23, 2017 9:53AM/Vetiva Research
Records 45% y/y increase in PAT to ₦193 billion
Coal usage across plants now over 50%
Noticeable downtrend in quarterly performance amidst low volume
Valuation revised, TP cut to ₦234.90
Strong Prices Continue to
Drive Impressive Revenues
DANGCEM reported a 37% y/y
rise in 9M’17 revenue to ₦604 billion, slightly lower
than our ₦607 billion estimate. Across regions, the Cement
giant recorded a 35% y/y rise in revenue from its Nigerian operations to ₦417 billion, despite a 19% y/y moderation in volumes (9M’17: 9.6
million Mt). However, on a q/q basis, Q3’17 revenue was down 10% to ₦125 billion – largely driven by a 10% decline in volume to 2.8
million Mt as high prices continue to constrain demand amidst weak private and
government consumption and unfavorable construction weather conditions.
Meanwhile, revenue from
Pan-African operations grew by 40% to ₦192 billion amidst price
increases and a gradual ramp up in volumes over the 9-month period (8% y/y
increase to 7 million Mt). Q/q revenue was also modest across the region, up 3%
to ₦67 billion despite a 5% q/q fall in Pan-African volumes to 2.3
million Mt. According to management, the strong Q3’17 performance from
Pan-African business was driven by price increases in South Africa and
Also, we understand that the
Congo plant (1.5 million MT) came onstream as planned and has so far added 5
thousand Mt to Group’s volumes. Overall, the Group reported a 10% y/y rise in
9M’17 volume to 16.5 million Mt (Vetiva estimate: 17.0 million Mt) – but
recorded a q/q decline of 9% to 5.0 million Mt.
Coal Usage Continues to
Support Nigeria Earnings
Meanwhile, DANGCEM reported a 64% y/y increase in group EBITDA to ₦294 billion, 2% below Vetiva estimate of ₦299 billion. The increase was driven by persistent strong pricing
in Nigeria – despite a 10% price rebate observed in August, positive
contributions from Pan-African operations, and continued ramp up in use of coal
at Obajana (coal usage 9M’17: 57% vs H1’17: 38%) and Ibese (coal usage 9M’17:
56% vs H1’17: 43%) plants. We gathered that the company sources over 50% of the
utilized coal from Dangote Industries Limited mines, 27% from local coal
miners, and just about 20% is imported - further reducing its cost and Foreign
On a q/q basis, Q3’17 EBITDA across Pan-African operations rose 5%
to ₦13 billion (30bps increase in EBITDA margin to 18.8%), spurred by
cost moderations across plants as well as higher prices across certain regions.
However, following price rebates in Q3’17, Nigeria’s EBITDA margin moderated
130bps lower to 64.4% for the quarter.
Overall, the Group’s Q3’17 EBITDA margin declined marginally to
47.5% (Q2’17: 49.2%). Furthermore, the cement giant reported a net finance cost
of ₦13 billion (Vetiva estimate: ₦12 billion), putting 9M’17
PBT at ₦220 billion – 48% higher y/y but 2% below Vetiva expectation of ₦225 billion. However, following a larger-than-expected tax expense
of ₦27 billion (Vetiva estimate: ₦17 billion; Q3’17 standalone
of ₦16 billion), PAT came in at ₦193 billion (up 45% y/y) for
the period – lagging our ₦208 billion estimate.
Cement Roads: Opportunity for
Volume Expansion in Nigeria
Whilst the continued decline of cement volumes in Nigeria remains
a cause for concern (Management explained that strong marketing campaigns were
responsible for maintaining market share at 67%), the recent foray of Dangote
Industries Limited (DIL) into road construction with cement opens up a fresh
avenue to push volumes in Nigeria over the medium to long term. AG Dangote
Construction Company Limited, a member of DIL, has already launched and completed
construction projects such as the Itori-Ibese road and the Obajana-Kabba road
as part of the company’s CSR initiatives.
Currently, the company, in conjunction with Flour Mills of
Nigeria, is carrying out renovations on the Apapa wharf road in a deal which
would see Parent company, DIL receive tax relief from FG. We expect this new
arrangement to support volume growth in the near to medium term. Also
supporting volumes is the gradual ramp-up in Pan-African volumes.
Whilst Q3’17 volumes declined across the region, we note that
there was increased construction activity from certain countries such as
Cameroon – in preparation for the African Cup of Nations – Ethiopia’s
increasing focus on Capital Expenditure and the new Congo and Sierra Leone
plants. We expect that these coupled with gradual recovery of the South African
cement market would drive long-term volumes across Pan-African region which
already accounts for 42% of group volume as at 9M’17.
Tax Assumption Increased,
Target Price Cut to ₦234.90
With the decline in Q3’17 volumes and revenue already anticipated
in our model, we maintain our FY’17 revenue assumption at ₦802 billion but increase outer years given our expectation of
stronger volume push from Pan-African regions as well as possible cement road
projects in Nigeria. However, reflecting the impact of the 10% price rebate on
margins, we marginally cut our FY’17 EBITDA assumption to ₦400 billion (Previous: ₦402 billion).
We have also raised our net finance cost to ₦18 billion for FY’17, reflecting the higher run rate in Q3’17 (₦5 billion vs expectation of ₦4 billion). Following this,
we cut our PBT estimate of ₦287 billion (Previous: ₦292 billion). Also, due to the sharp increase in tax expense in
Q3’17 and the expected higher effective tax rate going forward, we revise our
group tax rate forecast to 12% (in line with management guidance), and raise
our FY’17 tax estimate and PAT to ₦34 billion (Previous: ₦23 billion) and ₦253 billion (Previous: ₦268 billion) respectively.
Overall, we revise our target price to ₦234.90 (Previous: ₦240.58) and maintain a HOLD
rating on the stock.