Dangote Cement Higher Costs Offset Gains from Volume and Revenue Growth

Proshare

Friday, August 05 2016 1:18pm /DLM Research

Investment Summary

Dangote Cement Plc (DCP), H1’16 EBITDA of N132.50billion (~5% below our estimate) was down ~10.20% y-o-y despite robust revenue and volume growth of ~20.60% and ~59.60% respectively largely due to higher-than-anticipated costs (mainly energy and other direct costs).
Cost of fuel and power consumed rose by ~85.04% y-o-y and ~72.98% q-o-q – leading to higher energy cost/t. In addition, other direct costs also moved up by 54.83% y-o-y. However, taking cue from the strong volume growth for the period against the backdrop of improved demand visibility, we are revising our volume estimates upward by ~12.00% for FY16 leading to ~30.00% expected volume growth.

With the addition of new plants, earnings stream is set to expand considerably even as energy cost inflation is likely to offset such positivity. Factoring in chances of further improvement in capacity utilisation in FY17, this could aid significant expansion in margins for DCP, though; current economic challenges will impact on sales volume in the short term.

Dangote Cement is enjoying benefits from wider market coverage, and also seeking new markets to improve sales. We consider DCP’s decision to establish a plant in Okpila, Edo State Nigeria as a strategic one which will help boost sales within the region. However, we are inclined to consider the timing of the strategic investment given depressed consumer demand in Nigeria over the first half of 2016 buoyed by a contraction in government and private sector spending on infrastructure.

As a result, we are of the view that DCP will slow down its growth strategy in response to challenging market conditions. Furthermore, we are beginning to see some signs of business bottoming out in the sector (evident on Lafarge Africa H1’16).

However, we forecast that the domestic economic recovery which is expected by the end of the year will drive DCP’s volume growth and ease some degree of pressure on margins.

We adjusted our EBIT margins downward to account for higher costs and depreciation emerging from the new factories in Africa particularly as Tanzanian plant begins operation. Specifically, we have envisaged a scenario with EBIT margins contracting to 34.20% in 2016E and 32.10% in 2017F.

Hence, we trimmed our valuation to N201.17/share (vs. our previous N217.00/share) to reflect the downward adjustment on EBIT. DCP trades at 2016E P/E of 15.82x versus sector average 11.96x, leaving investors with a narrow gap on valuations.

In our view, dividend yield of 4.37% on current price does not make the company a yield based play with our forecast N8.50 DPS in 2016. Stock price has gained+7.65% YtD and outperformed the sector’s -16.70% and ASI’s -3.33%, leaving some opportunity for investors to reconsider for the long term.

Setting our new target price at N201.17/share, ~7.29% below our previous target price and 9.93% above current market price, we maintain our HOLD rating on the stock for short term investors and a BUY rating for long term investors.  



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