Dangote Cement Plc PBT Declines by 38% YoY Due to Gross Margin Contraction and Spike in OPEX

Proshare

Friday, October 28, 2016/ 10.41am /FBNQuest Research

Event: Dangote Cement reports Q3 2016 results

Implications: Likely upward revisions to consensus 2016 PAT forecast   

Positives: PAT grew 147% y/y driven by OCI gains of N37bn

Negatives: PBT declined by 38% y.y due to a gross margin contraction of -1773bps y/y and an 81% y/y spike in opex

Dangote Cement’s (DangCem) Q3 2016 results which were published today showed that although PBT fell by 38% y/y to N23.8bn, PAT grew markedly by 147% y/y to N68.3bn. The stellar growth in PAT can be attributed to a strong positive result of N37.5bn on the other comprehensive income line (OCI) and to a lesser extent, a tax credit of N6.3bn.

Excluding the OCI gains, the growth on the PAT line would have been more subdued at around 12% y/y (mainly because of an OCI loss of –N21.9bn in Q3 2015). Similar to Q2 2016, the OCI gains can be linked to currency translation effects of DangCem’s overseas operations.

Moving up the P&L, the marked declined in PBT was driven by a gross margin contraction of -1773bps y/y to 38.3% and an 81% y/y spike in opex. The negatives on both lines completely offset a 22% y/y growth in sales to N150bn. Sequentially, sales came in flattish.

However, PBT and PAT fell by 66% q/q and 45% q/q respectively. While the q/q decline in earnings was mainly driven by a -1095bp q/q contraction in gross margin, a -45% q/q reduction in OCI gains also contributed to the q/q reduction in PAT (OCI gains were around N68bn in Q2 2016). Compared with our forecasts, while sales and PBT missed by 15% and 62% respectively, PAT beat by 23% because of the strong positive result on the other comprehensive income line.

Similar to Q2 2016, the marked growth in sales during the quarter was driven by volume growth across all the major regions, particularly those of the West and central African region.

While total volume despatches in Q3 grew by around 9% y/y to c. 5.5 million metric tonnes (mmt), in Nigeria unit volume were up by 6% y/y to about 3.2mmt. On a 9M basis, Group and Nigeria unit volumes grew by 41% y/y and 28% y/y to 18.4mmt and 11.9mmt respectively.

Similar to Q2 2016, the firm had to contend with high fuel costs due to disruptions to gas supplies as a result of the vandalized gas pipeline infrastructure.

Although management effected a significant price hike of around 39% for the Nigerian market in late August, it appears that the combination of slower sales growth in Q3 (relative to the months preceding the price review) and significantly higher fuel costs (+53% y/y 9M 2016) more than offset the effect of the upward review in prices.

We would be looking for more clarity on the volume and cost trends on the company’s conference call which is slated to hold later today.

When annualised and adjusted for seasonality, DangCem’s 9M 2016 PBT of N148.7bn tracks behind consensus 2016 PBT forecast of N217bn. However, due to the significant gains in OCI, its 9M PAT tracks well ahead of consensus PAT forecast of N183bn.

As such, while we expect to see downward revisions to consensus 2016 PBT forecast, we expect to see upward revisions to the PAT forecast due to the strong gains on the OCI line. DangCem shares have gained 2.5% ytd compared with the -5.3% return delivered by the ASI.

At current levels, on our published estimates, DangCem shares are trading on a 2016E P/E multiple of 10.1x for 33% EPS growth in 2017E. We rate the shares Outperform. Our estimates are under review.

Dangote Cement Q3 2016  results vs. FBNQuest estimates



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