Operating Challenges Weaken Revenue: NASCON Allied Industries Plc reported FY2018 revenue of NGN25.77bn, which represents a 4.78% decline from the NGN27.06bn recorded in the previous year. This was due to the weaker contribution from the sales of salt, which constitutes 80.57% of the company’s topline while its tomato processing and vegetable oil plants lay idle. However, the revenue from its seasoning products and freight business grew by 20.76% and 5.84% respectively, with the latter accounting for 15.85% of total revenue.
In 2019, production is set to resume on the company’s tomato processing plant following its strategic decision to focus on backward integration for the supply of raw materials, along with the resolution of its disagreement with local farmers over pricing of tomatoes. We also expect the company to benefit from the planned ban on the importation of tomato paste by the FG. However, the contribution from this business segment should be modest; the difficulty in stemming the inflow of smuggled products through the country’s porous
borders as well as anticipated shortfalls in supply as local farmers adapt to the improved seedlings to be supplied by NASCON. Hence, we estimate revenue to grow by 5.0% to NGN27.05bn by FY2019. The company’s backward integration plan for the vegetable oil segment has a longer gestation period and is not expected to add to revenue in 2019.
Sticky Costs Structure Impairs Profit Margins: The decline in revenue pressured the gross margin, which contracted to 30.19% from 36.93% in FY2017, but this was worsened by the 5.38% rise in the cost of sales. Operating expenses also spiked by 13.48% to NGN2.70bn (vs. NGN2.38bn in 2017), the highest in a decade. Consequently, Profit before Tax and Profit after Tax dropped by 18.46% and 17.28% respectively. Net margin also declined by 3.20%, slightly underperforming a 5-year median of 16.30%.
Operating Accruals Underscores Poor Earnings Quality: NASCON generated NGN0.99bn in cash from its operating activities, barely 22.00% of its net income for the period. This underscores poor earnings quality for the year and raises the possibility of future negative earnings surprises.
Value Creation Constrained by Lower Asset Turnover: Return on equity dropped sharply from 50.95% in FY2017 to 33.51%, slightly below its five-year average of 35.59%. This was largely due to decreased asset utilization over the financial year, as asset turnover fell to 0.85x, lower than a seven-year average of 0.97x. Similarly, the return on asset weakened for the period at 12.97% (vs.16.56% in the previous year).
Recommendation: Our target price was reviewed downwards to NGN17.86
given lower expected EPS of NGN1.52 (vs. previous estimate of NGN2.19) and a
target PE of 11.75x. This gives a downside potential of 6.66% to its closing price
of NGN19.05 on the 16th of April. We therefore rate as HOLD.
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Lagos to open churches, mosques from June 19, limits gatherings to 40% capacity
Religious bodies to open at a maximum of 40% of their capacity and we’ll be working with them as being expected by the Lagos State Safety Commission.
Lagos State government says religious gatherings would be allowed to reopen on June 21, 2020. This was disclosed by the State Governor, Babajide Sanwo-Olu on Thursday during a press briefing at Government House, Marina.
According to the Governor, mosques are to reopen from June 19 while churches are to begin services from June 21 and only Friday and Sunday services should be held for now, as other regular services, including night vigils, must be put on hold.
He said, “There will now be restricted openings of religious houses based on compliance that we have seen and reviewed with the Safety Commission.
“From 14 days time, precisely on the 19th of June for our Muslim worshippers and from the 21st of June for our Christian worshippers, we will be allowing all of our religious bodies to open at a maximum of 40% of their capacity and we’ll be working with them as being expected by the Lagos State Safety Commission.
“But we know that these places of worship have different sizes but even if your 40% capacity is really so large, you cannot have beyond 500 worshippers at once, and keeping that maximum 40% capacity is really important.
“We will be encouraging people to have more than one service and ensure that they keep their premises clean, disinfect before another round of worship can take place.
“We will also be advising that there should only be mandatory Fridays and Sunday services. All other night vigils and services must be put on hold for now until we review our current situation.
Sanwo-Olu added that the state will also be advising that persons below the age of 15 because of how well they walk around should be excused from the places of worship and citizens that are above the age of 65 should not be allowed into these places of worship.
