NASCON: Sustained Border Closure Support Earnings, Market Share

NASCON: Sustained Border Closure Support Earnings, Market Share

NASCON Allied Industries Plc posted a topline growth of 12% year on year from ₦12.97 billion in H1 2019 to ₦14.53 billion in H1 2020.

Despite improvement in the company’s earnings and market share, NASCON share was downgraded to sell by analysts at WSTC Securities Limited.

The analysts explained that at the market price of ₦10.00k, the stock is trading at 31% premium to its reasonable estimate.

NASCON had moved from negative cash position to having more than ₦5 billion in the first half of 2020.NASCON: Sustain Border Closure Strengthens Earnings, Market Share

The company is strongly leveraging on reduced competition from influx of substitute products from neighbouring countries as borders remain closed.

In the first half, NASCON’s gross profit surged double-digit by 65% year on year. This came on the back of the haulage cost reclassification.

WSTC Securities explained that the group reclassified haulage cost from production cost to distribution expense, thus supported operating performance.

Operating profit rose by 14% from ₦2.12 billion in H1 2019 to ₦2.43 billion in H1 2020.

Then, the group’s profit before tax grew at a moderate rate by 7% from H1 2019 to ₦2.13 billion to ₦2.28 billion in H1 2020.

Likewise, profit after tax grew by 3% from ₦1.45 billion in H1 2019 to ₦1.49 billion in H1 2020 due to a higher effective tax rate. EPS for the period stood at N0.56k (H1 2019: N0.54k).

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Analysts said the group regains market share amid FX scarcity and sustained land border closure.

Despite the pandemic, NASCON revenue grew by 12% informed by robust growth across the geographical regions.

Analysts at WSTC Securities observed that revenue in the West increased by 36% to ₦2.72 billion in H1 2020.

Similarly, revenue in the East by grew 11% to ₦923mn in H1 2020. Income from the North also rose YoY by 5% to ₦9.91 billion in H1 2020.

“We believe that the growth in revenue was due to the sustained border closure and FX scarcity, which prevented the penetration of cheap smuggled goods that competed against the company’s market share”, WSTC Securities stated.

In the period, the group’s production cost declined year on year by 8% from ₦9.45 billion in H1 2019 to ₦8.71 billion in H1 2020.

Analysts attribute the drop in production cost to the reclassification of haulage cost to distribution expense.

Safe for the reclassification, WSTC said the cost of sales could have increased year on year by 7% to ₦10.15 billion in H1 2020.

Nevertheless, on the back of the reclassification, gross profit surged by 65% to ₦5.82 billion and gross profit margin strengthened by 129bps to 40% in H1 2020

Historical financial records showed that the company has been on a rebounding revenue growth trend between Q1 2020 and Q2 2020.

Analysts stated that NASCON revenue in Q2 2020 grew markedly by 24% despite COVID-19 related challenges.

However, trade receivables increased by 19% to ₦11.81 billion in H1 2020, which may suggest that the company may have relaxed its credit policy.

Notably, however, the group’s cash position also improved from a negative place of ₦310 million in H1 2019 to of ₦5.71 billion in H1 2020.

“We believe that the sustained border closure, as well as FX scarcity, was supportive of the group.

“We expect to see the group reclaim more market share given the persistent FX scarcity and the gradual easing of the lockdown.

“Overall, we have a revised forward EPS of ₦1.05k with a fair value estimate of ₦6.87k on the stock”, WSTC stated.

Hence, analysts at WSTC Securities advised investors to SELL NASCON stock given the fact that it trades at premium.

NASCON: Sustained Border Closure Support Earnings, Market Share