Monday, August 07, 2017 9:09AM / Vetiva Research
· Strong bottom line driven by improved efficiency, strong pricing
· Nigeria EBITDA margin soars to 66%
· Nigeria volume to remain under pressure amidst strong pricing
· Valuation revised amidst modifications to estimates
Improved fuel mix, strong H1 revenue lift bottom line
DANGCEM reported a 54% increase in H1’17 EBITDA (₦204 billion), coming in slightly behind our ₦206 billion estimate. Strong cement prices and cheaper fuel mix in the Nigerian operations as well as improving contribution from Pan-African operations (save for Tanzania) amidst capacity ramp-up remain the key performance drivers.
However, the cement giant reported a net finance cost of ₦7.9 billion vs. the N26.8 billion net finance income reported in the prior year, following the sizeable FX gain in Q2’16 - arising from the impact of currency devaluation.
Despite this, H1’17 PBT rose 25% y/y to ₦155.6 billion (Vetiva: ₦145.1 billion) buoyed by the strong earnings from operations (EBIT up 67% y/y). Coupled with pioneer tax exemption on production from lines 3&4 in Ibese and Obajana plants, PAT rose 39% y/y to ₦144 billion, 7% above our estimate.
Drilling down on Q2’17 performance, we highlight the improvement in Pan-African operations. The region’s EBITDA rose 62% q/q to ₦12 billion (EBITDA margin up c.580bps q/q to 18.5%) on volume growth of just 3% q/q.
This was driven by price increases implemented (including Ethiopia, Ghana, Senegal, Zambia) over the quarter, increasing market share, efficiency in logistics and cost control particularly in Ethiopia and Senegal. Cement revenue across the Pan-Africa region in the 3-month period totaled ₦66 billion, up 12% q/q.
In line with industry trend however, volumes in Nigerian operations was down 18% q/q to 3.1 million MT amidst strong cement prices and intense rainfall. Amidst this, revenue in the region dipped 9% to ₦291 billion in the period.
Overall, the Group’s H1’17 cement shipment was down 11% y/y to 11.5 million MT (Nigeria down 22%, Pan-Africa up 13%), with revenue up 41% to ₦413 billion, just 5% behind our estimate.
Fuel flexibility driving margin improvements
Notwithstanding the slight contraction in Nigeria Q2 cement revenue, the region’s EBITDA margin remained very strong at 66% (Q1’17: 65%; H1’16: 59%). Apart from strong cement prices, improvement in fuel mix continued to support margins.
The cement giant continues to diversify away from the use of LPFO (a more expensive energy source) in favour of gas and locally mined coal. Whilst gas usage in H1’17 improved to 58% (Q1’17: 48%) at Obajana and to 55% (Q1’17: 53.5%) at Ibese, the use of LPFO was lower at 4% (Q1’17: 6%) for Obajana and 2% (Q1’17: 3.4%) for Ibese.
More importantly, the company stopped the use of imported coal at the Obajana plant - replacing with cheaper locally sourced supply (from Dangote Industries Limited and other third party suppliers).