Wednesday, August 29, 2018 /02:08 AM/CardinalStone Research
To a large degree, we have seen our expectations play out in DANGCEM this year. Earnings have continuously impressed as volumes ramp up and improved cost efficiency remains a key driver of bottom-line growth. For us, we expect the narrative in H2’18 to remain unchanged, as we remain optimistic on further volume growth despite expected seasonality effect in Q3.
On cost, total eradication of the more expensive alternative fuel (LPFO) from its Obajana and Ibese plants, as well as our expectation of the delivery of the gas generating set in Tanzania, amplifies our optimism for a healthy EBITDA margin (50.2%) by year end.
Overall, we project an EPS expansion to N13.5 (+12.3% YoY) in FY’18. Our target price for the counter is N275.49, this represents an upside potential of 19.8% to its last close price of N230.00. We recommend a BUY.
An impressive start to the year
DANGCEM commenced the year on an upbeat note - over the first half of 2018, the company grew its top line by 16.9% YoY to N482.4 billion. This was a remarkable feat achieved through recovery in cement sales volumes (+7.4% YoY) to 12.4Mt, accompanied by favourable pricing.
Although, we highlight that the strong recovery in the Nigerian market has been principally responsible for overall volumes growth. This made up for the shortfall recorded in the Pan-African segment (-3.9% YoY), which was predominantly due to the production shutdown in Tanzania.
Top line growth to remain undeterred, despite seasonality
Going into H2’18, we expect the narrative to remain largely unchanged. In fact, we look to increased volumes growth in the Nigerian market, following stronger than expected pick up in volumes in the first half of the year. We remain positive that the increased demand by the private sector, the rise in public-private partnerships (PPP), as well as an expected increase in fiscal spending, should continue to spur demand in the Nigerian segment.
Therefore, we revise our volumes expectations for the segment upward to 6.95Mt in H2’18 (vs. 5.87Mt in H2’17). All in, we expect overall volumes for the Nigerian segment to stand at 14.76Mt in FY’18. However, our projection on pricing is more benign, as we expect the cement giant to retain prices at current level over H2’18. For the Pan-African segment, we note the weak output in H1’18 (-3.9% YoY to 2.3Mt); specifically, stemming from Ghana, Ethiopia and Tanzania.
Therefore, we cut back on our FY’18E volumes expectations to 9.4Mt (Previous: 10.02Mt). Overall, our overall group revenue forecast for FY’18 stands at N918.4 billion.
We observed improved cost efficiency in the first half of the year as gross margin expanded by 2.0 ppts to 59.0% (vs 57.0% in H1’17); following the total eradication of the use of the more expensive LPFO from its fuel mix in the Obajana and Ibese plants.
Considering this, coupled with management’s guidance on the complete installation of a gas generating set in Tanzania, we see gross margin settling at c.59.0% (+261bpss YoY) by year end. As such, we project group EBITDA margin to expand by 1.7 ppts to 50.2% (N460.5 billion) in FY’18.
Valuation remains attractive
Following our adjustment for tax, as well as the negative surprise of N15 billion in FX losses recorded in Q2, we cut our FY’18E PAT to N229.4 billion. On the back of our revised forecasts, we adjusted our model for these changes using the DDM, EV/EBITDA and FCFE valuation methodologies and arrived at a target price of N275.49 (previous: N291.69). This suggests an upside potential of 19.8% to current market price.
Therefore, we recommend a BUY.