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Dangote Cement Q3’17 Results - Negative Surprises in Gross Margin and OPEX

Proshare

Thursday, Oct 19, 2017 2:15PM/ FBNQuest Research

Event
:                       Dangote Cement reports Q3 2017 results

Implications:
       Slight downward revisions to consensus 2017 earnings forecast likely  

Positives:
               Sales and PBT up by 27% y/y and 171% y/y respectively

Negatives:
              Negative surprises in gross margin and opex 

This morning the NSE published Dangote Cement’s (DangCem) Q3 2017 results which showed that PBT grew strongly by 171% y/y to N64.6bn. The stellar growth in PBT was driven by sales growth of 27% y/y and a 1,859bp expansion in gross margin to 56.9%. These completely offset a 10.1x increase in net interest expense to -N5.0bn. We note that net interest expense was boosted by fx gains of N54bn in 9M 2016. Despite the triple-digit y/y growth in PBT, PAT declined by -37% y/y due to negative base effects stemming from other comprehensive income (OCI) (arising from fx translation gains of N106bn in 9M 2016).
 

Sequentially, sales, PBT and PAT fell by -7% q/q, -18%q/q  and -54% q/q respectively. Relative to our forecast, sales were in in line. While PBT missed by 28%, PAT missed by  a wider margin of 46%, mainly because of a higher effective tax rate of 24% vs. the 6% that we had in our model. The 24% tax rate is the highest rate paid by the company in recent times. To put the tax rate into proper perspective, it is far higher than the average taxation run rate of  7.4% over H1 2017 and the 13.6% tax rate for 2014 - one of the highest tax rates ever paid by the company.  
 

Despite the stellar sales growth, what is clear is that the unit volumes in Nigeria continue to be under pressure, due to the effect of weak private demand and elevated prices. Based on management’s statement, unit volumes for Nigeria declined by 16% to 2.8 million metric tonnes (mmt)  in Q3 2017. On a 9M basis the decline was even more at around 19% y/y to 9.6mmt. In contrast, unit volume growth for the pan-African operation was up by around 5% y/y in Q3 to around 2.3mmt.
 

DangCem’s group EBITDA margin expanded by 1,686bps to 47.5% in Q3 2017, mainly driven by a 2,324bp y/y expansion in EBITDA margin for Nigeria to 64.4%. Similar to Q2, we believe that the marked expansion in gross margin in Nigeria was driven by the combination of higher pricing and a favourable fuel mix in favour of coal and gas as compared with low-pour fuel oil (LPFO).  DangCem’s fuel mix shows that LPFO accounts for just about 2% and 1% of the total fuel mix in Obajana and Ibese compared with around 37% and 21% in 2016.
 

DangCem’s 9M 2017 PBT of N220.2bn tracks behind consensus 2017 PBT forecast of N286bn. As such, we expect to see downward revisions to consensus 2017
E earnings forecast and a broadly neutral reaction from the market. DangCem shares have underperformed the index this year. They have gained 26.4% ytd compared with the  36.3% return delivered by the ASI. At current levels, on our published estimates, DangCem shares are trading on a 2017E P/E multiple of 13.6x for 14% EPS growth in 2018E. 

We rate the shares Neutral. Our estimates are under review.
  

Dangote Cement Q3 2017 results vs. FBNQuest estimates
 
Proshare Nigeria Pvt. Ltd.
Source: Company data, FBNQuest Research estimates

 Proshare Nigeria Pvt. Ltd.

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