Tuesday, August 02, 2016 12:27pm /ARM Research
Dangote Cement Plc. (Dangcem) released its unaudited Q2 16 result wherein pre-tax earnings rose 20% YoY to
N70 billion well ahead of our estimates of N19 billion. However, PAT was 5% lower YoY at N50 billion following a 19pps rise in effective tax rates to 28%.
FX translation gains flatter earnings
In contrast to peer Lafarge, whose net short dollar position drove sizable FX losses in the aftermath of the 42% naira depreciation, Dangcem’s net long dollar position translated to net FX gains of
N38billion which masked weak operating performance. Adjusting for the exchange rate impact, pre-tax earnings slides 46% YoY to N32 billion with related margins shrinking 24.9pps to 21% (vs. +40bps to 46.4% prior to adjustment).
Focusing on core operating performance, we note that significantly higher costs underpinned weak underlying earnings performance in Q2 16.
Specifically, although group revenue rose 19% YoY to
N152 billion following strong growth in West & Central Africa (over two-fold YoY to N26 billion) and South & East Africa (+85% YoY to N16 billion), a combination of higher input and distribution costs eroded top-line gains.
According to management, input cost pressures (+73% YoY to
N77 billion) was underpinned by prolonged gas shortage across Nigeria which forced the company to rely on the more expensive back-up—LPFO.
Overall, although the huge currency gains does provide some earnings buffer for Dangcem over 2016, we remain cautious on the business’ core operating performance.
In Nigeria, for instance, prices are set to remain depressed over Q3 16 with management given only little weight to probability of price increase in Q4 16 at the earliest. To this effect, we have reviewed our average Nigerian prices 11% lower to
N25,734/tonne (-12% YoY).
However, current run rate of volume growth (+39% YoY to 8.8MT) suggests our target volume estimate of 14.6MT for Nigeria may be slightly pessimistic.
Thus, we have also increased our Nigerian volume growth target to 15.7MT (+18% YoY) with net impact of the top-line adjustments cascading to a 4% YoY rise in our target Nigerian cement revenues to
N404 billion (vs. +9% YoY to N424 billion in previous estimate).
Net the impact of these adjustments, our FVE is now 3% lower at
N161.48, which currently stands at a 10% discount to the stock’s last market price. Dangcem trades at current EV/EBITDA of 12.6x relative to 9.1x for Bloomberg EMEA peers.
We downgrade our recommendation on the stock to SELL (vs. NEUTRAL in previous communication).
1. Dangote Cement Earns N292Bn Revenue in Q2’16
2. Dangote Cement Shares Outperform the ASI; Gains 5.9% YTD as PBT Grows by 20% in Q2'16
3. DANGCEM Declares N103.42 billion PAT in Q2 2016 Result,(SP:N175.00k)
4. Dangote Lekki Refinery Petrochemical projects will boost Nigeria s economy- Ambode
5. DANGCEM Appoints Mrs Dorothy Udeme Ufot as an Independent Non-Executive Director
6. DANGCEM Q1 16 PBT Decline Driven by Negative Trends in Gross Margin OPEX Net Interest Expense
7. DANGCEM Declares N52.78 billion PAT in Q1 2016 Result,(SP:N161.04k)
8. DANGCEM: Bright outlook for 2016 after weak Q4 results
9. DANGCEM Records 30% PBT Decline in 2015 Audited Result; Driven by Negative Trends in OPEX
10. DANGCEM Declares N181.3 billion PAT; Proposes N8 Dividend per share in 2015 Audited Result,(SP:N148.83k)
11. DANGCEM Grows Revenue by 25.6% in 2015 Audited Result; Rated
12. DANGCEM to File 2015 Financial Statements on March 1 2016 Recommends Dividend Payment
13. Dangote Begins Construction of New 9m tons capacity Cement Plants in Okpella Itori
14. Dangote Cement Q3 15- High OPEX interest expense drive PAT lower