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DANGOTE CEMENT PLC 9M'16 - Cost pressures bite harder on earnings

For the first time since Q4’2014, DANGCEM’s overall cement volume declined on quarterly basis, down to 5.4 million MT in Q3 from the historic high of 6.5 million reported in Q2. Nigeria operation was the main culprit as shipment declined 26% q/q to 3.1 million MT. The drop was however expected as we had earlier guided in our Nigeria outlook report, Seeking a Winning Formula (20 September 2016) that the 46% price hike implemented at the beginning of September could hurt volumes. Speaking with management at the analyst call held after the release of the result, we understand that the hike indeed weighed on volumes, with September volume declining 7% y/y to halt an 11-month y/y growth streak. We recall the nationwide long-week strike (organized by National Association of Block Moulders of Nigeria) to protest the price increase, and believe this could have further impacted volume. Rest of Africa cement volume shipment also bucked the recent growth trend albeit marginally down 2% q/q amidst political disruptions in Ethiopia and intense rainfall in Tanzania. Notwithstanding the q/q decline, overall 9M’16 volumes remain impressive on the back of stronger earlier run-rate, up 41% y/y to 18.3 million MT, 8% ahead of our estimate.

We expect to see further drop in Nigeria cement volume in Q4 as we believe the last price hike would continue to cap demand. As such, we revise FY’16 Nigeria volume to 14.8 million MT (Previous: 15.2 million MT). We have however maintained our Rest of Africa volume at 8.7 million MT given the current strong run-rate (9M’16: 6.5 million). Consequently, our Group FY’16 volume forecast now stands at 22.6 million MT (Previous: 23.0 million MT), below management’s guidance of 24-25 million MT. Notwithstanding, our FY’16 revenue forecast is only little changed at N613.2 billion (Previous: N616.7 billion) as we expect the full-blown effect of the price increases to become apparent. Despite the expected savings from the close-to-zero-use of LPFO in Q4 as earlier said, we expect currency weakness to keep production costs on the high for the rest of FY’16. Amidst this, coupled with inflationary pressure on OPEX and expected strain on topline, we revise our FY’16 EBITDA to N229.7 billion (Previous: N293.9 billion). Our post-2016 earnings forecasts are however relatively unchanged; we expect a significant reduction in dollar exposure as the own-mined coal project attains significant threshold in FY’17, consequently boosting margins. Our target price is revised to N191.09 (Previous: N191.72). DANGCEM trades at 18.3x FY’16 P/E, a premium to 5-year historic average of 17.2x and Middle East and Africa peer average of 10.2x. We have a HOLD rating on DANGCEM.