Dangote Cement Plc - Weaker Growth, Higher Valuation, Turning Cautious!
- DANGCEM posted another impressive performance to over-shadow the historic feat achieved in 2016. Much of the strong performance mirrored margin improvement in Nigeria’s operations, a reflection of price-induced revenue growth as well as cost-effective energy mix. Also, non-Nigerian operations recorded volume growth on the back of higher demand in Tanzania, Senegal, Cameroun, Ethiopia, and Zambia. Consequently, the company reported a cumulative FY 17 EPS (N11.99) that is 1.4x and 1.1x those of FY 16 (restated) and FY 15 respectively. However, over Q4 17, the company’s EPS was 79% lower YoY at N0.65 following a surprise provision for unapproved tax incentives at the Ibese 3&4 and Obajana 4 lines which pushed the quarter’s effective tax to 84%.
- Going into 2018, we remain broadly positive on Dangcem and expect the company to sustain earnings growth, albeit at a much slower pace than 2017. Specifically, we see volume induced revenue growth and lower energy as key drivers of earnings in FY 18, relative to the price-induced growth story in prior year. On pricing, we believe with Nigeria gross margin now ahead of the pre-crisis level of ~61.8%, the argument for leaving prices at currently elevated levels to compensate for cost pressures will fall apart. And on energy, we look for a stable energy source over 2018 with locally mined coal now gaining more prominence and the streamlining of energy source in the non-Nigerian operation, especially with the installation of a gas genset in Tanzania. Consequently, the impact of lower energy cost is expected to moderate the waning effect of price hikes on margin which we expect to print at 57% (2017: 56%).
- Overall, we project EPS of N14.52 (+21% YoY). That said, while we think earnings growth story is compelling, it looks expensive from a valuation standpoint. Accordingly, we maintain our NEUTRAL recommendation with a FVE of N256.85 (previously: N282). DANGCEM trades at 2018 EV/EBITDA of 10.4x which is at a discount to EMEA peers of 10.5x.
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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