Oge
Nothing puts a smile on one’s face like a high- flying growth stock. Not only will stock in your portfolio that has returned 100%, 200% or even 500% help you build wealth faster but it also makes up for several losing stocks.
While this makes high-growth stock appealing, how can one spot such an opportunity before others? Amongst several strategies shared by top investment analyst, turnaround stock trading strategy seems to be the most rewarding of all.
What is a turnaround stock strategy?
In simple term, turnaround strategy picks temporarily out-of-favour stocks with upside profit potential. Of course, not all bearish companies offer potential turnaround opportunity, but this investing principle believes that bearish stocks with real value will always prevail regardless of the stock’s setback.
In the NSE market, one of the stocks that have been trending down week on week and has got everyone asking questions after a significant decline in EPS to 44k from N2.57 is Cement Company of Northern Nigeria (CCNN).
The company is engaged in the production and marketing of cement under the brand name “Sokoto Cement”.
In its latest financial results, the stock recorded an 82.7% fall in distributable earnings following a merger arrangement with Kalambaina Cement Company Limited 2018. Since FY2018 was released, the stock has lost up to 30% of its market value and might shed more as investors price in expected full year’s EPS for 2019 (based on 13.1 ordinary shares outstanding compared to pre-merger shares of 1.2b).
As of this analysis, CCNN stock trades for N14, 56% down from its 52-weeks high of N32.At the current market price, this may not be a stock to trade now but it does offer real value that could reward smart investors who key in at a bottom price.
Here are some key metrics that support the fundamentals of CCNN:
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Revenue
In the last 4 years, CCNN sales have been growing by an average of 33.6%. The cement company generated N13b, N14b, N19.5 and N31.7 in 2015, 2016, 2017 and 2018 respectively. In its latest Q1 result, sales jumped from N5.3b to N16b which is 201% Q on Q growth and 51% of previous year’s revenue
As the company looks to consolidates on local market penetration strategies and grow its export potential to neighbouring countries, the sales figure will certainly beat the previous figure.
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Profitability
Net margin, a measure of how much is left after accounting for all direct and indirect cost has been impressive; 9.2% (2015), 8.9% (2016), 16.4% (2017) and 17.98% (2018). On a 4-year average CCNN net margin is 13.12% which is above my 10% threshold.
CCNN declared a profit after tax figure of N1.2b in 2015, N1.25b in 2016, N3.2b in 2017 and N5.7b in 2018. Besides, in its Q1 result 2019, after-tax profit prints at N3.6, 260% growth over N1b in Q1 2018 and 63% of previous full year’s profit.
Profit after tax is growing by an average of 68% in the last 3 years which is one of the best double-digit PAT growth in the market right now.
On how it has managed cost, CCNN cost to sales ratio declined from 70% in 2015 to 55% in 2019 after reaching 72% in 2016. The company has been investing aggressively in the alternative energy mix to save cost.
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Liquidity
We will look at two key metrics to gauge the firm’s liquidity.
Current Ratio: We use this ratio measures how easy it is for the stock to pay its short term obligations with the available current asset. In its Q1 2019 result, current asset increased from N17.2 to N29.5 while current liabilities increased from N11.5 to N18.8. Based on this figure, CCNN’s current ratio increased to 1.56 from 1.52 in FY 2018
Interest Coverage: This metrics lets you see whether the company can pay interest obligation with operating earnings. As a low-levered stock, coverage ratio is extremely high, at an all-time; 18 times compared with 4 recorded in 2015.
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Return on Equity Vs Debt to Equity
RoE was negatively affected as it went to 1.7% compared with the average percentage of 17.2%. This is not unconnected to the additional share capital from Kalambaina Cement Company Limited that shot total equity to N333b (compared to N14b). Debt to Equity also declined significantly to 0.04, from an average of 0.70.
In its 2019 Q1 result, RoE prints at 1% which means the company may report an estimated full year’s return of 3 – 3.5% in 2019, a 76% increase compared to 2018. Debt to Equity also increased marginally to 0.06 as a result of higher trade and income tax payable.
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Valuation
In Q1 2019, the company generated revenue of N16b and declared a profit after tax of N3.6b which is 51% and 63% of sales (N31b) and profit (N5.7) realised in 2018. If it continues to deliver impressive performance Q on Q, the minimum projected profit for 2019 is N11.5b, 101% increase in the bottom line. Using the current weighted average number of shares (13.1b), EPS should be around 87k, 97% over 44k declared in 2018.
As bond yield falls to 13-14%, it makes sense to discount the EPS by a risk-adjusted figure of 17%. Given this, I have a fair value estimate of N5- N6
At N14, this is 64% downside potential but as a smart investor who understands that no one can accurately predict the depth of good stock investors are dumping, it makes more sense to start accumulating at levels below N9 and average down to the market’s acceptable level.
Any fresh buying interest below N9 with higher than usual volume might be the turnaround you can’t afford to miss, so it’s wise to get in early before others.
Conclusion
The analysis shared is based on my opinion and how I will play CCNN stock for long term capital appreciation. Fair value might change to reflect the latest quarterly results so you are strongly advised to do your research.
