Event
Nascon Allied Industries (‘the Company’) reported a 56% YoY revenue growth in Q2 2022 to N14.37bn. Unlike in Q1 2022 when gross profit declined by 19% YoY, gross profit grew by 58% YoY in Q2 2022, reflecting the impact of higher pricing. We believe that persistent cost increases due to unfavourable raw material prices in the global commodity market necessitated the need to raise product prices. Accordingly, gross margin expanded by 100 basis points (bps) in Q2 2022.

Operating expense increased by 66% YoY to N3.80bn in Q2 2022, resulting from higher distribution expenses. We attribute this to higher diesel prices during the period. Notably, the war between Russia and Ukraine led to a spike in global crude oil prices. Hence, the spillover effect negatively impacted the Company’s cost profile. In addition, heightened inflationary pressure added to the higher costs in Q2 2022. Overall, the operating expense margin increased by a 100 bps to 26% in Q2 2022.
Net profit grew by 58% YoY, with net margin flat at 8%. The bottomline growth was supported by a strong revenue generation during the period.

Outlook
In our last report, we emphasised that it could get to a point where the Company would have to raise prices to protect margins. Although we projected price increases in Q4 2022, the decision came earlier in Q2 2022. Therefore, we revised our projections, and we now expect earnings per share (EPS) of N1.21 for FY 2022 (previous: N0.46). Effectively, our valuation of the stock increased to N11.09. Notwithstanding, we recommend a HOLD. While we note the material jump in earnings growth, we are cautious about the sustainability of earnings in the medium term.

Please follow the link “Nascon Allied Industries Plc Q2 2022 – Higher Pricing Restores Margins” to view the whole report.

Thank you.