Revision to DANGCEM Plc Estimates delivers a HOLD Recommendation


Friday, November 04, 2016 12:52 PM / Cordros Capital

We have revised forecasts for DANGCEM going into 2017, considering (1) price action and competition (from LAFARGE whose production faced repeated interruptions in 2016) in Nigeria, which should impact sales volume; (2) likely price weakness in Pan Africa markets on intense competition; (3) higher (than expected) energy costs in Nigeria and Tanzania; and (4) higher opex spend in Pan Africa operation.

Consequently, we look for Group revenue, EBITDA and net profit of N740.7 billion, N323.8 billion and N209.7 billion, from N747.3 billion, N365 billion and N217.3 billion respectively, previously.

In Nigeria, we forecast cement volumes to ease by 13% in 2017.

The volume weakness expectation is as a result of the hike in September which raised selling price to N38,000. According management, the September price hike is expected to weaken demand and cause volumes in Q4’16 to dip below Q4’15 levels. We expect the weakness in demand to extend beyond Q4’16 into H1’17 as both the higher prices and continued challenges in the broader economy put pressure on sales. Additionally, with LAFARGE’s newly commissioned plant coming on stream, coupled with the potential for fewer disruptions on its existing plants relative to 2016, the company is poised to reclaim some of the market it lost to DANGCEM this year.

We forecast a 10% (vs. 49% in 2016F) volume growth in the Pan African operation in 2017, mainly on the back of the 1.5Mts capacity plant commencing operation soon in Congo. Growth across existing markets will be marginal, given weak infrastructure investment prospect in most countries.

Group fuel cost per tonne has almost doubled in the last one year, growing 2x in Nigeria and 1.4x in Pan Africa.

From Q4-15, fuel cost per tonne has actually grown faster in Pan Africa (2.1x vs. Nigeria’s 1.8x). In Nigeria, repeated attacks on gas facilities by Niger Delta militants despite peace talks offers little prospect of a normal return to the much cheaper (and largely preferable) gas. Contrary to what management expects, we do not think complete elimination of LPFO in the fuel mix is achievable as early as January. Energy pressure in Tanzania, and expected softer prices, including in South Africa, Cameroon, Zambia and Senegal has led us to revise Pan Africa gross margin.

We also revised estimates for operating expenses higher for (1) Pan Africa, as a result of continued quest for market share which should increase haulage and general administrative expenses and (2) Nigeria, on expected increase in exports (by road) to Ghana, Togo and Niger.
We arrive at 2017 TP of N172.73, representing 0.23% upside from current market value. DANGCEM currently trades at forward EV/EBITDA of 9.6x and P/E of 13.6x vs. Bloomberg SSA peer average of 10.4x and 6.7x respectively. HOLD

Price / Return

Target Price              (N)172.83

Current Price           (N)172.43

Implied Return        (%)0.23

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