Dangote Cement Q3 2016 Results Review - Maintaining Outperform Rating Despite Cut to PT


Thursday, November 17, 2016 9:05 AM /FBNQuest Research

Tangible cuts to our EPS forecasts and price target
Dangote Cement’s (DangCem) Q3 2016 results came in well behind our forecasts. As such, we have cut our EPS forecasts by around 12% on average over the 2016E-18E period.

However, the reduction to our price target is slightly higher at 17% because we have reduced the P/E multiple driving our valuation to 14.6x from 15.5x previously, in line with the multiple contraction of international peers.

Having shed -11.7% in the last one month (vs. -7.9% NSE ASI), the shares now provide a potential upside of +26.1% from current levels. Consequently, we retain our Outperform recommendation on the stock.

PAT up 147% y/y despite a 38% y/y decline in PBT
DangCem’s Q3 results showed that although PBT fell by 38% y/y to N23.8bn, PAT grew markedly by 147% y/y to N68.3bn. The stellar growth in PAT was driven by a strong positive result of N37.5bn on the other comprehensive income (OCI) line and, to a lesser extent, a tax credit of N6.3bn.

Excluding the OCI gains, the growth on the PAT line was more subdued at around 12% y/y (mainly because of an OCI loss of –N21.9bn in Q3 2015). Similar to Q2 2016, the OCI gains can be linked to currency translation effects of DangCem’s overseas operations.

Moving up the P&L, the marked declined in PBT was driven by a gross margin contraction of -1773bps y/y to 38.3% and an 81% y/y spike in opex. The negatives on both lines completely offset a 22% y/y growth in sales to N150bn.

Sequentially, sales came in flattish. However, PBT and PAT fell by 66% q/q and 45% q/q respectively.

Higher input costs; unfavorable fuel mix still a drag on earnings
In Q3, DangCem’s profitability was adversely impacted by higher input costs, mainly driven by the 10% depreciation of the naira between June and September.

Given disruptions to gas supplies due to vandalized pipelines, the firm had to rely on expensive Low-Pour-Fuel-Oil (LPFO) which is often imported, and is around 5x more expensive than gas.

According to management, the LPFO-to-total fuel mix increased to 19% and 32% for Ibese and Obajana respectively, compared with 0% for both plants in Q3 2015. Beyond Q3, we expect the surge in costs to be mitigated by the 39% increase in cement prices implemented in September and the imminent completion of coal mills at Ibese and Obajana.

Beyond Q3, we have cut our 2016E volume forecast by -4.4% to 24.4 million tonnes. These translate to sales and PBT growth of 34% y/y and 13% y/y to N656.4bn and N188.3bn respectively.

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