National Salt Company of Nigeria Plc: Increased activity in West and North of Nigeria boost revenue

National Salt Company of Nigeria Plc (NASCON) engages in the refining, processing and marketing of varied salt products used for industrial and domestic purposes. The company enjoys the household brand name of Dangote for its salt products, tagged Dangote Salts. It recorded years of misfortune due to poor choice of locations and other operational bottlenecks. Dangote Industries Limited (DIL) consummated a reverse acquisition of the ailing salt company in 2007, which ultimately led to the voluntary liquidation of Dangote Salts Limited following the transfer of its assets, liabilities and other business undertakings to NASCON. In return, 2.12 billion ordinary shares were issued as purchase consideration to DIL, the largest shareholder with about 62% controlling interest. Consequently, NASCON became a subsidiary of the Dangote conglomerate. Expectedly, installed capacity initially ramped up to 400,000 tonnes per annum for 25-50 kg bags of salt and 100,000 tonnes per annum for smaller sachets but later increased to 600,000 metric tonnes cumulatively. The turnaround also led to a substantial gain in market share, now estimated at over 60%, and surpassing the company’s aged long rival, Union Dicon Salt Plc that boasts of 700,000 metric tonnes capacity.

GROWTH IN REVENUE ON THE BACK OF CORE BUSINESSES

NASCON’s revenue shows a remarkable increase of 25.53% at the end of third quarter, September 30th 2016 to N12.79 billion from N10.19 billion recorded in September 2015, after a half-year growth of 30.03% over the corresponding figure of 2015. The resultant was due to increase in the sale of edible, refined, bulk and industrial salt; as well as seasoning, tomato paste and vegetable oil over the period to its wide range of distributors and customers, especially in the western and northern Nigeria where sales rose by 66.39% and 17.87% respectively. Sales of its core products rose by a substantial 28.56% in the period ended, third quarter 2016 to N11.21 billion from N8.72 billion reported in the corresponding period 2015. Income from freight services increased by 7.64% to N1.59 billion and covers 15.56% of total revenue. The Company provides freight services to customers by transporting refined salt purchased to their destination. Cost of sales grew notably to N8.56 billion from N6.95 billion over the period; representing a growth of 23.04%. The increment rose from the combined effect of rises in various components of operational expenditures especially: direct material cost, direct labour cost, manufacturing expenses, external haulage, depreciation and loading which increased by 23.46%, 6.39%, 25.16%, 33.52%, 13.09% and 14.26% respectively, which we believe shows partly the inflation changes caused by prevailing macroeconomic headwind in the economy. Expectedly, due to the higher growth in generated revenue over cost of operation, gross profit grew considerably by 30.90% to N4.24 billion at the end of third quarter 2016 from N3.24 billion reported a year earlier.

GROWTH IN OPERATIONAL COST IMPACTS ON PROFITABILITY

The Company’s management increased activities towards income generation by investing its large liquid funds in money market instrument – fixed deposit; hence leading to an unexpected constant growth in investment income which grew by 4272% in the half year and at currently at a growth of 5,115% to N21.8m from N0.42m in September 2015. Nevertheless, other income as anticipated reduced by 94.64% to N6.11m from N114.17m in September 2015. This resulted from reduction in profit generated from asset disposal as well as the absence of insurance claim and profit exchange differences recorded a year ago. Management of expenditures was adversely affected by the Company’s extensive rebranding programme and communication expenses as distribution expenses consumed N537.35m in the nine-month ended, September 2016 from N76.63m in the corresponding period of 2015; hence indicating an massive increase of 601.2%. Increase in administrative expenses was recorded at 6.09% to N950.35m in September 2016 compared to September 2015 figure of N895.81m. Similarly, net financial cost increased to N185.68m which represents 100% increment when compared with September 2015 figure and a rise of 825.37% when compared to December 2015 of N20.07m. NASCON recorded a growth in profit before tax of 8.94% to N2.59 billion in third quarter ended, September 2016 over N2.38 billion reported in the corresponding period of 2015. Nevertheless, despite the same per cent change in income tax which grew to N829.69m from September 2015 figure of N761.61m, profit after tax recorded similar feat as it grew by 8.94% to N1.76 billion in September 2016 from N1.62 billion reported in September 2015.

