Chapel Hill Downgrades DANGCEM to a HOLD on Strong Price Rally


Friday, March 7, 2014 2:45 PM / Chapel Hill Denham Research

We downgrade our recommendation on Dangote Cement Plc (Dangcem) to a HOLD from a BUY due to a strong rally in price. We however remain positive on the fundamentals of the business.   


Downgrading to a HOLD on strong price rally  

Investment considerations remain unchanged, but valuation is rich. We downgrade our recommendation on Dangcem to a HOLD from a BUY as we believe the valuation of the stock is rich at this point, trading at FY-14E P/E of 15.3x, broadly in line with our FY-14E P/E target of 15.9x. The stock has appreciated by 26.4% since 31 May 2013, when we upgraded our rating to a BUY from a HOLD. Furthermore, Dangcem has outperformed the NSE ASI by 23.4% over the same period, implying a higher trailing P/E of 26.6x compared to 19.5x for the market. We believe better-than-expected quarterly results and satisfactory progress on its African expansion projects were the major catalysts of the uptick in the stock price. It is however worth noting that our investment considerations on Dangcem are unchanged as the business remains fundamentally strong, in our opinion.

Gaining traction on African expansion projects. Dangcem is on track to deliver on its African expansion plans. The company has begun production of cement at the Delmas milling plant in South Africa, a fully integrated cement plant owned by Dangcem and Sephaku Holdings in the ratio 64:36 respectively. As previously advised by Dangcem, volume ramp up at the plant is expected in H2-14E. Dangcem has also thrown more light on the proposed cement plant in Kenya. According to the Chairman of Dangcem, Alhaji Aliko Dangote, the fully integrated Kenyan plant requires an investment of US$600mn (N96bn) and will have a production capacity of 3mn tonnes per annum. Dangcem has concluded arrangements on the investment and is only waiting to obtain an operation licence from the Kenyan government within the next few months.

FY-13 results expected to be broadly positive. We expect Dangcem to publish its FY-13 results over the next few weeks. We believe the results will be positive and exceed market expectations as indicated on Bloomberg. We expect an EPS growth of 40.5% yoy vs. market expectation of 32.8% yoy. Dangcem’s EPS rose by 45.8% yoy in 9M-13, underpinned by a volume growth of 29.1% yoy and efficiency gains due to increased utilisation of gas. We believe the company had a good Q4-13 with a volume growth of 7.6% qoq to 3.6mn tonnes, indicating a recovery from the 10.9% qoq decline seen in Q3-13. We expect Dangcem to announce a DPS of N4.51, which implies a dividend yield of 1.9% and a growth of 50.3% yoy in absolute terms.


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