Dangote Cement Plc - Still On An Upward Trajectory

Proshare

Monday, March 04, 2019    02:15PM / CardinalStone Research

 

Dangote Cement Plc recently released its FY’18 results, which showed that top line grew by 11.9% to N901.2 billion, in line with our estimates (+3.4% deviation). Also, profit before-tax was bang in line with our projections, settling at N300.8 billion (+3.9% YoY) for the full year. However, PAT surprised positively, owing to the approval of the pioneer tax incentive for the Ibese lines 3 & 4 and Obajana line 4, resulting to a tax credit of N89.5 billion. As such, the company proposed a final dividend of N16.0 per share (implied yield of 8.1% on the price as at 01 March 2019). In this report we give our outlook for 2019 and review of the Q4’18 performance.

 

Volume-induced growth to drive top line

In line with our expectation, volumes in the Nigerian operations grew by 11.4% YoY to 14.2Mt in FY’18, rebounding from softer levels in 2017, while pricing remained flattish (+0.5% YoY). Going into 2019, we expect the narrative to be similar, with further volumes growth boosted by demand from sustained capital expenditure spend by the Federal Government. According to management, sales were up 10.0% YoY by midFebruary, although we look to a slowdown in this momentum in March, owing to election activities. 

However, post-election, we expect demand to pick up and remain strong through the year. On pricing, we are lesssanguine, given enhanced competition from BUA particularly in the South South region (c.15.7% of Nigeria revenue). For context, in the past financial year, BUA group ramped up on capacity (total capacity 8.1Mt; 6Mt in Okpella and 2.1Mt in Sokoto). As such, we highlight price cuts in Q3’18 and Q4’18 by 2.5% and 1.1% respectively. In 2019, we believe DANGCEM will keep its prices competitive to protect its market share. On that note, we forecast lower average pricing per tonne to N41,429 (-5.0% YoY) and a modest increase in volumes to 15.2Mt (+7.2% YoY). 

In the same vein, we are optimistic on volumes growth in the Pan-African segment, although volumes were flattish YoY in 2018. Specifically, we are optimistic on the operations in Tanzania, Zambia and Ethiopia:

 

Tanzania (3.0Mt Integrated plant)

Production was constrained from January till November 2018, due to the delay in the installation of the gas turbines. We expect production to ramp up in 2019, following the successful installation of the gas turbines.

 

Zambia (1.5Mt Integrated plant)

Cement demand has been supported by increased infrastructure and mining projects in the country; volumes grew by 25.0% YoY to 1.0Mt in 2018. We expect this to be sustained in 2019.

 

Ethiopia (2.5Mt Integrated plant)

Disruptions from civil unrest hampered production and distribution over 2018, as volumes declined by 6.2% YoY to 2.1Mt. We expect activities to recover in 2019, following the appointment of a new prime minister which has improved the political situation in the country. 

We are less optimistic on the South African market, given fragile economic growth, increased domestic competition, and increased importation of cement which continues to threaten DANGCEM’s ability to grow its sales in the country. 

Notwithstanding, we expect the Pan African segment to support sales in 2019. Our projected overall volumes for this segment stand at 10.2Mt in FY’19 (+4.7% YoY), accompanied with higher pricing (+6.0% YoY). This translates to a total revenue of N326.9 billion for the segment; thus, increasing revenue contribution of the nonNigerian segment to 34.2% (31.4% in FY’18). Overall, we project group FY’19 revenue to settle at N956.6 billion (+6.1% YoY).

 

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Energy efficiency, stable exchange rate to support margins

To a large degree, we are convinced that direct production costs will remain subdued in FY’19. We expect the use of third-party Nigerian coal and own-mined coal in the Obajana and Ibese plants to continue to support gross margin in the year. Our expectation of a stable exchange rate environment in 2019 also enhances our optimism for lower costs in the Pan-African segment. For context, translation rate at the end of 2018 was N359/$ (vs. N331/$ in 2017), this represents a depreciation of 7.8% which impacted negatively on costs for the non-Nigerian segment in the year. 

All in, we project a gross margin expansion of 2.5 ppts to 60.0% for FY’19. In addition, given our expectation of a stable exchange rate environment, we anticipate that the high base in 2018 will lead to a moderation in OPEX pressure in FY’19 (+2.7% YoY to N194.4 billion) and drive EBIT 13.5% higher YoY to N384.3 billion with operating margin at 40.2% (vs. 37.6% in FY’18). We also expect EBITDA margin to stand at 50.0% (vs. 48.3% in FY’18). 

Following the refinancing of more expensive debt and lower effective borrowings (- 9.9% YoY), finance costs declined by 20.5% YoY in 2018 to N41.4 billion, although this was tempered by foreign exchange losses amounting to N8.1 billion during the year. Going into 2019, we expect DANGCEM to refinance more debt in the anticipated lower interest rate environment and as such, we look to lower finance costs (-18.2%) to N33.9 billion in FY’19. All in, we expect PBT to come in stronger at N359.3 billion (+19.7% YoY). However, we expect after-tax earnings to settle at N276.7 billion (- 29.1% YoY), given the tax credit of N89.5 billion that the company booked in FY’18.

 

We recommend a BUY

In sum, largely reflecting our expectation of increased overall volumes growth (+7.8% YoY), continued drive for cost containment, a stable exchange rate environment and lower finance costs, we are optimistic in our outlook for DANGCEM in 2019 and have adjusted our estimates in the light of recent realities. 

Consequently, using our Discounted Cash Flow valuation model, we arrived at a target price of N249.25, with a potential upside of 26.8%, based on the last close price of N196.60 on 01 March 2019. Therefore, we recommend a BUY.

 

Q4’18 earnings review – Tax credit amplifies bottom-line growth

In Q4’18, sales grew by 6.9% YoY and 6.4% QoQ to N215.9 billion, as overall volumes were up 6.1% YoY to 5.8Mt. Going by provided breakdown, volumes in the Nigerian operations advanced by 10.6% YoY to 3.4Mt, accompanied by lower pricing at N42,948/tonne (-2.4% YoY). However, revenue was buoyed by higher pricing per tonne in the Pan African segment (+3.5% YoY) to N29,418/tonne, as volume growth flatlined. 

Elsewhere, we observed that cost-of-sales grew at a slower pace (+4.6% YoY) than revenue, resulting to a gross margin expansion of 1.0 ppts YoY to 55.7%. However, selling and distribution expenses advanced by 29.5% YoY to N54.1 billion, driven by an increase in haulage costs (+19.1% YoY) to N24.0 billion. As a result, operating margin was pressured in the period, contracting by 2.7 ppts to 33.6% in Q4’18. 

Further down the line, net finance costs inched higher, by more than five-fold to N19.0 billion during the quarter. Although, we highlight that this was driven by FX losses amounting to N7.9 billion booked during the period. 

As a result of higher operational and net finance costs, DANGCEM recorded a decline in its PBT to N53.4 billion (-23.0% YoY). 

Recall that we mentioned in our note “cost efficiency, volumes to drive growth in 2018” that DANGCEM had been awaiting approval from the Nigerian investment Promotion Commission for tax exemptions for the Ibese production lines 3 & 4 and Obajana production line 4. The company finally obtained approval for the pioneer status on these plants in Q4’18. As such, the company booked an overall tax credit amounting to N178.6 billion during the quarter. Consequently, after-tax earnings surged by 362.7% YoY to settle at N232.0 billion in the period.


Proshare Nigeria Pvt. Ltd.


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