DANGCEM Rated Neutral After the Release of Q4 2014 Result ; Sales, PBT and PAT Decline


Thursday, March 26, 2015 3:54 PM / FBN Capital Research


Event: Dangote Cement reports Q4 2014 results

Implications: Consensus 2015 PBT forecast likely to move down

Positives: The company reported a significant net interest income of N6.0bn

Negatives: Sales, PBT and PAT declined by 16% y/y, 22% y/y and 49% y/y respectively, and were weaker than expected 


This afternoon, the NSE published Dangote Cement’s (DangCem) Q4 2014 results which showed marked declines across key headline items. While sales declined by 16% y/y to N81.4bn, PBT and PAT declined by much wider margins of 22% y/y and 49% y/y to N30.6bn and 21.2bn respectively.


The y/y decline on the topline drove a slight gross margin contraction of 48bps to 60%. These, combined with a 23% y/y rise in opex, completely offset a positive result of N6.0bn on the net interest income line and were the primary factors underpinning  the 22% y/y reduction in PBT.


A tax charge of N11.6bn in Q4 2014 (vs. a tax credit of N6.0bn in Q4 2013) following the expiration of the pioneer tax status on Obajana lines 1 and 2 and Gbkoko line 3, widened the y/y decline on the PAT line to 49% y/y.


Sequentially, the trends mirrored those of the y/y comparables with sales, PBT and PAT contracting by 20% q/q, 35% q/q and 52% q/q respectively. Compared with our forecasts, sales, PBT and PAT all missed by 8%, 24% and 34% respectively. 


On a full year basis, DangCem’s sales were up modestly at N391.6bn. However PBT declined by 3% y/y to N184.7bn, due to a 274bp contraction in gross margin to 63.5% and a 6% y/y rise in opex.


A significant tax charge of N25.2bn (compared with a tax credit of 10.5bn in  2013) following expirations of the tax exemptions on some lines drove an 18% y/y decline in PAT to N161.1bn.


The full year results were well behind consensus 2014 sales, PBT and PAT forecasts of N413.4bn, N198.2bn and N185.6bn respectively.  Our forecasts (sales, PBT, PAT) of N399.1bn, N194.3bn and N171.9bn were all lower than consensus.    


Dangote Cement has proposed a final dividend of N6.00, implying a dividend yield of 3.9% and a payout ratio of 63.5%. The proposed dividend is in line with our DPS forecast of N6.09 (N6.20 DPS consensus forecast).


Dangote Cement Q4 2014 results: actual vs. FBN Capital Research estimates (N millions)

The Q4 results confirm our view that the macro headwinds led by the slide in crude oil prices by around 50% in H2 2014 adversely affected cement demand. Indeed, on its Q3 conference call, DangCem’s management had hinted at a weak Q4, following the build-up of clinker inventory.


Due to the weak demand, unit volumes from Dangcem’s Nigerian operation declined by 3% y/y to 12.9 million metric tonnes (mmt). This compares with a growth of 31% y/y in 2013 and is well behind the flattish growth of 21mmt estimated for the market.  Of the total unit volumes for the year, cement dispatches by DangCem’s flagship plant, Obajana, was around 7.4mmt or 57% of total. Ibese and Gboko contributed 30% and 17% of total unit volumes respectively.  


The unit volumes imply average utilisation rates of 72%, 65% and 40% for Obajana, Ibese and Gboko respectively. Of the 3.0mm tonnes dispatched in Q4, we estimate that the Obajana plant accounted for around 1.9m tonnes (-5% y/y) or 62% of total. We estimate that unit volumes for Ibese and Gboko were around 1mmt and 0.2mmt respectively, implying y/y growth of 4% y/y and -58% y/y respectively.


Although disruptions to fuel supplies (mainly gas) weighed heavily on the operation of Obajana for most of the year, gas supply normalised in mid Q4. Given the significant cut to the federal capital budget to N630bn from around N1.55trn in 2014, we continue to envisage a weak demand outlook for cement for the balance of the year.  


DangCem shares have sold off markedly this year. They are down -23.7% ytd, compared with a -13.2% decline for the ASI. At current levels, on our published estimates, DangCem shares are trading on a 2015E P/E multiple of 11.5x for 17% EPS growth in 2016E. These compare with the 9.1x multiple for a -12% decline in EPS that Lafarge Africa is trading on.


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


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