Dangote Cement Plc - On Track for Strong FY Close; Quarterly Decline Worrying


Monday, Oct 23, 2017 9:53AM/Vetiva Research 

Records 45% y/y increase in PAT to 193 billion

Coal usage across plants now over 50%

Noticeable downtrend in quarterly performance amidst low volume roll out

Valuation revised, TP cut to 234.90 

Strong Prices Continue to Drive Impressive Revenues
DANGCEM reported a 37% y/y rise in 9M’17 revenue to 604 billion, slightly lower than our 607 billion estimate. Across regions, the Cement giant recorded a 35% y/y rise in revenue from its Nigerian operations to 417 billion, despite a 19% y/y moderation in volumes (9M’17: 9.6 million Mt). However, on a q/q basis, Q3’17 revenue was down 10% to 125 billion – largely driven by a 10% decline in volume to 2.8 million Mt as high prices continue to constrain demand amidst weak private and government consumption and unfavorable construction weather conditions. 

Meanwhile, revenue from Pan-African operations grew by 40% to
192 billion amidst price increases and a gradual ramp up in volumes over the 9-month period (8% y/y increase to 7 million Mt). Q/q revenue was also modest across the region, up 3% to 67 billion despite a 5% q/q fall in Pan-African volumes to 2.3 million Mt. According to management, the strong Q3’17 performance from Pan-African business was driven by price increases in South Africa and Ethiopia. 

Also, we understand that the Congo plant (1.5 million MT) came onstream as planned and has so far added 5 thousand Mt to Group’s volumes. Overall, the Group reported a 10% y/y rise in 9M’17 volume to 16.5 million Mt (Vetiva estimate: 17.0 million Mt) – but recorded a q/q decline of 9% to 5.0 million Mt.

Coal Usage Continues to Support Nigeria Earnings
Meanwhile, DANGCEM reported a 64% y/y increase in group EBITDA to 294 billion, 2% below Vetiva estimate of 299 billion. The increase was driven by persistent strong pricing in Nigeria – despite a 10% price rebate observed in August, positive contributions from Pan-African operations, and continued ramp up in use of coal at Obajana (coal usage 9M’17: 57% vs H1’17: 38%) and Ibese (coal usage 9M’17: 56% vs H1’17: 43%) plants. We gathered that the company sources over 50% of the utilized coal from Dangote Industries Limited mines, 27% from local coal miners, and just about 20% is imported - further reducing its cost and Foreign exchange dependence. 

On a q/q basis, Q3’17 EBITDA across Pan-African operations rose 5% to
13 billion (30bps increase in EBITDA margin to 18.8%), spurred by cost moderations across plants as well as higher prices across certain regions. However, following price rebates in Q3’17, Nigeria’s EBITDA margin moderated 130bps lower to 64.4% for the quarter. 

Overall, the Group’s Q3’17 EBITDA margin declined marginally to 47.5% (Q2’17: 49.2%). Furthermore, the cement giant reported a net finance cost of
13 billion (Vetiva estimate: 12 billion), putting 9M’17 PBT at 220 billion – 48% higher y/y but 2% below Vetiva expectation of 225 billion. However, following a larger-than-expected tax expense of 27 billion (Vetiva estimate: 17 billion; Q3’17 standalone of 16 billion), PAT came in at 193 billion (up 45% y/y) for the period – lagging our 208 billion estimate.  

Proshare Nigeria Pvt. Ltd.

Cement Roads: Opportunity for Volume Expansion in Nigeria
Whilst the continued decline of cement volumes in Nigeria remains a cause for concern (Management explained that strong marketing campaigns were responsible for maintaining market share at 67%), the recent foray of Dangote Industries Limited (DIL) into road construction with cement opens up a fresh avenue to push volumes in Nigeria over the medium to long term. AG Dangote Construction Company Limited, a member of DIL, has already launched and completed construction projects such as the Itori-Ibese road and the Obajana-Kabba road as part of the company’s CSR initiatives. 

Currently, the company, in conjunction with Flour Mills of Nigeria, is carrying out renovations on the Apapa wharf road in a deal which would see Parent company, DIL receive tax relief from FG. We expect this new arrangement to support volume growth in the near to medium term. Also supporting volumes is the gradual ramp-up in Pan-African volumes.

Whilst Q3’17 volumes declined across the region, we note that there was increased construction activity from certain countries such as Cameroon – in preparation for the African Cup of Nations – Ethiopia’s increasing focus on Capital Expenditure and the new Congo and Sierra Leone plants. We expect that these coupled with gradual recovery of the South African cement market would drive long-term volumes across Pan-African region which already accounts for 42% of group volume as at 9M’17.

Tax Assumption Increased, Target Price Cut to
With the decline in Q3’17 volumes and revenue already anticipated in our model, we maintain our FY’17 revenue assumption at 802 billion but increase outer years given our expectation of stronger volume push from Pan-African regions as well as possible cement road projects in Nigeria. However, reflecting the impact of the 10% price rebate on margins, we marginally cut our FY’17 EBITDA assumption to 400 billion (Previous: 402 billion). 

We have also raised our net finance cost to
18 billion for FY’17, reflecting the higher run rate in Q3’17 (5 billion vs expectation of 4 billion). Following this, we cut our PBT estimate of 287 billion (Previous: 292 billion). Also, due to the sharp increase in tax expense in Q3’17 and the expected higher effective tax rate going forward, we revise our group tax rate forecast to 12% (in line with management guidance), and raise our FY’17 tax estimate and PAT to 34 billion (Previous: 23 billion) and 253 billion (Previous: 268 billion) respectively. 

Overall, we revise our target price to
234.90 (Previous: 240.58) and maintain a HOLD rating on the stock. 

Proshare Nigeria Pvt. Ltd.

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