Cement Company of Northern Nigeria Plc AKA CCNN is one of the foremost Cement Companies in Nigeria competing with the likes of Dangote Cement and Wapco Lafarge. The company reported an 8.7% rise in revenue to N15.1billion for the period ended December 2012. Gross Profit however dropped from N5.5billion in 2011 to N4.24billion in 2012. Operating profit also dropped by half year on year to about N1.8billion. The company also disappointed as profit after tax dropped 48% from the prior year to N1.19billion.
So what happened?
Going by the numbers, one might conclude the company have failed to generate enough growth in revenue to cover expenses. However, CCNN has actually performed averagely in terms of growing revenues over the last 5years as revenues has grown from about N9.8billion in 2008 to the N15.1billion posted in 2012 resulting in a CAGR of about 9%. But compare that to pre-tax profits which have dropped by a CAGR of 9% over the last five years too. The problem is that expenses have grown much higher and pre-tax profits has had a zigzag revenue growth over the last 5 years. In fact the best year was in 2009 where they made a pre-tax profit in excess of N3billion, other results have been sea saw like.
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Zeroing in to 2012, the companies cost of sale appears to be their achilles heel rising from N8.2billion to N10.8billion. They therefore earned N28 from every N100 of revenue made after deducting cost of sales. SG&A increased slightly by just 9% helping further dent profitability during the period. I am even more worried that about the percentage of SG&A that is sliced out of gross profits, 80%!!!! Surely, the company is in a highly competitive sector.
Any Silver Lining?
On a flip side though, the company has zero long term borrowings a marked difference from its competitors. Much of the company’s assets are financed with trade creditors (24%) while as Equity covers 53%. In terms of their ability to sell their inventories quickly enough, the company had an inventory turnover of 2X which when compared to Wapco’s 4.7X may explain why revenues haven’t quite grown enough to match rising cost. Nevertheless the revenue was still able to provide a ROE of 14% and ROA of 13% and example of how little or no debt can help a company make good profits despite declining revenue growth. The company has clearly used its assets to generate very good sales earning over N1 in sales for every N1 in assets invested.
Is it worth Investing?
CCNN has been around for years playing in the northern market. The emergence of Dangote Cement as a nationwide giant will surely impede on their market share forcing them to loose more and more business. A radical approach is needed to survive in the competitive cement industry. Currently, the industry is having to cope with a glut in the market as more and more cement gets imported whilst production capacity locally also increases amidst high operating cost. The share price is currently N10.55 and has risen about 125% year on year. The price represents a P.E ratio of just 11x making it appear cheap when compared to Wapco 16x and Dangote 23X.
In a today’s bullish market this looks like an attractive price but don’t be fooled, the premium appears high considering the latest result and outlook for the company. A company that spends 92% of its income on operating and direct expenses despite still posting double digit ROE is a company on the decline. Hopefully, management will act quickly.
CCNN 2012 Audited Accounts is posted on the website of the NSE