August 14, 2020 / 02:12 PM /
by FBNQuest Research / Header Image Credit: All News
Neutral rating maintained
Dangote Cement's (DangCem) Q2 2020 results surprised positively. Although sales were hurt in Nigeria and Pan Africa due to covid-related restrictions put in place in Q2, the impact of the pandemic was limited. In Nigeria, national cement sales volumes fell by just -1% y/y in Q2, much better than we had expected. In Q2, DangCem delivered a record EBITDA margin of 21.7% for Pan Africa, driven by a combination of volume growth, price increases (in Zambia) and cash cost reductions.
Ethiopia, Cameroon and Senegal are key to the group's Pan African strategy, accounting for c.55% of volume sales in Q2. We continue to expect solid growth for these countries, projecting unit volume growth of 16% y/y, 15% y/y and 6% y/y for Cameroon, Senegal and Ethiopia respectively for 2020E. For the Nigerian business, we project flattish volumes y/y this year. In Q2, DangCem shipped a first batch (27,000 tonnes) of clinker exports from Nigeria to Senegal and expects to ramp up clinker sales to West and Central Africa over the medium term. The strategy in our view justifies continued capacity expansion in Nigeria. Given the strong set of results, we have raised our earnings forecast for 2020E by around 27%.
However, our projections beyond this year remain unchanged. Overall, our EPS outlook over the 2020-22E period is up 13% on average. Our 2021E-based price target of N182.7 is relatively unchanged. At current levels, our new PT implies a potential upside of 34%. We retain our Neutral recommendation on the stock. DangCem shares have shed -4.2% year-to-date, broadly in line with the NSE ASI's -6.0% performance.
Q2 PAT growth of 11% y/y helped by tax incentives
DangCem's Q2 sales of N227.7bn came in flattish y/y. Pan African Q2 sales growth of c.9% y/y to N75.2bn offset relatively softer sales in Nigeria (-3% y/y to N153.0bn). Topline was helped by a moderate increase in unit pricing which offset a y/y decline in cement sales volumes. Q2 PBT also came in flattish y/y while PAT of N63.3bn advanced by 11% y/y. Q2 PAT growth was driven by a lower effective tax rate of 12.4% compared with 22.9% in the corresponding period of 2019.
According to management statements, the tax line was impacted by tax exemptions arising from the Pioneer Status Incentive scheme for Ibese lines 3 & 4 and Obajana line 4. On a half year basis, both sales and PAT were flattish y/y. Compared to our forecast, PAT beat by around 18%.