EUR 3.48 For Business Accounts Only

Initial View: Dangote Cement Plc. FY 17 - Improved Margins but growth momentum cools off

• In sync with our expectation, Dangote Cement (DANGCEM) reported full-year 2017 result showing a 43% YoY growth in EPS to N65 (2017E: N16.11) on the back of improved margins, which more than offset the impact of lower finance income and bill to the taxman, to drive earnings below estimates. For context, while operating profit tracked higher by 67% YoY to N304 billion, the duo of higher net-finance charge (+973% YoY to N16.8 billion) and higher taxes (124% YoY to N85.3 billion) moderated earnings growth. The company reported dividend of N10.50/share (pay-out ratio: 87%) which translates to 4% dividend yield based on current pricing
• Going by the breakdown, much of the margin expansion in Q4 stemmed from higher prices in the Nigerian business (+7% YoY to N43,411/tonne) which more than made up for weaker volumes (-4% YoY to 3.1MT). Away from Nigeria, volumes were however stronger (+7% YoY to 2.3MT) as stronger volumes in Cameroun, Ethiopia and Senegal jointly contributed to robust volumes in the period. Consequent on the mentioned, and pass-through from still high per tonne price in Nigeria, group revenue printed higher 17% YoY at N202 billion – missing our estimate by only 4.5%. Elsewhere, energy efficiency improved over the quarter with input cost decelerating by 80bps YoY to N4 billion. For evidence, management reported lower usage of LPFO in the period to 2% and 1% of energy usage in Obajana and Ibese respectively (2016: 29% and 16%) as local coal and gas usage assumed greater prominence. Thus, gross profit was 37% higher YoY to N110 billion with related margin at 54.7%, below Q1 – Q3 2017 levels. Other highlights from the result came in form a surge in operating expenses (53% YoY to N41.8 billion), which we allude to higher haulage cost and professional fees. The combination of higher opex and lower ‘other income’ (-65% YoY to N2.3 billion) moderated growth in operating profit (+18% YoY to N71 billion) with related margin coming in 43bps higher YoY at 35.2%.
• On balance, save for the unexpected tax provision (which management guided to a reversal), DANGCEM’s Q4 17 was very strong and reflected gains from robust price and currency translation gains of Pan-African operations, and the improved energy flexibility (with FX exposure at the lowest level with the used of locally mined coal) DANGCEM trades at a P/E and EV/EBITDA of 22.8x and 12.2x compared to Bloomberg Middle and East Africa Peers at 20.9x and 11.3x respectively. Our last communicated FVE of N282 translates to a NEUTRAL rating on the stock. Our model is under review.

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