EUR 53.02 For Business Accounts Only

DANGOTE CEMENT PLC - FX gains taper impact of gas shortages

Having weighed on margins in Q1, the persistent gas shortages that have rocked the year thus far again came to the fore in DANGCEM’s 6-month earnings. H1’16 gas utilization at Obajana and Ibese plants dropped to 50% (H1’15: 88%) and 26% (H1’15: 83%) respectively, prompting higher use of more expensive fuel (LPFO, AGO and imported coal). In the wake of the less favourable fuel mix, DANGCEM’s gross margin over the 6-month period softened to 52% (H1’15: 65%), lower than our 53% estimate. Still on margins, the group’s H1’16 EBIT margin declined much steeper, down to 34% (H1’15: 51%) amidst less efficient OPEX containment over the period and cement pricing pressure in Rest of Africa operations, particularly South and East Africa. Talking in absolute terms, EBIT declined 20%y/y to N98.0 billion, 9% behind our estimate.

We do not think demand would be the major concern for DANGCEM in H2’16. Rather, we think meeting the demand (and at decent margins) could be the biggest worry amidst the persistent gas shortages. As part of efforts to calm some of the energy challenges however, management said it has moved to install coal mills across its plants in Nigeria. We understand that coal running has started at Obajana line 1 & 2 since July, with line 4 expected to be completed in 4-6 weeks. Ibeshe and Gboko lines are also being readied for coal, with completion scheduled for August and September respectively.

As earlier mentioned, we believe DANGCEM is on course to meet our FY’16 volume estimate of 23.8 million having already shipped 57% of the estimate as at H1’16. We have revised our FY’16 revenue estimate to N573.5 (Previous: N564.0 billion) amidst our expectation of price increase in Nigerian operations in the second half of the year; we think this will make up for price pressure in Rest of Africa, particularly South and East. We have also revised our post-FY’16 revenue projections as we expect the weakened currency value to yield more topline naira translations from operations outside Nigeria. After tweaking our model to reflect the higher costs of dollar-priced input materials and inflationary pressure on OPEX, we revise our FY’16 EBITDA to N248.8 billion (Previous: N283.1billion). Nonetheless, our FY’16 PAT estimate is revised higher to N188.1 billion (Previous: N184.1billion), to be buoyed by net FX gains on foreign currency denominated assets. We note that the N42.7 billion reported as net FX gain for the period was based on the NGN285/USD rate at the end of Q2. Since then, the naira has further weakened 12% to the current rate of NGN320.50/USD, having previously touched a high of NGN330/USD. As such, we expect more net FX gain in H2’16; we estimate a total of N55 billion for FY’16. After reflecting all the aforementioned views and assumptions in our model, we revise our target price to N183.19 (Previous: N177.01). As earlier mentioned, we believe DANGCEM is on course to meet our FY’16 volume estimate of 23.8 million having already shipped 57% of the estimate as at H1’16. We have revised our FY’16 revenue estimate to N573.5 (Previous: N564.0 billion) amidst our expectation of price increase in Nigerian operations in the second half of the year; we think this will make up for price pressure in Rest of Africa, particularly South and East. We have also revised our post-FY’16 revenue projections as we expect the weakened currency value to yield more topline naira translations from operations outside Nigeria. After tweaking our model to reflect the higher costs of dollar-priced input materials and inflationary pressure on OPEX, we revise our FY’16 EBITDA to N248.8 billion (Previous: N283.1billion). Nonetheless, our FY’16 PAT estimate is revised higher to N188.1 billion (Previous: N184.1billion), to be buoyed by net FX gains on foreign currency denominated assets. We note that the N42.7 billion reported as net FX gain for the period was based on the NGN285/USD rate at the end of Q2. Since then, the naira has further weakened 12% to the current rate of NGN320.50/USD, having previously touched a high of NGN330/USD. As such, we expect more net FX gain in H2’16; we estimate a total of N55 billion for FY’16. After reflecting all the aforementioned views and assumptions in our model, we revise our target price to N183.19 (Previous: N177.01).