CCNN: profit performance still following random walk

Cement Company of Northern Nigeria’s [CCNN] earnings performance follows a recurring pattern of rise and fall and the random walk pattern of profit is yet expected in the current year. This year looks very much like an upturn, as the cement manufacturing company seems to be making a reasonable progress in pushing sales volume that has been static in the past two years. With that, the weak profit recovery seen last year could have a chance of strengthening up and the company can look forward to closing this year’s operations with a good profit.

Mr. Alf Karlsen, managing director/chief executive officer of the company, faces the task of rebuilding profit after a big fall that happened in 2012. He is making an impressive headway so far in the current year with after tax profit already ahead of the 2013 full year figure at the end of the first half of the year. Theprogress is built on an all-round cost reduction that has lifted profit margin considerably. If he is able to maintain the current growth rate, the company can be expected to close this year’s operations with a new peak in profit. If he loses grip, the full year earnings outcome will be uncertain.

The company closed second quarter operations with sales revenue of over N9.39 billion, which is an increase of 7% over the corresponding figure in 2013. This represents a slowdown in the growth rate from the turnover figure of N4.88 billion the company generated in the first quarter. The full year outlook is however indicating a much stronger growth, as last year’s second quarter growth rate decelerated at full year.

Whether the current growth rate will be maintained or lost in the second half is the caution on the company for now. If it is maintained, turnover is expected to stand in the region ofN19.8 billion for CCNN in 2014. This will be an increase of 25.4% over the sales revenue figure in the preceding year. The chance remains that the loss of revenue growth momentum in the second half of last year might repeat itself this year. The company has not been able to grow sales revenue reasonably over the past two years.

After tax profit amounted to N1.59 billion at the end of the second quarter, which is a major advance of 91% over the corresponding figure last year. This represents an accelerated growth from N700 million the company posted in the first quarter. Based on the current growth rate, net profit is projected at N3.4 billion for CCNN at the end of the year. This will be an exceptional growth of 139.4% in 2014, which will be a new peak in profit for the company, also marking a full recovery from a drop of about 48% in after tax profit in 2012.

The full year profit projection should be read with caution, as the company has no established trend in profit performance and this has been the experience for many years. Profit outcomes have followed a random walk of rise and fall that leaves an overall impression of uncertainty. The profit figure of N1.42 billion in 2013 is below the N1.81 billion reported in 2009 and the N1.20 billion in 2012 was down from the 2008 figure of N1.53 billion.

The high growth in profit against moderate improvement in sales revenue indicates that a significant cost reduction has occurred in the company’s operations this year. It is indeed an all-round cost reduction for the company in the second quarter.The biggest cost saving came from distribution/administrative expenses, which dropped by 44% to N1.32 billion year-on-year at the end of the second quarter. That is followed by interest expenses, which went down by 30% and then cost of sales, which declined marginally at N5.71 billion during the same period.

Profit margins have improved significantly out of both the improvement in sales revenue and the cost reductions achieved. Gross profit margin improved from 34.8% to 39.2% over the review period. Net profit margin has continued to improve from 9.4% in June last year, 14.3% in the first quarter to 16.9% at the end of the second quarter of this year.

The drop in interest expenses follows a drop of 70% in short-term balance sheet debts from the last year’s closing figure but a long-term borrowing of over N800 million was added during the same period. Other major changes in the balance sheetduring the period include a rise of 124% in cash and bankbalances to N2.54 billion, an increase of 16% in trade debtors and other receivables and a rise of 33% in trade creditors and other payables.

The changes in the balance sheet resulted in a robust cash flow position for the company with net cash generated from operating activities advancing by 158% to over N3.0 billion. This was much more than the cash requirements for investing and financing activities, leaving a net cash increase of about N1.9 billion at the end of June.

The company earned N1.26 per share at the end of the second quarter, up from 66 kobo in the corresponding quarter last year. The full year outlook is N2.70 per share for CCNN in 2014, an anticipated leap from N1.13 at the end of 2013. The company paid out 70 kobo per share in cash dividend for its 2013 operation on August 20, 2014.

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