Monday, August 07 2017 6:16 PM/FBNQuest Research
Downgrading to Neutral on valuation grounds
Dangote Cement’s (DangCem) Q2 2017 unit volumes declined by around 16% y/y to c.5.5 million metric tonnes (mmt). Despite this, the results showed strong y/y growth in sales and PBT.
The results were driven by elevated cement prices (up 59% y/y) which underpinned a gross margin expansion of 5,949bps y/y to 56.1%.
Management disclosed that margins were also boosted by a “more favourable fuel mix” for its Nigerian operations, due to the higher utilisation of coal and gas as opposed to low-pour-fuel-oil.
However, the claim remains unsubstantiated given that total fuel and power costs increased by around 22% y/y on a per tonne basis. Although, we have reduced our unit volume forecasts by around 3% on average over the 2017- 19E period, these reductions are offset by average increases of 7% and 181bps to our pricing and gross margin assumptions respectively.
As such, we have increased our EPS forecasts by around 7% on average over the forecast period and our price target by 5% to N243.8. On a relative basis, the shares are trading on a 2017 P/E multiple of 14.9x for 14% EPS growth in 2018E.
These compare with the 7.6x multiple for a -26.5% decline in EPS for rival Lafarge Africa. Having gained around 52.2% in the last 3 months (vs. 43.0 NSE ASI), the shares are now trading close to our fair value estimate.
Consequently, we downgrade our rating on the shares to Neutral from Outperform.
Sales and PBT up by 35% y/y and 11% y/y respectively
DangCem’s Q2 PBT grew by 11% y/y to N78.3bn despite Q2 2016 PBT being boosted by net fx gains of N38.1bn. The key drivers behind the y/y growth in PBT were sales growth of 35% y/y to N204.5bn and a 5,949bp expansion in gross margin to 56.1%.
These positives were strong enough to offset a negative swing in net interest expense to –N2.0bn (from a net interest income of N28.5bn in the prior year).
Despite the y/y growth in PBT, PAT declined by 24% y/y due to the strong result of N67.6bn on the other comprehensive income line (OCI) line that the company delivered in Q2 2016.
Sequentially, sales dipped by 2% q/q, while PBT was flattish. However, PAT expanded by 27% q/q because of a positive result of N24.9bn on the OCI line.
Compared with our forecasts, sales were in line while PBT beat slightly by 6%. However, PAT came in significantly ahead (43%) of our forecast due to the strong result on the OCI line.