Tuesday, October 24, 2017 3:45PM / FBNQuest Research
6% cut to our EPS forecast and price target
Dangote Cement’s (DangCem) Q3 2017 PBT missed our forecast by around 28%, due to negative surprises in gross margin and opex. To a lesser extent, a slight 2% underperformance relative to our sales forecast, resulting from weaker unit volumes, also contributed. Although management mentioned that cement dispatches in Nigeria have picked up y/y in the last two months, demand remains weak due to elevated pricing and weak macro-economic conditions.
While we forecast a 10% y/y growth in unit volumes for the pan- African operations following the ramp-up of plants, particularly Ethiopia and Cameroon, we still expect group unit volumes to decline by around -7% y/y to c.21.9 million metric tonnes in 2017, due to soft demand in Nigeria.
Consequently, we have reduced our unit volume forecasts by around 4% over the 2017-19E period. Following a 20bp average cut to our gross marginforecasts over the 2017-19E period, and material increases to our opex forecasts, we have cut our EPS forecasts by around 6% on average over the forecast period, and our price target by the same amount to N228.9.
On a relative basis, DangCem shares are trading on a 2017E P/E multiple of 15.0x for 22% EPS growth in 2018E. Our new price target implies a potential upside of 4.1% from current levels. As such, we retain our Neutral rating on the stock.
Sales and PBT up by 27% y/y and 171% y/y respectively
DangCem’s Q3 PBT grew strongly by 171% y/y to N64.6bn. The stellar growth in PBT was driven by sales growth of 27% y/y and a 1,859bp expansion in gross margin to 56.9%. These completely offset a 10.1x increase in netinterest expense to -N5.0bn. The net interest expense was boosted by fx gains of N54bn in 9M 2016.
Despite the triple-digit y/y growth in PBT, PAT
declined by -37% y/y due to negative base effects stemming from other
comprehensive income (OCI) (arising from fx translation gains of N106bn in 9M
2016). Sequentially, sales, PBT and PAT fell by -7% q/q, -18%q/q and -54% q/q
respectively. Relative to our forecast, sales were in line. While PBT missed by
28%, PAT missed by a wider margin of 46%, mainly because of a higher effective
tax rate of 24% vs. the 6% that we had in our model.