Reduced cost spikes AshakaCem profit as insurgency weighs on sales

The ability of the savvy management and board of directors of Ashaka Cement in cutting costs has helped to spike full-year profit by 61.70 percent as the security challenges in the Northern part of the country continue to erode sales.

For the year ended December 2014, Ashaka’s profit after tax (PAT) surged by 61.70 percent to N4.56 billion from N2.82 billion the same period of the corresponding year (FY) 2013. Sales increased by 2.68 percent to N21.13 billion.

Earnings per share (EPS) increased by 61.90 percent to N204k in 2014 from 126k in 2013.

The growth at the bottomline can be attributed to a significant reduction in production cost as cost of sales reduced by 19.37 percent, while cost of sale margin reduced to 61.43 percent in 2014 from 74.93 percent in 2013.

Gross margins spiked to 38.57 percent in 2014 as against 25.76 percent in 2013, due to increased coal substitution for more expensive low-pour-fuel-oil (LPFO).

According to management, Ashaka attained a coal substitution ratio of 71 percent vs. 35 percent in 2013. It also means the company is spending less on input costs to generate every unit of sales.

Net margin moved to 21.58 percent in 2014, compared with 13 percent in 2013.

Further analysis of the company’s 2014 audited financial showed it was able to effectively manage direct costs attributable to project as gross profit surged by 45.80 percent to N8.15 billion from N5.59 billion in 2013.

However, Ashaka’s top-line did not improve as much as the bottomline as operating environment peculiar to region the company operates. It turned out to be a quite challenging year for the company as deteriorating insurgency in Northern Nigeria and increased competition remain major concerns in some of its Northern markets.

The menacing insurgency is responsible for the single digit growth in sales.

“Unlike its much larger rival, Dangote Cement, whose Q4 sales were impacted by a weak demand, Ashaka Cement’s operations were hampered by security challenges in the last quarter of the year,” said Tunde Abidoye, equity research analyst with FBN Capital, in a March 28 note to BusinessDay.

“Specifically, two separate insurgent attacks on the plant’s facilities in November and December weighed heavily on utilisation rates, sales and margins during the quarter,” said Abidoye.

Boko Haram, which means Western education is a sin, has killed more than 12,000 people in the North part of the country as it seeks to impose the sharia law.

Other challenges stunting growth of cement makers in Africa largest economy are lengthy rainy season, currency volatility caused by the devaluation of the naira and power shortage from PHCN’s successor company, resulting to reliance on diesel for fuelling its power generating plant.

However, analysts are upbeat that a curb to insecurity, rapid urbanisation, huge infrastructure deficit and burgeoning middle-class that crave for accommodation will drive the demand for cement.

Ashaka’s total assets were up by 6.08 percent to N71.52 billion in 2014 from N67.42 billion in 2013.

Return on average equity (ROAE) was 9.26 percent in 2014, higher than the 5.36 percent recorded in 2013, a sign of improved profitability.

The company’s share price closed at N21.40 on the floor of the exchange, while market capitalisation was N47.92 billion.