Wednesday, April 20, 2011 10:34 AM, Vetiva Research
Please find below the highlights of the Dangote Cement Plc FY'10 Earnings Release Report by Vetiva Research:
Analysis of result
Dangote Cement’s scorecards are broadly as expected with significantly minimal surprises. The reported turnover at N202.5 billion, is largely in line with our expectation, coming in 2.8% lower than our forecast of N208.5. Reported top-line, however, showed a wider variance (lower by 10%) to management’s forecast of N225 billion (as detailed in the Scheme of Merger document). Profit before tax at N101.3 billion also came in close to our expectation of N106 billion (lower by 4.4%). The results also show that Dangote Cement maintained its strong operating efficiency and sustained the profitability margins we saw in Q3’10 numbers. Pretax and after tax profit margin stood at 50% and 52.6% respectively (compared to 52.5% and 51.4% as at Q3’10).
With a pre-tax profit margin of 50%, the company unarguably has the highest profit margin among the publicly listed companies on the Nigerian Stock Exchange. Dangote Cement’s pre-tax profit margin jumped to 50% in FY’10 from 38.1% at FY’09. We attribute the significant boost in profit margins to 2 key reasons: 1. Improved stability in gas supply as the company was able to use more of gas (88%) in production at its Obajana Plant compared to the previous year when gas was about 60% in the fuel mix 2. Considerable reduction in the importation of cement as the costs of imported cement is more than 80% of revenue from the sale of the product; according to management, cement imports accounted for 20% of FY’10 revenue down from 40% as at FY’09.
Revisions to our forecasts
We have duly adjusted our FY’11 forecasts to accommodate the delay in the expected production dates from the new plants – Ibese and Obajana line 3. Hence, we now project a 58% growth in FY’11 revenue to N320.9 billion. It is important to note that the growth expected in FY’11 is tied to the completion and operation of the new plants – hence the Q3’11 and Q4’11 would account for a greater portion of FY’11 numbers. The implication of this also, is that Q1’11 would have lower contribution to FY’11 numbers (17.4% by our estimate).
Using the Discounted Cashflow Method, our revised target price stands at N137.08 and an implied range N127.10 – N142.10. Following the downward revision to our target price, we place a “Neutral” Rating on the stock. At its current price of N126.00 DANGCEM is trading at a 8.8% potential return to our target price estimate and a FY’11 forward P/E of 13.4x relative to sector 2011 P/E of 13.3x.