to observed operating pressure in the business environment driven by inflation worries, devaluation of the local currency and weak macroeconomic conditions.
Due to inflation pressure, the company saw a strong increase in costs, both direct and overhead costs increased. In its financial statement submitted to the Nigerian Exchange for the second quarter, NASCON Plc. earnings per share tumbled 15.5% year on year into ₦0.27 from ₦0.32 a year ago.
The slowdown was underpinned by a sturdy growth of 31.4% in the cost of sales, a situation that was further peppered by a 21.1% increase in operating expenses.
With both direct and indirect costs combine with weight on the company’s revenue, profit margin took a forceful slowdown as the inflation rate impacts operation.
According to the company’s result, revenue grew by 20.7% year on year to ₦9.23 billion in the second quarter of 2021. When compared on a half-year basis, sales jumped 20.9% to ₦17.57 billion.
Cordros Capital said in a report that the growth in the company’s revenue was mainly supported by higher salt volumes, following the expansion of its refined salt plant capacity from 72kmt to 250kmt.
Across NASCON’s regional footprint, sales from the West which accounts for 33.6% of total revenue recorded the highest quarterly outturn in Q2-2021. Specifically, revenue from the region surged by 58.5% year on year to ₦3.10 billion.
“We highlight that this reflects management’s strategy to penetrate other regions asides from the North accounting for 60.4% of total revenue”, analysts added.
Similarly, sales from the East which accounts for 6.0% of the company’s total revenue recorded jerked up 20.6% in the period.
Due to pressure on the cost profile, NASCON recorded a 117 basis points drop in gross margin to 38.2% as against 43.3% in Q2-20: 43.2%. This occurred as the company’s cost of sales ballooned 31.4% year on year, rising faster than the 20.7% increase in topline in the period.
In their comments, analysts said the increase in the cost of sales was influenced by the growing cost of raw materials consumed in the period, which increased by 37.3% to ₦ .81 billion from ₦3.5 billion in Q2-2020– the highest consumption in any single quarter.
Earnings before interest, tax, depreciation and amortisation (EBITDA) and operating income (EBIT) margin saw a significant drop. According to Cordros Capital, EBITDA and EBIT margins declined by 338 and 374 basis points to 25.0% and 11.6% from 37.8% and 18.5% in Q2-2020 following reduced gross margin decline expansion in operating expenses.
Stretched further, NASCON also reported higher operating expenses, the number that was influenced by 34.2% expansion in both the general & admin and 16.3% jump in selling & distribution expense lines.
Further down, the company recorded a net finance income of ₦1.00 million in Q2-2021 as against a net finance cost of N60.00 million in Q2-2020, underpinned by an 82.2% contraction in finance cost.
According to analysts, the company’s financial statement shows that finance obligations increased to NGN12.00 billion N71.00 million in Q2-2020 after NASCON made N3.3 billion loan obtained in 2019.
Thus, the company’s total debt as of H1-2021 declined by 38.8% year on year to ₦3.70 billion from ₦64.04 billion H1-2020.
Overall, profit before tax fell sharply by 21.1% year on year to ₦1.07 billion from ₦1.36 billion in Q2-2020. With a tax expense of ₦494.86 million, the company’s profit after tax came at ₦727.33 million from ₦860.24 million in Q2-2020.
In a review, analysts at Cordros Capital said NASCON’s Q2-2021 performance is reflective of the high cost of operation in the business environment, given the heightened inflationary pressure and currency depreciation during the period.
Analysts also highlighted that management’s adoption of a low-price strategy to drive volume growth has limited revenue growth despite refined salt plant expansion.
“Going forward, we expect the ballooning costs to continue to weigh on profitability in the near time”, Cordros Capital stated.
Atlass Portfolio said despite posting reduced returns for investors in H1-2021 with return on equity dipping to 11.06% from 11.83% in H1:2020 NASCON still possesses strong fundamentals.
“We expect a potential upside of 20% in the stock price; amid increasing covid-19 inoculations and economic activities”, Atlass Portfolio analysts said.
First Half Review
NASCON recorded a 2.52% reduction in profit after tax in H1-2021 from ₦1.48 billion in H1-2020 to ₦1.45 billion. Revenue jumped 20.93% in H1-2021 but was doused by a faster increase in the food product production segment.
The company’s operating cost expanded from ₦3.79 billion a year ago to ₦4.81 billion in H1-2021, with a negative impact on profitability.
In the period, NASCON significantly reduced borrowings and raised cheaper funds cheaper thereafter. This reduced borrowings and finance costs by 98.11% and 84.84% respectively.
The company’s borrowing tumbled from ₦2.03 billion in H1-2020 to ₦38.57 million a year after while finance cost slowdown to ₦25.20 million from ₦166.21 million.
Read Also: NASCON: Sustained Border Closure Support Earnings
NASCON Earnings Dip as Increased Costs Pepper Performance
