Analysis: Is Nascon A Bargain or Trap?

Companies associated with Aliko Dangote have taken a beaten of late as the stock market continues to display volatility. One such companies is NASCON, the major salt maker. The stock has lost a whopping 51.5% of its value in the last one year and currently trades at about N6.16. As a shareholder this stock is a major reason for some of the red lines in our portfolio. Nevertheless, at this price one wonders if it makes sense to buy. Is it a trap or is it a bargain? Lets examine the odds

Bargain

• Share price is currently shows a P.E ratio of about 6.8x
• It dropped to N5.8 its lowest in one year before rebounding to above N6
• This suggest about 5 to 10% upside in price in the short term
• It’s a liquid stock and displays a lot of volatility
• It’s intrinsic value (by our estimates) is between N5 and N7
• They pay between 80% to 88% of profits as dividends in the last 3 years
• If they pay the same dividend as they did last year, dividend yield at this price should be about 14.8%

Trap

• The company is set to declare at least 20 to 25% drop in earnings when it reports in 2014 results
• Price to book ratio of 2.3x suggest there is more room for downward trend
• Margins are expected to be lower for companies in the consumer sector, Nascon inclusive.
• Cash flow looks very thin and it is unlikely that they will match last year’s dividend of N2.3 billion.
• A dividend of N1billion will be at most what they could pay
• We won’t be surprised if they decline to pay dividends
• The company is undergoing some restructuring which might take time to materialize. They plan to diversify away from relying solely on salt.
• The bears might take a larger portion of the volatility

Finally,

It appears things will get worse for Nascon before it gets better suggesting a Trap if you are an investor with a short term outlook. However, if you are patient enough and in for the long haul, Nascon looks ripe for the taking at a price below N6. One key thing to consider is their upcoming results. That should determine how dire things really are for the company and we suggest any long term buyer waits till then. If the results come out worse than we expect then buying it is a confirmed trap!!