Thursday, November 28, 2013 / Chapel Hill
Dangote Cement Plc (Dangcem) recently hosted a conference call to discuss its 9M-13 results and the outlook for its business. We raise our 12-month target price (TP) to N243.06 from N225.98 and maintain our BUY recommendation on the stock, post a review of our earnings forecasts.
9M-13: Strong performance, positive outlook
■ We cut our FY-13E EPS growth expectation to 41% yoy from 51% yoy previously. The EPS downgrade is largely due to the delay in the commencement of operations at the plant in Senegal. Management previously advised that operations will start in Q4-13, but this has been shifted to Q2-14. We however cut our FY-13E interest expense by 11% to reflect the impact of the 5% yoy decline seen in 9M-13. Looking beyond FY-13E, we see a strong growth potential for Dangcem, both locally and abroad. The Nigerian business is expected to see an increase of c.68% in total output capacity to 32.25mn tonnes p.a. by FY-16E from 19.125mn currently, while the other African businesses are expected to have a combined capacity of 22.75mn tonnes p.a. by FY-16E.
■ Strong volume growth and efficiency gains drove performance in 9M-13. Dangcem’s EPS growth of 46% yoy in 9M-13 was underpinned by a strong volume growth of 29% yoy as cement prices were stable during the period. According to management, the direct distribution approach adopted by Dangcem was supportive of volume growth in 9M-13. The performance also reflects a 16% yoy growth in volume in Q3-13, supported by low base, as Q3-12 was characterised with flood. The EPS also grew on the back of improved efficiency as the combined gas utilisation rate at the Obajana and Ibese plants rose to 85% in 9M-13 from 70% in 9M-12. We believe Dangcem has the capacity to further improve its efficiency in the coming years. This is given that the company has built a coal mill at its Ibese plant and construction is ongoing to build a coal mill at its Obajana plant. This should reduce the use of Low Pour Fuel Oil (LPFO), which is a more expensive source of energy compared to gas or coal.
■ African expansion projects are progressing steadily. We are pleased with the updates provided by management on the expansion into other African countries, with the exception of Senegal, which was a bit disappointing. Management however believes the plant in Senegal will be operational by Q2-14E and will eventually export to Sierra Leone. Dangcem disclosed that Sephaku, its plant in South Africa, is ready for operations in January 2014, but volume ramp-up is expected to come through in H2-14E, post the completion of the fully integrated plant. The plant in Cameroon is expected to be commissioned in Q1-14E, while the plant in Ghana will likely see an increase in capacity in FY-14E. Dangcem also confirmed the availability of limestone and coal around the location of its proposed plant in Kenya.
■ We maintain our BUY recommendation on Dangcem with a revised 12-month TP of N243.06. The upward review of our TP is driven by our relative valuation method, which incorporates higher P/E and EV/EBITDA multiples. The revised TP implies an exit P/E of 15.7x FY-14E EPS, which reflects a discount of 10% to the 3-year historical average P/E of 17.5x for the stock. In the coming quarters, we see better-than-expected results and completion of expansion projects as the likely catalysts for Dangcem.
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