FG may lift ban on interstate movement on June 21
Interstate movement may resume on June 21.
The Federal Government may lift the ban placed on interstate movements on June 21, 2020.
This was disclosed by special adviser to President Muhammadu Buhari on new media, Bashir Ahmad on Thursday via his Twitter handle.
He stated, “Interstate movement may resume on June 21, the National Coordinator of the Presidential Task Force on COVID-19, Dr Dani Aliyu, gave the hint recently, as domestic flights expected to resume on June 21.”
Interstate movement may resume on June 21, the National Coordinator of the Presidential Task Force on COVID-19, Dr. Sani Aliyu, gave the hint recently, as domestic flights expected to also resume on June 21.
— Bashir Ahmad (@BashirAhmaad) June 4, 2020
Meanwhile, the FG last Monday, June 1, 2020, announced a cautious advance into the second phase of the national response to COVID-19. As part of the measure in the new phase, the FG has announced the full reopening of the financial sector.
This was announced by the national coordinator of the presidential task force on COVID-19, Dr Aliyu Sani. He said that the banks will now be allowed to operate at normal working hours five days a week as against the restricted time of 2 or 3 pm that was announced during the first phase of the easing of lockdown.
The Presidential Task Force also gave the green light to hotels to reopen but must do so based on the guidelines rolled out by the National Centre for Disease Control (NCDC). They are to maintain non-pharmaceuticals intervention. However, gyms, cinemas, parks, nightclubs and bars are to still remain closed until further evaluation.
The restaurants, other than those in hotels must remain closed to eat-ins but are allowed to prioritize and continue to practice the takeaway measure that has been in place since the first phase.
The conundrum in the retail pricing of PMS
Considering the landing cost of petrol is largely influenced by the prices of crude oil in the international market, we think prospects of continued recovery in crude oil prices is likely to put upward pressure on the cost of importing petrol.
The decision of the Petroleum Products Pricing Regulatory Agency (PPPRA) to reduce the pump price of Premium Motor Spirit (PMS), also known as petrol, to N121.50 per litre from N123.50 per litre has been met with stiff resistance from oil marketing companies (OMCs). The Independent Petroleum Marketers Association of Nigeria (IPMAN) have also stated that it impossible for its members to sell petrol at the new price floor of N121.5 per litre.
We recall that on 18 March 2020, the Federal Government (FG) reduced the retail price of Premium Motor Spirit (PMS) by c.14% to N125/litre from N145/litre, following the global pandemic which led to an unprecedented decline in oil prices and by extension a reduction in the landing cost of petrol. Subsequently, the FG announced a further reduction to N123.50 which took effect on April 1, 2020. Earlier this month, the FG directed a reduction in the pump price of Premium Motor Spirit (PMS) for the third time to N121.50 per litre. We note that the adjustments in the retail price is in line with the directive from PPPRA on a monthly review of the pump price, depending on prevailing market realities.
In our view, considering the landing cost of petrol is largely influenced by the prices of crude oil in the international market, we think prospects of continued recovery in crude oil prices is likely to put upward pressure on the cost of importing petrol. With the gradual relaxation of lockdown measures by countries who are starting to reopen their economies alongside the historic production cuts of OPEC+ which took effect last month (a 9.7mb/d oil production cut for May and June), we think the risks to oil prices are tilted to the upside in the near term.
Since hitting a two-decade low of US$19.33 on 21 April when the retail price of petrol was pegged at N123.50, brent crude prices have gained c.105% to close at US$39.54 on 3 June. Against this backdrop, we expect that the retail price of petrol should rather be adjusted upwards to reflect current market realities. The current situation appears no different from historical trends where the FG becomes reluctant to effect an upward adjustment in the retail price of petrol during periods of rising crude prices. This has often resulted in the renewed payments of the age-long fuel subsidy. We also think oil marketing companies (OMCs) who have only recently begun to import petrol alongside the Nigerian National Petroleum Corporation (NNPC) due to more favourable pricing could halt importation once again if domestic retail prices become unfavourable.
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