KEY FINANCIAL RATIOS REFLECTS IMPROVED PERFORMANCE

The Company’s balance sheet shows positive changes in total assets, net assets and total liabilities which grew by 50.98%, 12.02% and 76.57% respectively as at third quarter ended, September 2016, when compared to third quarter ended, September 2015. Total asset currently positions at N25.14 billion from a N19.24 billion reported as at half-year 2016; while total liabilities stood at N17.74 billion; and N7.39 billion marks shareholders’ value. Furthermore, with respect to returns, the company’s return on average equity (ROAE) improved to 24.35% in the third quarter from a record of 18.21% in the second quarter 2016; while return on average assets (ROAA) stood at 8.51% as at September 2016. The Company’s liquidity ratio - current ratio – maintains its 1.13x mark since second quarter compared to 1.03x at the end of September 2015. NASCON’s management shows effectiveness in the handling of operation cycle with an average collection period well below payment days to about 199.04 days.

DESPITE THE OPPORTUNITIES, THE VALUE CHAIN IS YETTO BE FULLY OPTIMISED

Findings reveal that the country spends more than US$2.3 billion on salt importation annually despite the country’s abundant endowment of the natural resources required for salt production. Raw salts can be derived mainly from two sources; the brine lakes and rock salt, which are readily available in the country. Brine lakes are water containing high concentration of salt flows heavily in Imo, Plateau, and Ebonyi states while Rock salts also known as crystalized salts is available in Benue state. In fact, Nigeria is estimated to have reserves of at least 1.5 billion tonnes of rock salt deposits. However, given that the players in the salt industry act as packaging companies as opposed to producers, the country remains an importer of raw salts. The industry is yet to adopt backward integration despite the presence of a huge market for its outputs. Nigeria is a high consumer of salts with estimated annual consumption of 600,000 metric tonnes (from household, animal, and industry) while the per capita consumption (PCC) is between 2.2g and 6.3g daily. The reasons for the failure of the industry to take advantage of the opportunities that the abundance of raw salt in the country presents are unclear. However they may include inadequate support from the government and the low capacity of the operators. Also, we observe that regulatory oversight in the industry is weak despite the existence of a mineral and mining ministry and related agencies.

AVOIDING ANOTHER ROUND OF SALT SHORTAGE REQUIRES DOMESTIC ACTIONS

With the success of electric vehicles that will run on batteries instead of fuel in Japan and the US, a global shortage of raw salt appears imminent as salt is used for lithium, a primary raw component for producing batteries. Furthermore, rapid population growth and industrialisation in the Asian countries as well as Brazil and Australia is also a threat to sustainable salt supply. The sophistication of the nuclear power plants which are persistently being introduced in Asia also appears to contaminate sea salt production. It therefore becomes even more vital for the local industry to open up since even our packaging activities are import-driven. Government needs to intervene to give active support to the local operators to promote platforms for real production. The backward integration process comes with multiple benefits amongst which are job opportunities, foreign exchange earnings, FDI, development of local communities and most importantly, GDP growth.

WE RECOMMEND A HOLD

In line with our review of NASCON’s current operations, we believe that the Company has the capacity continue to boost current performance with increased and well planned activity within its core business areas in an industry with high growth potential. We therefore maintain our earnings projection of N19.34 billion for the full year 2016 and a revised net income of N2.12 billion, leading to a forward EPS of N0.85. Using a combination of the adjusted price to earnings multiple (P/E) valuation model, we forecast a weighted 3-month target price of N8.46, which represents 8.05% upside on the current stock price. We place a HOLD recommendation on the shares of National Salt Company of Nigeria Plc.

IN LINE WITH OUR REVIEW OF NASCON’S CURRENT OPERATIONS, WE BELIEVE THAT THE COMPANY HAS THE CAPACITY CONTINUE TO BOOST CURRENT PERFORMANCE WITH INCREASED AND WELL PLANNED ACTIVITY WITHIN ITS CORE BUSINESS AREAS IN AN INDUSTRY WITH HIGH GROWTH POTENTIAL