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ARM Securities Limited
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Dangote Cement Plc - Spotlight on energy efficiency


  • FY 16 results provided some shine to management’s campaign to expand its African footprint with non-Nigerian operations contributing to top-line and, uncharacteristically, providing buffer for earnings over the reporting period via tax credits. Going into 2017, we expect higher prices and improved cost efficiency to underpin earning resilience after a challenging 2016.
  • Sales green light at both ends, with non-Nigeria shining brighter: DANGCEM reported strong top-line growth in Nigeria as impact of raised cement prices offset volume softness (-20% YoY to 3.22MT) to leave revenue from domestic operations 26% higher YoY at N118 billion in Q4 16. Elsewhere, revenues surged in DANGCEM’s pan-African businesses (+75% YoY to N58 billion) after an over 50% YoY increase in average price per ton to N26,692 and 17% increase in cement volumes to 2.2MT in Q4 16. On the balance, the group reported strong jump in revenue (+37% YoY to N173 billion) in Q4 16 which helped push FY 16 sales to N615 billion (+25% YoY).
  • Energy challenges transcend Nigerian domain: In line with the pattern over 2016, energy pressures remained intact over Q4 16 largely due to more expensive energy mix in Nigeria, where DANGCEM had to increase reliance on imported coal, and unfavourable gas pricing in Tanzania. Thus, gross profit margin contracted 3.3pps YoY to 46.7%.
  • Zambian tax credit swings PAT higher: Over the last quarter of 2016, DANGCEM reported unrealized foreign exchange loss (N13 billion in our estimate) which drove down net FX gains from N54 billion as at 9M 16 to N41 billion by YE. Management linked the Q4 16 FX loss to naira appreciation and adverse currency movements in some African operations in the review period. That said, an over ten-fold YoY surge in deferred tax credits to N21 billion, 76% of which were received from Zambia, swung PAT higher (+128% YoY to N53 billion).
  • Higher Nigerian prices and improved energy mix to drive enhanced margins: Going into 2017, we expect price increases to remain net positive for the Nigerian business over 2017 as in Q4 16. Thus, we forecast group revenues at N759 billion (+23% YoY). On the cost side, we expect recovery in domestic gas supply as well as completion of coal mill projects across Ibese and Obajana to reflect in margins in Nigeria after DANGCEM completely cut down LPFO use in Q4 16. Elsewhere, restructuring of O&M contracts in Zambia, Senegal, and Tanzania should provide further buffer to earnings in the current year. Thus, we look for 2017E PAT of N263 billion (+41% YoY).
  • YTD, DANGCEM has declined by 10% (NSEASI: -6.5%) and trades at 2017E EV/EBIDTA of 8.2x (Current: 11.75x) relative to Bloomberg EMEA peer average of 9.4x (current 9.5x). In view of our upbeat earnings outlook for DANGCEM, hinged on higher prices, receding energy challenges, and better cost control that has been largely ignored by recent sell-offs, we see 25% upside from current market price given our FVE of N195.26. Accordingly, we upgrade our recommendation on DANGCEM to STRONG BUY (vs. OVERWEIGHT previously).


07/03/2017 10 EN
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ARM Securities Limited
ARM Securities Limited

ARM Securities Limited is a full-service brokerage house that offers best-in-class brokerage services to local as well as foreign private and institutional investors. Formerly known as Hamilton Hammer, the Company commenced operation in 1994 and was acquired by ARM Investment Managers in 2008--an acquisition which has successfully re-positioned the company as a recognized brokerage firm in Nigeria. The Company is a dealing member of the Nigerian Stock Exchange (NSE) and is regulated by Securities and Exchange Commission (SEC). ARM Securities research team provides insightful commentaries on the Nigerian economy and its equity and debt markets using an approach which incorporates a thorough understanding of the fundamentals of the industries and companies under coverage. The research therefore adopts an integrated methodology of top-down analysis and bottom-up stock selection, which focuses on publicly quoted companies on the Nigerian Stock Exchange that are judged to offer the highest potential for earnings growth. In addition, its analysts provide periodic commentaries on a range of topical global and local issues which provide investing clients with a holistic view of the opportunities and risks in today’s financial market landscape. ​

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