Event

Nascon Allied Industries Plc delivered strong topline growth in Q3 2022, as revenue increased by 110% year-on-year to N15.48bn. A combination of higher product prices and a low base in Q3 2021 spurred revenue growth.

Due to the benefits of effective price realisation, gross margin expanded by 400 basis points to 46% in Q3 2022 from 42% in Q3 2021. That translated to a 132% year-on-year growth in gross profit to N7.09bn.

Higher energy costs induced a 121% increase in selling and distribution expenses. The notable driver here was higher diesel prices used for delivery trucks. Total operating expenses (opex) increased by 77% year-on-year to N4.13bn. However, opex margin declined by 500 basis points to 27% (Q3 2021: 32%) due to the significantly higher revenue generated during the period.

Operating profit grew by 289% year-on-year to N2.98bn, but the growth in profit before tax stood at 41%. This was majorly due to an N856mn FX loss incurred in Q3 2022, relative to N714mn FX gain in Q3 2021. Profit after tax grew by 40% year-on-year to N1.35bn – the highest quarterly profit recorded since Q3 2018. Meanwhile, net margin shrank by 400 basis points to 9% (Q3 2021: 13%).

Outlook

We expect pricing benefits to support topline and bottomline growth in the near term. Although we expect input cost and inflationary pressures to negatively impact profitability, we believe that price increases on products would offset the increases.

In the medium term, we believe that Nascon’s fundamentals are solid, albeit weakening. The Company retains a significant market share in a highly fragmented and competitive industry. Regulatory and policy supports are also positive for the Company. Internally, a relatively strong balance sheet (i.e., adequate liquidity and relatively low debt levels) enables the Company to capture future growth opportunities. 

We previously recommended a hold for the stock with an estimated fair value of N11.10. Between our last report and this report, the stock price declined by 14%. Based on our revised estimates and valuation, we believe that the current market price presents an entry opportunity.

After incorporating the Q3 2022 numbers, our revised earnings per share (EPS) for FY 2022 is N2.03 (previous N1.21) and our fair value estimate was revised to N12.85. The stock’s forward price-to-earnings multiple of 4.67x is at a 35% discount to our justified price-to-earnings multiple of 6.32x. Hence, we recommend a BUY.

Please follow the link “Nascon Allied Industries Plc Q3 2022 – Sturdy Margins Despite Macroeconomic Challenges” to view the whole report.

Thank you.