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Dangote Cement Plc Q2 17 - Energy concerns bow to price edge

• Dangote Cement Plc. (DANGCEM) released its H1 17 results, which revealed a 39% YoY expansion in EPS to N8.45 (H1 17 estimate: N8.11). As with peers, higher prices was a strong pillar of support to DANGCEM’s Q2 17 earnings (+45% YoY) and looks set to remain so for the rest of the year. Unsurprisingly, current earnings growth momentum has also seen positive investor reactions in the equity market with the company’s share price rallying for extended periods in 2017 (+37.94% YTD) even as Dangote Industry’s recent sale of 2.3% stake to foreign investors provided markets with greater free float in tilting towards NSE specifications.

• Top-line positive, but are non-Nigerian “roses” gradually drying up?: In the review period, group revenue came in 34% higher YoY at N205 billion on the back of higher weighted nominal cement prices which more than offset volume weakness (-16% YoY to 5.5MT). Going by provided breakdown, Nigerian operation, which accounted for 68% of group revenue, reported a 27% YoY rise in revenue to N139 billion that was buoyed by a 75% nudge in ex-factory cement prices to N45,070/ton. In other climes, revenue was sturdy at N66 billion (+149% YoY) largely owing to foreign currency translation gains consequent upon the conversion of sales from Pan-African currencies to the naira. However, output decomposition suggests that the company struggled to match strong non-Nigerian volume growth recorded in prior quarters with output coming in only 3% higher YoY at 2.4MT in Q2 17 despite maiden contribution from Sierra Leone (34KT).

• Price and tax concessions to crown doozy FY 17 results: Going forward, we expect Nigerian cement price level to remain a strong influence on earnings in Q3 17 with its impact expected to sizably wane in Q4 17 given high base effect from Q4 16’s price surge (+57% YoY to N36,805/ton). At the same time, we retain a cautious volume expectation for Nigerian operation over H2 17 with higher prices likely to keep private demand (~70% of market) largely at bay. That said, we now project a 16% YoY decline in Nigerian cement volume to 12.7MT. Elsewhere, we expect stronger volume growth (18% higher YoY at 10.2MT) in Pan-African markets in the coming months owing to gradual output ramp up in the business’ two new plants (Sierra Leone and Congo). The foregoing combined with our mean Pan African prices at ~N27,000/ton and expectations for the domestic market, should drive 2017 group top-line 29.5% higher YoY to N797 billion (vs. +41% YoY to N412 billion in H1 17).

• On the cost front, we expect gains from energy flexibility to become more evident in Nigeria over H2 17 as the high base implied by the currency down-leg in June 2016 (-61% YoY to N351.82/$) moderates pass-through from NGN weakness. However, away from Nigeria, concerns in Tanzania and Zambia are likely to subsist as usage of expensive diesel continues in the near term. This, in addition to our relatively tamer revenue expectation for the second half of the year, should leave the company’s gross margin at current run-rate level of 57% over FY 17 (vs. 47% in 2016 and 61.1% in the five years leading to 2016) despite expected H2 17 energy gains in Nigeria.

• Overall, net adjustments to our model result in a 5% increase in our FVE to N215.11. Relative to last market price, our FVE is however at a 10% discount following positive sentiments trailing the impressive earnings as well as expectation of a solid FY 2017—our view. Thus, further aided by an expensive relative valuation outcome, which indicated 2017E EV/EBITDA of 11.8x for the company (vs. 9.0x for Bloomberg EMEA peers), we downgrade our rating on the stock to a SELL (vs. NEUTRAL in prior communications).

• See attached for full report