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NASCON Plc: Costs swallow benefits of increased product prices

Vanguard

NASCON Plc: Costs swallow benefits of increased product prices

By Emeka Anaeto, Business Editor

IN  the season of strong first half 2017 (H1’17) earnings announcements, NASCON Allied Industries Plc was one of those that delivered impressive results.

The company, last week, announced another top line growth as revenue grew by 48 per cent to N12.72 billion in H1’17 from N8.59 billion in H1’16.

But industry analysts believe the significant jump came on the wings of the remarkable price increases in the products during the period which was necessitated by the higher input costs in its manufacturing business, now transmitted to the consumers of its products.

But then the increase in product prices did not just turn in an impressive revenue as higher input costs continued to subdue gross margin. Gross profit margin declined to 31 per cent as against 35 per cent in H1’16. Cost of sales grew faster by 56 per cent to N8.73 billion compared to N5.58 billion in H1’16, driven primarily by sharp rise in direct material costs by about 63 per cent to N5.53 billion compared to N3.4 billion in H1’16.

Similarly, the external haulage costs rose by 62 per cent to N1.56 billion against N959.17 million in H1’16. However, the company recorded a significant reduction in distribution expense despite increase in the cost of fuel during the period. But analysts say this may be suggesting that gains on this line must have been a product of lower volume when compared to H1‘16.

Nevertheless, distribution expenses declined by 29 per cent to N323.12 million as against N456.01 million in H1’16. This and the robust revenue growth prevented a crash in operating margin, which remained flat at 23 per cent in H1’17.

Consequently, profit before tax and profit after tax grew markedly by 54 per cent to N2.88 billion against N1.87 billion and N1.95 billion against N1.27 billion respectively in H1’16.

Analysts’ Valuation

Reviewing this performance last week, stock analysts at WSTC Financial Services Limited, a Lagos based investment house stated: “We have reviewed our top line forecast for Full Year 2017 upwards to N25.77 billion taking into account the growth in revenue in H1’17 which came better than our expectation.

Accordingly, we expect revenue to grow by 41% in Full Year 2017. We however maintain that elevated input costs remain a pressure point for margins.

“Hence, we have revised our fair value estimate to N12.64 and we review our recommendation to a HOLD due to the recent movement in the share price. Our fair value estimate of N12.64 implies a 5.1% discount to the current market price of N13.32.”

 

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