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Dangote Cement Plc Q3 17 - Don’t lose much sleep over 2018

• Over the last 10 months, DANGCEM has steadily raised prices to support revenue at the expense of marked volume weakness with analysts, almost unanimously, making the call for substantial price pass-through to earnings in the current year. For us, this call has largely panned out and so focus must shift to 2018, a year for which we expect energy efficiency to upstage price as the critical driver of earnings’ growth. Even though our model adjustments translated to a downward revision to 2018E EPS, we believe the implied 19% YoY upside would still be enough to douse investors’ anxiety. 

• 2017 assumptions were spot on. In line with expectation, DANGCEM further cemented its leading position in the sector with a cumulative 9M 17 EPS (N33) that is already 1.0x and 1.1x those of FY 16 and FY 15 respectively. Over Q3 17, the company’s EPS was also 63% higher YoY at N2.88 in spite of a shock effective tax rate of 24%. For context, we note that the company’s EPS would have printed at N3.51 going by the average effective tax rate of 7.4% recorded over H1 17. 

• Price momentum to see off volume worries. Despite our expectation for weaker top-line growth rate for Q4, we believe the price-led momentum built over the first three quarters of the year, a normalisation of effective tax rate (~10% in FY 17E) and the now obvious energy flexibility gain should leave FY 17 earnings in good shape (FY 17E EPS:  N07 (+33% YoY), DPS: N11.15). 

• Bet on DANGCEM to deliver in coming year. Going into 2018, three things are crucial to expectations. The first is the outlook on prices while the other two are closely related currency and energy projections. On prices, we believe that with Nigerian gross margin having exceeded pre-crisis level of ~61.8%, the argument for leaving prices at currently elevated levels to compensate for cost pressures will gradually fall apart. But, we expect this price correction to be gradual as the market leader considers the sustainability of current gains. In view of this, we now adopt average Nigerian cement price of N40,000/ton for 2018 (vs. N34,280/ton previously). Consequent upon the price drop, we expect consumers to be slightly stimulated and thus hold out for a 13% YoY growth in Nigerian volume to 14.3MT (vs. 18.8MT in prior forecast), with related revenue expected to print lower at N574 billion. Elsewhere, even though the Sierra Leon and Congo operations are expected to gain some traction in the coming year, we project non-Nigerian volumes and mean price at 12.3MT (vs. 14.3MT previously) and N27,606/ton respectively, with weaker volume projection reflective of ongoing output slowdown in other climes. In all, we now look for implied FY 18 group revenue of N858 billion (vs. N921 billion previously). 

• For us, with currency and energy outlook looking stable over most of 2018 (please see “Q4 2017 Outlook: Pathway in turning tide”), we see scope for a 42% cost to sales ratio in the coming year (2017E: 43%). In addition to this, effective tax rate is expected to play around 12% (vs. 10% in 2017E) in the coming year going by recent management guidance. On balance, largely reflecting our more tapered volumes expectation across the group, we now look for 2018E PAT of N305 billion (+19% YoY) with most of the gains expected to come from greater cost efficiency (as opposed to the price-led gains of 2017). 

• The concussion of these changes, which includes adjustments for gradual price correction as well as changes to input cost assumptions over forecast horizon, translates to a 5% decline in our FVE to N32. DANGCEM trades at 2017E EV/EBITDA of 10.8x which is at premium to EMEA peers (~10.0x). We retain a SELL rating on the stock.