Wednesday, March 21, 2018 /0 3:55 PM / ARM Research
Dangote Cement (Dangcem) reported full-year 2017 result showing a 43% YoY growth in EPS to N11.65 (2017E: N16.11) on the back of improved margins, which more than offset the impact of lower finance income and bill to the taxman, to drive earnings below estimates. For context, while operating profit tracked higher by 67% YoY to N304 billion, the duo of higher net-finance charge (+973% YoY to N16.8 billion) and higher taxes (124% YoY to N85.3 billion) moderated earnings growth. The company reported dividend of N10.50/share (pay-out ratio: 87%) which translates to 4% dividend yield based on current pricing.
Going by the breakdown, much of the margin expansion in Q4 stemmed from higher prices in the Nigerian business (+7% YoY to N43,411/tonne) which more than made up for weaker volumes (-4% YoY to 3.1MT). Away from Nigeria, volumes were however stronger (+7% YoY to 2.3MT) as volumes in Cameroun, Ethiopia and Senegal jointly contributed to robust volumes in the period. Consequent on the mentioned, and pass-through from still high per tonne price in Nigeria, group revenue printed higher 17% YoY at N202 billion – missing our estimate by only 4.5%.
Elsewhere, energy efficiency improved over the quarter with cost of sales decelerating by 80bps YoY to N91.4 billion. For evidence, management reported lower usage of LPFO in the period to 2% and 1% of energy usage in Obajana and Ibese respectively (2016: 29% and 16%) as local coal and gas usage assumed greater prominence. Thus, gross profit was 37% higher YoY to N110 billion with related margin at 54.7%, below Q1 – Q3 2017 levels. Other highlights from the result came in form of a surge in operating expenses (53% YoY to N41.8 billion), which we allude to higher haulage cost and professional fees. The combination of higher opex and lower ‘other income’ (-65% YoY to N2.3 billion) moderated growth in operating profit (+18% YoY to N71 billion) with related margin coming in 43bps higher YoY at 35.2%.
A feed through of the overall positives from higher volumes, currency translation, and improved energy mix translated to a 2.3x YoY PBT growth to N74.8 billion (forecast: N84 billion). However, the unexpected surge in tax provisions of N58 billion (effective tax rate of 78% in Q4 17), significantly pressured earnings with PAT at the lowest level of N11 billion (-79% YoY). On the tax provision, management submitted that the earlier tax benefits of N28 billion and N44 billion taken in 2015 and 2016 respectively on the Ibese 3&4 and Obajana line 4 assumed that it qualifies for a pioneer status incentive. However, given the delay on the approval of the status by Nigerian Investment Promotion Commission (NIPC), management decided to make provision for the year and at the same time reversed previous benefits booked in 2016.
On balance, save for the unexpected tax provision (which management guided to a reversal), DANGCEM’s Q4 17 was very strong and reflected gains from robust price, currency translation gains of Pan-African operations, and the improved energy flexibility (with FX exposure at the lowest level with the used of locally mined coal).
Management gave the following update at its conference call yesterday (March 21st, 2018).
· Also, on the pricing, they submitted that an upward review of prices would be in response to any sudden shocks in the broader business environment, while any downward revision to prices, if any, would be moderate.
DANGCEM trades at a P/E and EV/EBITDA of 22.8x and 12.2x compared to Bloomberg Middle and East Africa Peers at 20.9x and 11.3x respectively. Our last communicated FVE of N282 translates to a NEUTRAL rating on the stock. Our model is under review