Daily Independent (Lagos)
Emele Onu
13 October 2008
opinion
From a peak of N24. 50 per share it attained in April this year, just about a month before the market downturn set in; the Cement Company of Northern Nigeria (CCNN)has been shedding in value even when investors spotted a green light from the first quarter result.
The lingering drop in price which led to the N13.41 it closed at the weekend is attributed to profit taking by investors (some of them realigning their portfolios)as well as the general market slump.
Some analysts have ascribed medium to long-term buy prospects to the equity on the strength of the recent quarterly financials.
To a large extent, the stock will appeal to the investor based on how management leverages the additional capital and technology at the disposal of the company.
In a bid to bail out the cement plant, the management floated a rights issue in 2007. The offer was for the purpose of reducing the level of gearing in the business, acquire technology, improve working capital and grow financial capability to enhance production capacity and also deepen sales.
CCNN had in its five year history, declared losses in two years, with investors not just denied dividends but meant to exchange their shares below its intrinsic value at the stock exchange.
Part of the problems of the company was a credit line it obtained some years ago and which exposed its books to high interest expenditure that traditionally would encroach on profit. The company also lacked the financial muscle to take advantage of opportunities in the cement industry.
The worsening state of its business resulted in a sharp decline in post tax profit from N827 million in 2004 to N224 million in 2005 and which later plunged into a loss of N35 million in 2006. The topline was about flat in three years - 2004 to 2006.
Fortunately, the indicators later changed, suggesting the turnaround measures may have started paying off.
From the first quarter management account to March 2008 and the 2007 audited statement, the company's operations may be coming out from the woods.
For the investors that increased their holdings in the organisation's rights issue last year, which caused the over subscription to that offer, their faces radiated joy.
It declared for the first quarter of the running year, profit after tax of N135.3 million as against a loss after tax of N18.3 million in the comparable quarter of 2006. The striking thing about the result being the fact that the quarter one net value was about the size of the 12 months profit for the 2007 financial year. Some analysts interpreted the result as the outcome of quality cost control and efficiency measures said to have been built into the business.
CCNN's net position had moved from a negative of N34.9 million in 2006 to a profit after tax of N138 million in 2007, which was the equivalent of 498 percent increase.
Turnover by the audited report advanced by 26 percent from N6.4 billion to N8 billion. Following the performance, the directors declared a dividend of 10 kobo per share, serving as a reward to shareholders for the improved business done in the review period. For the first quarter of the running year, the turnover recorded N2.2 billion, below N2.5 billion garnered in first quarter 2007.
Nevertheless, the question on the lips of many investors is, "can CCNN guarantee steady increase of the topline and bottomline numbers in the years ahead, such that those that bought into the equity can recoup what they have lost in the past?
The management is facing a number of challenges in that regard, one of them being that it
needs to accelerate sales to measure to the gross revenue earned in full year 2007.
The directors may have pacified its shareholders for some of their losses in the business. But it is the kind of outlook it presents to the market in the next quarters that will matter more. What the discerning investor will be waiting for is evidence that the cement outfit has come to stay for good on the upbeat.
At a time in the past, when it was felt that the business had positioned for the top, it came crumbling. That is not lost on the investor.
The new management in CCNN is challenged to ensure that the trend it established in 2007 and the first quarter of 2008 is sustained to greater height in the running year and thereafter.
The indicators show the cement outfit has grown input and output capacity. What remains is to deploy them at the right mix to harness to the fullest opportunities emanating in the local and offshore cement markets.
Good a thing, the industry environment has improved significantly.
The Nigerian cement Industry was in the doldrums up till about three years ago until a shift in public policy which placed restrictions or ban on the importation of the commodity.
Some cement manufacturers have since resuscitated their businesses and are declaring profits that compare with the best in the Nigerian Stock Exchange.
WAPCO and Ashaka Cement are dominating the market and reported to have accounted for about 80% of the market between 2002 and 2006. CCNN is captured in the calculation as a minor operator, notwithstanding its relatively larger share of the Northern market, particularly in the central states region.
Ashaka Cement has consistently reported profits over the past five years. WAPCO was deep in losses at a point in time due to the effect of debt capital and the devastating interest exposure. WAPCO has since rebounded moving from loss making positions to report profits year on year in the past three years.
CCNN was neck deep in the valley until recent reports. For the financial year ended December 31, 2006 it declared a turnover of N6.37 billion representing 7.6 percent increase against N5.92 billion it garnered in the preceding year. It recorded a loss after tax of N34 million against N108 million in 2005.
The company needs to improve on subsequent quarterly reports to put its share price back on the upbeat.
Good a thing, the industry environment is positive and supportive of growth by the operators.
Cement production for 2006 was 4.5 million metric tons while estimated demand was over 11.5 million metric tons. That leaves a supply gap of 7 million metric tons. Local cement producers have a lot of market and by that prospect.
Aggregate investment in the industry has increased tremendously going by total outlay of assets and equity. Total investment in the industry measured by total asset is reported to have increased by an average annual rate (compounded)of 16.7 percent, with net investment (shareholders' fund)increasing at an average rate of 33.8 percent from 2002 to 2006.
The greatest growth in the industry in terms of investment occurred between 2004 and 2005. The period saw total investment and equity increasing by 31 percent and 193 percent respectively. Total assets of the industry stood at N95.1 billion in 2006 while equity was N46.5 billion.
A major barrier to entry in the cement industry is the huge capital outlay that is needed to succeed in that sector. The greater the economies of scale desired, it is said, the larger the plant required. Even though CCNN had in the past raised further capital, some analysts think it is yet to show positive manifestations in its income statement.
To that extent, Management has to address obvious challenges in the business as related to capital and assets to enable the organization benefit from the huge supply gap in the market and also face competition.
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