NASCON Allied Industries has seen its share price collapse by around 50 percent from N20 on August 21 2018 to N10.1 on August 21 2020 as the company’s efficiency levels continue to deteriorate across several financial ratios including terms of its return on assets, return on equity and cost to income ratio.
Investors are often criticized for overreacting to short term company outperformance or underperformance but appear to have been “spot on” in terms of investors’ reaction to the slip up in NASCON fundamental performance.
In the last two years, NASCON return on average asset has dropped from 15.52 percent in H1 2018 to 8.05 percent in H1 2020, while return on average equity dropped from 44 percent in H1 2018 to almost 24.96 percent in H1 2020 according to EUA-NASCON financial analysis report.
Return on average assets (ROAA) and return on average equity (ROAE) are indicators used to assess the profitability of a firm’s assets, and it is most often used by analysts as a means to gauge financial performance. The ratios show how well a firm’s assets and equity are being used to generate profits for shareholders.
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A significant decline in these ratios make the companies less attractive to investors which triggers a selloff like we have witnessed in the share price in the last two years.
The company’s return on tangible assets also fell from as high as 45.26 percent in H1 2018 to 18.14 percent in H1 2020, while its cost to income ratio more than doubled from 30.94 percent in H1 2018 to 65.11 percent in H1 2020 according to EUA-NASCON financial analysis report.
Return on tangible assets measures the return on a business’ real assets. For industrial companies who hold a significant portion of their assets in tangible state, it is important for the company to generate high returns from these assets through a high utilization rate. The higher the return on tangible assets, the more attractive the company is to investors.
The cost to income ratio shows a company’s costs in relation to its income. The higher the cost to income ratio, the less profitable the company will become overtime. Although a company like NASCON has continued to generate higher profit despite the rise in its cost to income ratio, the rate of growth in profitability has slowed down considerably due to rising cost overhead.
The cost profile of the company rose significantly this year as distribution cost jumped more than 550 percent from N421.2m in H1 2019 to as high as N2.74b in H1 2020 after the company spent about N2.3b on external haulage and depreciation and impairment of trucks this year which was not recorded in the past year.
As the company’s efficiency level halved in the last two years, so did its stock price performance. Investors will be watching closely in the second half of the year to see if there is any improvement in the efficiency performance of the company to determine which direction the stock will likely move.
“Lower efficiency levels only point in one direction for stocks and that is down. If NASCON fails to control cost growth in the near term investors won’t only lose profitability, they may also see their net worth decline considerably as the stock price tanks further,” said Titobi Okunoba, head of equity research at EUA Intelligence Ltd, an investment advisory firm based in Lagos.
Investors may swoop on shares on the expectation that the gradual reopening of the business after months of debacle caused by the coronavirus pandemic that forced government to impose lockdowns.
With inflation in a double digit region, consumer confidence will continue to be damped, a double whammy for operators in the consumer goods industry.
Last week, the National Bureau of Statistics (NBS) released job report that showed unemployment rate spiked to 27.10 percent in the second quarter of 2020, from 23.70 percent in the third quarter of 2018.
What this means is that Nigerians are getting poorer and they will be reluctant to open their purse strings.
On top of that, analysts have warned that the Covid- 19 crisis could tip the already fragile economy into a recession.
The International Monetary Fund (IMF) has announced that the Nigerian economy would witness a deeper contraction of 5.4 percent and not the 3.4 percent it projected in April 2020.
Nascon Allied and peer rivals are walking on rotten ice as the bleak outlook for the economy, combined with a myriad of challenges bedeviling the industry could trigger further sell off by investors who had been dumping shares..
