Monday, May 10, 2012

·Dangote Cement Plc reported a 17.6% YoY rise in Q1 2012 revenue to N64.1 billion. According to management, YoY revenue growth was driven by volume increases of 11% to 2.4 MMT, YoY, with locally produced cement up 38% to 2.2MMT—highlighting production at its new Ibese plant, which led to a decline in imported cement by 73% YoY to 0.14 MMT. Average price YoY rose by 5.7% to N27, 075 per MT.

·Despite the strong YoY revenue growth, Q1 2012 revenues came in ~7.3% below the company’s N69.2 billion and 3% below our of N66.1 billion forecast. Management attributed this to maintenance works during the quarter, the January nationwide strike and unanticipated delays in the commencement of production at the new 5MMT Obajana expansion.   
 

Operating efficiency weighs on margins, but still industry’s highest
·Q1 2012 cost of goods sold rose 6.7% YoY to N27.5billion, the company benefiting from lower energy costs as a result of increased gas utilisation—in addition to lower import tariffs—during the quarter relative to the comparable period the previous year, though supply problems resulted in a mild deterioration of gas utilization rates QoQ which fell to 68% compared to the 95% gas utilization level management had expected for the period. Gross margin stood at 57.2%, up 4.4ppts YoY but down 1.8ppts QoQ.

·PBT rose 9.0% and 24% YoY and QoQ to N30.3 billion, which was nevertheless substantially behind our N34.9billion forecast, primarily on account of a 288.2% increase in opex to N5.8 billion, compared to our N3.9 billion forecast for Q1 2012. Q1 2012 PBT margin dipped 3.8ppts YoY to 47.3%.

· Capital allowances on Ibese and a tax holiday of Obajana and Gboko plants, which have currently been extended to 2013, resulted in a N9.6 million tax credit. PAT rose 10.7% YoY but dipped 8% QoQ to N30.3 billion, which also fell below our N34.1 billion forecast. PAT margin also dipped 3.0ppts YoY to 47.3%.  

Outlook remains robust   
·According to management, the 11MMT capacity expansion at Obajana (5MMT) and Ibese (6MMT) are ramping up production with significant increases in utilization at these plants anticipated over the next few months. Based on the Q1 results, the company still grapples with gas supply problems and we have account for the impact of this on costs going forward. For now we discount management assertions that new contracts for gas supply will lead to significant supply improvements, we now believe stabilization in gas supply may be a longer term proposition.  Nevertheless, the company still stands to benefit from tax holiday on Ibese and prospective Obajana expansions which are due to commence in January 2013, moderating the impact of costs over our forecast horizon. 
 

·The company’s has now entered into contracts for the construction of 14MMT additional domestic expansions in Ibese, Obajana and Calabar with scheduled completions in 2014-15. Management asserts the African projects are advancing, and maintains previously communicated timelines. It also claims that 1.5 MMT Senegal plant has been completed and expects it to become operational in Q3 2012.

·Dangote Cement’s operational performance is still well ahead of its competitors’ and the company maintains the highest margins in the industry. We expect margins to remain fairly robust for the foreseeable future but incorporate moderate deterioration going forward in line with current trend. 
 

Adjustments to valuation assumptions make stock less attractive
·Although DCP is in line to meet our revenue forecasts for FY2012 given the highlighted production increases during the year--we project a 78% revenue growth in 2012 -- adjustments to our cost assumptions lead to lower forecast earnings. In particular, we reflect our expectations for higher energy costs overall based on changes to gas usage assumptions. We; also adjust our opex forecasts higher to reflect moderate changes to cost structure we anticipate—which corresponds with management guidance. These adjustments reduce our 2012 earnings forecast by 5.02%.

·Our new TP of N129.73 compared to our previous TP of N134.65 which gives the stock a 7.6% upside on current market price of N120 and the stock currently trades at a 2012 forward  P/E , P/B and P/S of 8.77x, 5.68x and 4.36x compared to industry averages of 6.98x, 2.33x and 1.81x respectively. Based on our new target and moderate price gains since our last report, we revise our rating on the stock from overweight to NEUTRAL.

Source: Company financials, ARM Estimates

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ARM ratings and recommendations
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Reference: DANGCEM declares N30.3b PAT in Q1 '12 result,(SP:N120.00k)

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