Tuesday, July 24, 2018 /04:17 PM/Vetiva Research
Solid operations underline decent result
DANGCEM released its H1’18 result, reporting a 3% y/y PAT growth to ₦113 billion vs. our ₦123 billion estimate. The earnings growth was supported by strong Nigerian and Pan African operations, with Group EBITDA rising 21% y/y to ₦246 billion ahead of our ₦226 billion estimate – translating to a 51% margin vs 49% in H1’17. EBITDA was particularly strong in the Nigeria operation, rising 19% y/y to ₦227 billion, supported by healthy cement prices (following a price hike in April) and continued improvement in fuel efficiency.
The region’s EBITDA was however 3% weaker q/q, following a mini-surge in operating costs in the quarter, with EBITDA margin consequently falling 80bps q/q though remaining strong at 65.5% (H1’18: 65.9%). Operations in the Pan African business also remained strong within the period, with EBITDA rising 32% y/y to ₦26 billion. Similarly, the region’s EBITDA was 2% weaker q/q, taking EBITDA margin 80bps lower q/q to 18.3% (H1’18: 18.7%).
Meanwhile, Net finance costs rose 89% y/y to ₦15 billion (Vetiva: ₦6 billion), weakened by a ₦15 billion FX loss in Q2’18 from Pan African operations that use the CFA as a functional currency. Overall, PAT rose 3% y/y, weakened by a higher effective tax rate of 39% (H1’17: 29%, Vetiva: 31%).
Strong demand sustains impressive topline
Cement demand strengthened in Nigeria, with volumes rising 14% y/y to 7.81 million MT in H1’18 (Q2’18: 3.84 million MT, Q1’18: 3.97 million MT, Vetiva: 3.77 million MT). Combined with higher prices, topline rose 18% y/y in Nigeria to ₦344 billion. Revenue from Pan African Operations also rose 11% y/y, despite a 4% y/y drop in cement volume to 4.57 million MT (Q2’18: 2.33 million MT, Q1’18: 2.24 million MT, Vetiva: 2.64 million MT).
We understand that Revenue was boosted by higher cement prices across certain regions and translation gains from stronger currencies. However, volumes remained under pressure, mainly due to weak output from Ethiopia (sustained civil unrest), Tanzania (shut down operations from Feb-May for maintenance and due to high costs) and Ghana (operations halted pending the completion of Dangote jetty).
We understand however, that operations are back up in Ethiopia amid relative stability and expect Tanzanian operations to pick up following the delivery of gas gensets (expected in August). Exports to Ghana are however expected to resume anytime from Q4’18 when sea-based exports would be operational. Overall, Group revenue rose 17% y/y to ₦482 billion (Vetiva: ₦481 billion), supported by a 7% y/y rise in volumes to 12.36 million MT (Vetiva: 12.61 million MT).
Positive outlook maintained despite mild miss in H1
Following better than expected volume roll out in H1’18, we revise our Nigeria volumes estimate to 15.4 million MT (Previous: 15.3 million MT) for the year. With management hinting at no plans to change prices any time soon, we estimate an FY’18 Revenue of ₦685 billion (Previous: ₦681 billion). Meanwhile, we note the sustained downtime across certain Pan African operations and thus, revise our FY’18 volume expectation to 10.8 million MT from 11.2 million MT.
However, after adjusting for the impact of FX movements, we reduce revenue mildly to ₦273 billion (Previous: ₦279 billion). Overall, we cut our volume forecast for the Group to 26.2 million MT (Previous: 26.5 million MT) and our FY’18 revenue estimate to ₦958 billion (Previous: ₦960 billion). We also adjusted our FY’18 cost estimates to reflect H1’18 run rate.
Following this, we arrive at a reduced FY’18 Group EBITDA of ₦490 billion (Previous: ₦499 billion). Furthermore, we raised our interest expense from ₦27 billion to ₦39 billion, after taking into account the FX losses in Q2 and the recently issued Commercial papers (Series 1: ₦12.04 billion at 12.40% PA, Series 2: ₦37.96 billion at 12.65% PA).
We understand that the proceeds from the notes would be used to fund some local projects and improve working capital. After adjusting for tax, we revise our PAT to ₦243 billion. With a revised target price of ₦276.28 on the stock, we maintain our BUY rating.
Onyeka Ijeoma firstname.lastname@example.org
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