Thursday, March 16, 2017 2.50PM /Cordros Capital
We have raised DANGCEM’s 2017 EBITDA and PAT slightly higher to N329.9 billion (previously N323.8 billion) and N212.7 billion (previously N209.7 billion) respectively, following (1) significant decline in Nigerian energy cost in Q4-2016 which came earlier than expected, (2) additional price adjustment also in Nigeria, and (3) likely resolution of fuel challenges in Tanzania.
Consequently, we have increased target price by 8% to N187.52, while retaining HOLD recommendation on 16.83% upside.
Altogether, we like DANGCEM’s forward-looking approach, and continue to rate the company high in our universe of cement companies. The stock has lost 7.8% YtD and trades at 11% discount to SSA peers on 11.2x FPE.
In Nigeria, we forecast EBITDA to grow by 28% in 2017 to N296.4 billion (58% margin) primarily on energy cost improvement, pricing, and stable FX rates.
Beyond 2017, we retain the modest 8% average growth forecast over 2018-2020. Per tonne energy cost dropped from the peak of N7,902 in Q3-2016, to N5,138 in the fourth quarter around which we have modeled our assumptions.
With coal facilities fully commissioned across all the local plants, and Nigeria’s gas situation expected to improve into the year, we have significantly reduced expectation for LFPO utilization in the fuel mix.
On pricing, management guided to additional adjustment of N150/50kg bag at the start of this quarter and N250/50kg VAT-inclusive, in February. Feedback from our routine check is that Dangote Cement is currently sold at ex-factory VAT-inclusive price of N2,585 (N51,700/tonne) in the West, representing about 65% increase over 2016 average national price, VAT adjusted.
That said, the latest price hike amidst the modest macro recovery prospect has increased the case for lower sales volume (we forecast 11% decline to 13.2MTs), besides the expected loss of market share to BUA cement (a new entrant) and LAFARGE (rejuvenated production after 2016 crisis).
Below the EBITDA line, we expect PAT to decline in this market on higher effective tax and importantly, significantly lower net foreign exchange gain on stable naira value.
Our EBITDA scenarios in Nigeria range from (1) N296.4 billion on -11% volume and N38,855/tonne price, (2) N257.7 billion on -23% volume and N38,855/tonne price, (3) N284.1 billion on +8% volume and N32,000/tonne price, (4) N270.7 billion on +3% volume and N32,000/tonne price, and finally (5) N277.4 billion on +6% volume and 32,000/tonne price.
12-month target price under these scenarios ranges from N166.19-N187.52, representing 3.5%-16.83% upside from market value.
Weak quarter-on-quarter Pan-African sales volume observed since Q2-2016 is suggestive of low room for growth over 2017.
DANGCEM has invested significantly on logistics in the newly entered markets, helping to strengthen product reach to consumers ahead of competitors.
But having already claimed visible market shares within a short period, and given a less aggressive African cement consumption outlook, we forecast volume to grow by only 9% to 9.2MTs in this category, supported by Sierra Leone and Congo coming on stream, as well as export opportunities.
We forecast EBITDA to reach N33.6 billion (vs. N26.4 billion in 2016) on (1) less disruptive energy issues in Tanzania where resolution will likely be reached with the government over gas pricing, (2) stable average price, and (3) volume growth. Below the EBITDA line, we forecast post-tax loss to reduce to N33.5 billion on significantly lower net forex loss.
1. Dangote Cement Plc FY 2016 Earnings Update - Expiring Tax Breaks Cast a Cloud on Forward Earnings
2. DANGCEM Declares N186.6bn PAT in 2016 Audited Results; Proposes N8.50k Final Dividend,(SP:N168.99k)
3. Dangote Ends Nigeria’s Cement Importation In 2016…Exports 0.4m mt Cement To Neighboring Countries
4. Dangote Cement Plc - Cost pressures bite harder on earnings
5. Dangote Cement Plc PBT Declines by 38% YoY Due to Gross Margin Contraction and Spike in OPEX
6. DANGCEM Declares N133.52 billion PAT in Q3 2016 Result,(SP:N175.00k)
7. Nigeria Outlook - Seeking a Winning Formula
8. Dangote Cement Plc Q2 16 - Net FX Gains Mask Weaker Operating Performance
9. Dangote Cement Earns N292Bn Revenue in Q2’16
10. Dangote Cement Shares Outperform the ASI; Gains 5.9% YTD as PBT Grows by 20% in Q2'16
11. DANGCEM Declares N103.42 billion PAT in Q2 2016 Result,(SP:N175.00k)
12. Dangote Lekki Refinery Petrochemical projects will boost Nigeria s economy- Ambode
13. DANGCEM Appoints Mrs Dorothy Udeme Ufot as an Independent Non-Executive Director
14. DANGCEM Q1 16 PBT Decline Driven by Negative Trends in Gross Margin OPEX Net Interest Expense
15. DANGCEM Declares N52.78 billion PAT in Q1 2016 Result,(SP:N161.04k)
16. DANGCEM: Bright outlook for 2016 after weak Q4 results
17. DANGCEM Records 30% PBT Decline in 2015 Audited Result; Driven by Negative Trends in OPEX
18. DANGCEM Declares N181.3 billion PAT; Proposes N8 Dividend per share in 2015 Audited Result,(SP:N148.83k)