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Dangote Cement Plc: Notes from conference call Q2 17

• On Friday, Dangote Cement Plc held a conference to discuss its H1 17 results as well as delineate its expectations for the rest of the year. Find below key highlights of the discussion.

• On energy concerns: According to management, the company reduced usage of LPFO and increased reliance on imported coal in H1 17. It also explained that gas was the predominant energy source in the review period, noting an increase in gas to overall energy mix ratio in Nigeria over H1 (+33pps YoY to 56%). In addition to this, the company noted the use of domestically sourced coal from Kogi state, which was aimed at reducing FX exposure. In spite of the efforts, the company still had some currency concerns on this front as further depreciation of naira (from N212/$ in H1 16 to mean of N305/$ in H1 17) increased cost of imported coal. As previously communicated, the Tanzanian operation was still very dependent on expensive diesel for power even as it extended EBITDA level losses into H1 17.

• More on Pan-African operations: Overall, management reported strong performance across its non-Nigerian operations as cement sales went up 12.6% to 4.7MT over H1 17—contributing 30% to the group’s revenue (vs 25% in H1 16). Despite recording higher volumes in the period, pass-through from energy-induced weakness from Tanzanian operation reduced EBITDA margin in non-Nigerian operations.

• Tax credits: As previously noted, the company enjoys tax concessions in foreign operations such as Zambia, Cameroon and Ethiopia. According to the CFO, benefits of tax concessions, from Nigeria and beyond, also provided support for group profit over H1 17 (+39% YoY). Specifically, in the period under review, effective tax rate for Nigerian operations was 7% (vs. 7.4% for group) representing tax-related positives from lines still under concessionary status.

• OPEX: Naira depreciation left operating expense higher relative to pre-2016 levels. Higher operating expense was also linked to depreciation and haulage cost on the business’ 1000 trucks obtained last year.

• FX revaluation gains and borrowing plans: According to the company, currency depreciation led to a net exchange gain of N11.2 billion on dollar denominated assets, albeit coming in 73% lower YoY. The CFO also attributed the period’s high finance cost to increased borrowings and currency translation impact on conversion of Pan-African interest expense.

• Borrowing plans: Management hinted at focusing more on foreign borrowings due to elevated domestic interest rates.

• Capex plan: According to management, its total capex plan for 2017 is ~$300 million (vs. over $400 million in 2016). Of this lot, just 40% was spent in the first half of the year as the company directed investments towards improving energy efficiency in Nigeria and setting up operations in Congo. The new 1.5MTPA plant at Mfila, Congo is expected to start operations in July.

• 2017 outlook: Going forward, management remains bullish on top-line growth for the remainder of the year. This is premised on sizably higher Nigerian prices and additional capital investments in Congo. Management also guided to expected ramp up of volumes in Tanzania, Sierra Leone, and Ethiopia – even though South African market is expected to remain weak due to the country’s recession.

• In our view, the company is on course to record another strong performance in Q3 17 that would be aided by higher prices. Top-line growth should however be tamer in Q4 17 as high base effect from Q4 16 price adjustment limits gains from pricing. However, aided by strong growth in top-line over the first three quarters of the year and expected gains from energy flexibility investments over H2 17, we expect earnings to remain in good shape over 2017.

        Our FVE of N203.94 is at an 8% discount to market following a rally in the stock’s market price that was buoyed by optimism over earnings. This implies a SELL rating by our rating scale.​