NASCON Rated Hold as Working Capital Slumped after Debt Repayment
Analysts at Meristem Securities may probably not be interested in ramping up NASCON Allied Industries Plc. stock over its hold or neutral rating due to lack of required upside potential. NASCON is expected to do N1.17 earnings per share in 2021 as analysts set the price target at N15.21 per share, resulting in to hold rating recommendation.
Its financial statement showed the company’s sales jump in the first quarter of 2021 across the region which pushed top-line growth double-digit above the comparable period. While demand grew, profit margin slide just as the company’s debt repayment impacted negatively its working capital.
According to the numbers, NASCON Plc. recorded a significant increase of 21.24% in its Q1:2021 revenue to NGN8.34 billion from NGN6.88 billion in the comparable period in 2020.
Notably, the revenue from all the company’s geographical locations increased during the review period. The highest increase was recorded in the West with a record jump of 48.69%.
However, analysts said revenue performance of the Northern and Eastern regions trailed behind, inching upwards by 11.96% and 11.74% respectively.
“Considering that the domestic market for salt and seasoning products is highly competitive, we expect the re-opening of the land borders to intensify the competitive nature of the space”, Meristem Securities said.
It also noted in addition that the consistent spike in inflation and its impact on consumers’ disposable income poses a downside risk to the firm’s outlook.
Premised on the foregoing, analysts said they forecast a moderate top-line growth of 7.58% to NGN30.13 billion in 2021 driven primarily by improved demand in the business-2-business segment.
Earnings Undeterred by Increased Cost
In the review, analysts said the firm’s production cost grew at a slower rate relative to revenue, rising by 12.86% to NGN4.92 billion as against NGN4.36 billion in reported in Q1:2020 which was mainly influenced by an increase of 11.69% in raw materials cost.
Despite the increase in cost, cost-to-sales declined to 59.07% from 63.45% in Q1:2020 leading to an improvement in gross margin to 40.93% compare with 36.55% in Q1:2020.
Similar to direct costs, operating expenses rose by 23.99% to NGN2.35 billion on the back of a significant rise in delivery expenses during the period.
NASCON’s operating profit, however improved by 5.13% to NGN1.06 billion implying an operating margin of 12.75% in Q1:2021.
Analysts review indicated that the company’s finance cost declined by 86.04% following the full repayment of the loan valued at NGN3.30 billion obtained in 2019.
On this note, Meristem Securities saw the firm’s interest coverage ratio expanded to 79.70x from 10.58x.
In a similar vein, profit after tax increased significantly by 15.20% to NGN723.20 million at the end of the period. Overall, net margin contracted to 8.67% from 9.13% as the increase in revenue outpaced the growth in earnings.
“For the rest of the financial year, we anticipate an uptrend in costs on the back of general inflationary pressures and our expectation of increased sales volume”, Meristem’ analysts said.
The investment firm also projected a net profit of NGN3.11 billion for 2021, implying a net margin of 10.32%.
Working Capital Slumps after Debt Repayment
After a sizeable outflow meant for the loan repayment left the company, NASCON experience some sorts of cash draught for its operational demands.
Meristem Securities said due to loan repayment, the company reported a negative working capital for the first time in five years, which continued into Q1:2021.
The negative working capital of – NGN586.38 million from NGN42.31 million in Q1:2020 was particularly driven by a significant increase of 18.92% in trade payables.
“While the company does not have a demonstrated history of taking on debts frequently, we expect Management to make efforts towards buffering its working capital position in order to meet its short-term operational needs”, analysts said.
Meristem Securities forecast earnings per share of NGN1.17 and target price-earnings of 13.0x in 2021, resulting in a target price of NGN15.21.
NASCON Rated Hold as Working Capital Slumped after Debt Repayment
