DANGCEM records strong performance in 9M '13; Chapel Hill recommends BUY


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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