Dangote Cement Q4 2019 Results Review: Downgrading to Neutral Post Q4 2019 Results


Friday, March 06, 2020   /01:50 PM / By FBNQuest Research/ Header Image Credit: Africa Uodate Newspaper


5-7% cut to our 2020-21E EPS forecasts and price target

Dangote Cement's (DangCem) Q4 2019 PBT came in -9% behind our forecast due to negative surprises in sales and gross margin. As such, we have cut our 2020-21E earnings forecasts by c.5% on average. Our new price target of N187.1 is also -7% lower.


On its Q4 2019 conference call, management was optimistic that unit volumes for Nigeria - which accounted for 68% of sales in 2019 - will rebound in 2020. Its positive outlook for demand stems from an expected increase in public-private partnership (PPP) led infrastructure projects, following the federal government's executive order on road infrastructure development and refurbishment investment tax credit scheme. The scheme provides an incentive for Nigerian private sector firms to utilise the total cost incurred on road construction - plus a stipulated margin - as a tax credit against their future income tax liability.


However, relative to management, we have a less upbeat view on demand. Due to concerns around the corona virus, we see downside risk to 2020E GDP growth for the Nigerian economy, and by extension cement demand. We also expect the competitive landscape to continue to intensify because of the level of spare capacity in the sector (>50%). Consequently, we have cut our 2020E unit volume forecast for Nigeria by c.5% to 14.4 million tonnes (mt), implying growth of +1.9% y/y.


Our Group volume forecast is also down by 6% to 24.1mmt (+2.2% y/y). Our 2020E volume forecasts imply sales and PBT growth of 2% y/y and 5% y/y to N912bn and N263bn respectively. Our new price target implies a potential upside of c.10.0% from current levels. As such, we downgrade our rating on the shares to Neutral from Outperform because we see greater upside potential elsewhere within our coverage universe.


Q4 PAT down -80% y/y due to base effects from prior year tax

DangCem's Q4 sales and PBT came in flat y/y at N212bn and N53bn respectively. The flattish sales and earnings performance was underpinned by a -3% y/y decline in Group cement dispatches to 5.6 mmt and flat pricing y/y.


Below the tax line, PAT fell by -80% y/y because of negative base effects on the tax line - an income tax expense of N6.6bn vs. a tax credit of N178.6bn in Q4 2018. Sequentially, sales were flat q/q.


However, PBT expanded by 25% q/q, thanks to a gross margin expansion of 320bps q/q to 57.5%. A lower effective tax rate of 12.6% vs. 16.8% in Q3 2019 resulted in an acceleration of PAT growth to 51% q/q.


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