EUR 4.00 For Business Accounts Only

Dangote Cement Plc - Competition caps earnings growth

• DANGCEM posted an impressive growth in EPS by 91% YoY to N22.9 (missing our estimate of N13.52) over 2018. The deviation from our estimate stemmed largely from the long-awaited tax credit (N89.52 billion) which included reversal of tax provisions (N134 billion) made on the Obajana 4 and Ibese 3 & 4 lines for 2015 – 2017, as well as a tax charge of N44 billion based on a 15% effective tax rate for 2018 (inclusive of an extension of the additional two-year pioneer tax credit which is pending approval). However, we reckon that core earnings dragged over 2018 with PBT increasing modestly by 4% YoY to N300.81 billion, which was in line with our estimate of N303.21 billion.
• Going into 2019, we maintain our optimism on DANGCEM and expect the company to sustain earnings growth, albeit at a still slower pace. Specifically, we expect PBT to expand modestly by 6% YoY and a steep decline in EPS by 32% YoY to N15.6 (reflecting the high base of 2018 due to the reversal of prior year tax benefits); excluding the impact of the tax reversals in 2018, forecasted 2019 EPS will grow 3% YoY. The slower growth in our forecast PBT stemmed from i) downward revision of our 2019 and 2020 volume growth to 10% and 6% to 25.96mt and 27.55mt respectively; ii) downward adjustment to revenue per ton, with average price for the group estimated at N35,790 per ton (lower by 3.1% YoY) largely driven by price erosion in Nigeria and the rest of Africa as competition intensifies; and (iii) reduction in our gross margin estimates to 57.8% from 58.3%. The impact of our adjustments culminated in a cut of our FVE on DANGCEM to N248.14 (Previous: N253.03). DANGCEM trades at 2019 EV/EBITDA of 9.8x which is at a discount to MEA peers of 12.74x. Accordingly, we maintain our STRONG BUY recommendation on the stock.