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Dangote Cement Plc - Price increases in SSA powerhouse pair

Are higher prices panacea for cost woes across SSA?: Across select markets in Africa, cement prices were reviewed upwards in prior quarter to reflect the impact of soaring energy cost as well as shrinking margins. Beginning from the closing months of 2016, Nigeria’s industry-leader and price-setter (DANGCEM) championed a chain of increases in per tonne price of cement to N40,424 (+70% YoY) in a bid to pass-on pressures from higher energy prices in Nigeria. Similarly, Pretoria Portland Cement Company Limited (PPC)—leader in South Africa’s cement market—recently pioneered a gradual step up in prices after the industry reached the bottom of the pricing cycle, in its opinion. That said, having recently noted weather-induced volume declines in January and February, the gradual pick up in prices (+3% YoY to $111.58/tonne at the retail end) are unlikely to have notable pass-through to the company’s margins in Q1 17.

Pass-through from raised prices more evident in Nigeria: On the flip side, price hikes in Nigeria drove strong revenue growth for most cement companies in the country, with DANGCEM’s Nigerian operation, aided by a relatively benign policy environment, reporting a 42% YoY surge in top-line to N152 billion (Group top-line: N208 billion) despite a consequent 16.5% YoY decline in volumes to 3.8MT in Q1 17. Further down, the company’s management reported EBITDA margin of 64.8% for Nigerian operations (Q1 16: 61.8%) with higher prices the undisputed trigger. Elsewhere though, with Tanzania leading the pressures, rest of Africa performance was largely margin dilutive with a low EBITDA margin of 12.7% (Q1 16: 21.7%) dragging down that of the group by 2pps YoY to 49.5%. On other fronts, leaps in net finance cost and charges from the tax man provided further dent to both PBT and PAT margins, which shed 1.7pps and 3.7pps YoY to 37.1% and 33.9% respectively.

2017 earnings to ride the price wave: Going forward, we see scope for sustained top-line growth for DANGCEM as resilience in Nigeria continues to ride on an over 70% YoY increase in cement prices with the non-Nigerian operation leveraging on further production ramp up in Sierra Leone, commencement of operation in Mfila, Congo (1.5MTPA) in May, and higher prices in South Africa and Ethiopia. Thus, despite a relatively muted expectation for Nigerian cement volumes on account of consumer reactions to higher prices, we see scope for strong revenue growth in 2017 (+32% YoY to N814 billion).

DANGCEM trades at 2017E EV/EBITDA of 8.4x vs. 10x for Bloomberg EMEA peers. Following a rally in the price of the stock to N173.30 as at last market close, our new FVE of N203.94, which captures impact of price changes across the group, implies a NEUTRAL recommendation by our rating scale (vs. STRONG BUY previously).