DANGOTE CEMENT PLC H1'17 - Earnings surge on pricing, improved fuel mix

Earnings surge on pricing, improved fuel mix
DANGCEM reported a 54% increase in H1’17 EBITDA (₦204 billion), coming in slightly behind our ₦206 billion estimate. Strong cement prices and cheaper fuel mix in the Nigerian operations as well as improving contribution from Pan-African operations (save for Tanzania) amidst capacity ramp-up remain the key performance drivers. However, the cement giant reported a net finance cost of ₦7.9 billion vs. the N26.8 billion net finance income reported in the prior year, following the sizeable FX gain in Q2’16 - arising from the impact of currency devaluation. Despite this, H1’17 PBT rose 25% y/y to ₦155.6 billion (Vetiva: ₦145.1 billion) buoyed by the strong earnings from operations (EBIT up 67% y/y). Coupled with pioneer tax exemption on production from lines 3&4 in Ibese and Obajana plants, PAT rose 39% y/y to ₦144 billion, 7% above our estimate.

EBITDA margin in Nigeria remained very strong at 66% (Q1’17: 65%; H1’16: 59%). Apart from strong cement prices, improvement in fuel mix continued to support margins. The cement giant continues to diversify away from the use of LPFO (a more expensive energy source) in favour of gas and locally mined coal. Whilst gas usage in H1’17 improved to 58% (Q1’17: 48%) at Obajana and to 55% (Q1’17: 53.5%) at Ibese, the use of LPFO was lower at 4% (Q1’17: 6%) for Obajana and 2% (Q1’17: 3.4%) for Ibese. More importantly, the company stopped the use of imported coal at the Obajana plant - replacing with cheaper locally sourced supply (from Dangote Industries Limited and other third party suppliers).

We are optimistic about the long term prospect of the cement giant. Given the traction gained across other Pan-African operations as well as the potential growth opportunity in the Nigerian market. We expect margins to remain strong in the near term - buoyed by strong cement price outlook and increasing efficiency in fuel mix across the entire group. Management’s guidance on the use of gas turbines at Tanzania (starting September) is further supportive of margins; Tanzania currently generates negative EBITDA amidst heavy reliance on expensive diesel. After updating our model to account for the earnings outperformance, we revise our PAT estimate to ₦265 billion (Previous: ₦251 billion). Consequently, our target price is raised higher to ₦240.58 (Previous: ₦209.21). Whilst the stock is fairly-valued based on fundamentals, we believe the strong market sentiment will continue to support demand on the counter. Hence, we revise our rating on the stock to HOLD.