Monday, July 31, 2017 1:15PM/ Elixir Research
DANGCEM today made public its H1’17 results, showing strong y/y revenue growth but weaker on q/q—similar trend was observed with Lafarge H1) while profitability improved significantly boosted by cost efficiency and cut in tax expense.
We noticed that margins performed well on a y/y basis but are weak on q/q, as the company continued in its bid to boost margin, though defending it seem to take front burner within the quarter. EBITDA printed at 49.4% (from 45.4% H1’16) vs. 49.2% in Q2 (down from 49.5% in Q1’17).
Operating profit margin is up 606bps y/y to 39.6% in H1 vs. 75bps q/q decline to 39.24% (Q2 standalone). Similarly, gross profit margin rose by 461bps y/y to 56.98% but fell 171bps q/q to 56.1%.
Equally, operating expenses increased by 29.4% y/y, which should have weakened operating margins, but a stronger top-line growth compensated for the jump. On the other hand, the company recorded efficiency with the contraction in total OPEX (down 7.19%) on a q/q basis.
However, net profit margin was weak y/y (to 34.9%, down 49bps) due to the increase in net finance cost in H1 to ₦7.92 billion from net finance income of ₦26.85 billion in H1’16. On the cost line, there was a marginal drop in efficiency, as cost to sales rose 43.9% q/q though improved to 43.0% y/y from 47.64% in H1’16.
On profitability, DANGCEM reported 39.3% y/y jump in PAT and a relatively slower 4.11% q/q growth. The y/y growth was boosted by the sharp 46.3% drop in tax expense to ₦11.54 billion from ₦21.47 billion in H1’16 and the 7.2% q/q drop in OPEX though the higher net finance cost weighed on that line.
Pan African operation’s EBITDA improved q/q to ₦12.15 billion (up 62.4%), signifying the benefit of favourable pricing and efficient energy mix. However, the Nigerian operation EBITDA shrank by 7.4% q/q to ₦91.41 billion.
Revenue is up 41.2% y/y but contracted marginally by 1.76% q/q. Slower cement volume in Q2 (5.48MT vs. 6.03MT Q1’17) and the heavy rains accounted for the q/q decline in revenue, although we suspect that the company had likewise increased cement prices by 7.9% q/q based on our computations—and inline with industry trend.
We wait further clarifications from management. We observed that cost of cement/ton moved by higher 12.3% from ₦14,573 in Q1’2017 to ₦16,365 in Q2 while, gross profit/ton rose to ₦20,927 from ₦19,977 q/q, up 4.8%, marking a much slower move.
We still see soft pressure point from cost but fuel efficiency should compensate for this. We maintain our 2017 revenue estimate ₦880.62 billion (2016FY ₦615.10 billion) but have lowered our cost-to-sales ratio by 200bps to 44%.
This is due to general improvement in cost efficiency. We do not anticipate any reduction in cement prices in the near term but make provision for surprises given DANGCEM’s price dictatorship.
On the balance of factors, we have marginally revised higher our 2017 target price to ₦238.88 from ₦232.18. We now rate the stock ‘HOLD’