NASCON: Steep Rise in Finance Cost Dwarf Shareholders Returns
Equity analysts’ have set ₦13.60 price target for NASCON Allied Industries (NASCON), a member of the indigenous conglomerate, Dangote Industries Limited for 2020.
In the last five years, return on equity (ROE) trends have been mix, peaked at 46.32% in 2017 but closed 2019 at 16.64%.
In 2015, NASCON’s return on equity was 29.71%, surged to 30.02% in 2016 and lifted strongly a year after.
By the end of 2018, ROE was 37.17% as the company struggled to find value for investors with increased leverage.
In the stock market, investors can buy NASCON for ₦30.733 billion on Thursday on 2,649,438,378 outstanding shares.
In the last 7 trading session, the company’s share price was flat at ₦11.60, though it has lost 10.42% of its opening value year to date.
However, in their estimates, analysts are projecting earnings per share to come at ₦1.36 kobo as the company’s cost of funds stands at 19.83%.
The company’s return on equity (ROE) have been positive, strong and most times above the cost of obtaining funds.
But the trend in ROE has however reverted since 2018. Meristem said, upon establishment, NASCON was solely involved in refining of salt.
However, over the years, the company has grown its business operations to include manufacturing, refining, marketing and distribution of salt.
It produces seasoning, tomato paste and vegetable oil products with operating production facilities in Lagos, Ogun, and Rivers states.
The Nigeria’s porous border before closure had impacted competition, and NASCON had struggle to find value for investors.
The expansion of its business interests necessitated the change of name in 2014 from National Salt Company of Nigeria to NASCON Allied Industries Plc.
NASCON’s topline growth has been impressive, with an annual growth rate of about 11.18% in the last 5 years.
Based on the earnings trends, it is discovered that this was driven mainly by its salt and seasoning business.
Its seasoning products compete in the saturated market with big brands such as Unilever’s Knorr and Nestlé’s Maggi.
Financial year 2019 has been the best since 2015, as the company recorded a 6.67% growth in revenue to ₦27.49 billion.
Meristem Securities Limited considers this as a new high point in its history.
Although the company’s production costs has also climbed significantly, from ₦11.82 billion in 2015, to ₦21.65 billion in 2019.
This translated to 12.87% annual growth rate over 5-year.
NASCON has stayed on the path of profitability, ending every financial year in a profit position, analysts explained.
In 2019 however, the company recorded a 58.25% slump in profit after tax to ₦1.85 billion from ₦4.42 billion in 2018 as cost pressures wiped off the improvement in revenue.
It is noteworthy to mention the growth in the company’s finance costs to ₦222.81 million from nil in 2018.
Analysts explained that this came following the ₦3.30 billion long-term borrowing to fund capacity expansion projects undertaken during the year.
Meanwhile, in Q1:2020 financial scorecard, there was 0.83% marginal uptick in revenue to ₦6.88 billion from ₦6.82 billion in Q1:2019.
Meristem said this performance was solely propelled by a 19.99% growth in revenue from salt and seasoning products to ₦6.88 billion.
The feat was achieved despite the mounting competition in the seasonings market.
“We anticipate an improvement in sales volume by the end of the financial year, on the back of the COVID-19 necessitated lockdowns and increased spending on food items by households, social organizations and the Government”, Meristem stated.
The firm also projects a 12% growth in topline by 2020, to be fueled by an increase in volumes in the second and third quarters.
However, weak disposable income, and a reopening of the land borders without addressing smuggling and dumping activities pose significant downside risks to this projection.
Increased Debt Obligations:
Analysts noted that over time, the company has created significant value for its shareholders, recording strong double-digit ROE.
For example, in 2015 its ROE was 29.71%, 30.02% in 2016 and 46.32% in 2017. By the end of 2018, ROE was 37.17% and it settled at 16.64% in 2019.
Analysts said its ROE was higher than its cost of equity of 19.83% and upholding a consistent dividend paying culture.
The trend in ROE has however reverted since 2018.
Meristem said the decline has been fueled by deterioration of both net margin and asset turnover from 19.74% and 0.90x respectively in 2017 to 6.71% and 0.71x in 2019.
According to equity report, financial leverage has trended upwards, from 2.30x in 2015 to 3.49x in 2019.
The jump in financial leverage from 2.55x in 2018 to 3.49x in 2019 was on the back of the company taking up more debt obligations to fund its capacity expansion drive.
At the end of 2019, interest-bearing debts settled at ₦7.06 billion as against ₦38.57 million driven by an expansion in both borrowings and lease liabilities.
Both current and quick ratios however deteriorated, particularly driven by an increase in trade payables by 29.18%, from 1.18x and 0.94x in 2015 to 1.06x and 0.82x in 2019.
This indicates a contraction in NASCON’s ability to meet its short-term obligations.
Although its cash position improved to ₦3.66 billion from ₦2.59 billion in 2018, the company’s working capital worsened by 55.10% to ₦1.11 billion as 16.49% rise in current liabilities outpaced that of current assets which surged 6.94% year on year.
“Looking ahead, we identify the stricter border policy that has stemmed smuggling and dumping activities of unbranded products.
“Especially in the Northern market which constitutes the bulk of the company’s sales, increase in demand channels for food and seasoning products amid the coronavirus pandemic and headroom to improve capacity utilization as positives for NASCON”, Meristem explained.
NASCON’s growth strategy is hinged on capacity expansion and market penetration – by offering price discounts.
Analysts said its strategic focus on sustainable expansion via capacity growth and increased market penetration saw it enhance its total installed capacity for salt production to 567,000Mtpa.
This include 275,000 Mtpa in Apapa, 210,000 Mtpa in Rivers and 82,000 Mtpa in Oregun and it released new products into the market in 2018.
NASCON also launched the Dangote Stew Mix, Dangote Curry and Dangote Classic Seasoning product portfolio, expanding its product portfolio and leveraging on its market dominance to drive sales.
The company, like many others located in the region faces the logistic hiccup at the Apapa port.
In dealing with this, NASCON has moved about 60% of its production from its Apapa plant to the Oregun and Port Harcourt plants.
Also, the management engages third-party transporters to ensure timely delivery of its finished goods.
Despite the gridlock situation, the location near the ports in Lagos – Apapa, and Port Harcourt provide strategic advantages.
Analysts said this is the reason the company has not adopted a regional approach in the location of its plants, despite the Northern market accounting for about 70% of its salt sales volume.
NASCON: Steep Rise in Finance Cost Dwarf Shareholders Returns