Culled—Proshare
August 25, 2016/FBNQuest Research
Maintaining Neutral rating despite increases to our EPS forecasts
Dangote Cement’s (DangCem’s) Q2 2016 PAT beat our forecast by a considerable margin and grew strongly (+132% y/y). However, the results were mainly driven by fx gains. Excluding the gains, the underlying results were weak. As such, we have increased our EPS forecasts by only 6% on average over the 2016E-18E period.
Although we have rolled over our valuation to 2017E, our new price target of N191.1 has barely changed because (i) we have reduced the P/E multiple driving our price target to 15.5x from 17.5x previously, in line with the multiple contraction of international peers, and (ii) increased our risk-free rate by 200bps to 14.5%.
Having gained +6.2% ytd (vs. -2.7% NSE ASI), the shares now provide a potential upside of +5.9% from current levels. Consequently, we retain our Neutral rating on the stock.
PAT up 132% y/y but operating profit down -36% y/y
DangCem’s Q2 results showed marked growth across the P&L. While sales grew by 19% y/y to N151.7bn, PBT grew by 20% y/y to N70.4bn despite a contraction in gross margin which lead to operating profit falling by -36% y/y.
The growth in PBT was driven by a net interest income of N28.4bn on the back of net fx gains of N38.1bn. Thanks to a positive result of N67.6bn on the other comprehensive income (OCI) line (fx translation gains), PAT grew by 132% y/y to N123.2bn.
Sequentially, sales were up by 8% q/q. However, PBT and PAT grew by 29% q/q and 130% q/q respectively due to the impact of fx. Compared with our forecasts, sales missed by 5%. However, PBT and PAT beat by 28% and 144% respectively.
Core operations weighed down by disruptions to gas supplies
Despite the stellar y/y growth in PBT, DangCem’s core operating profit for Q2 declined by 36% y/y due to gas supply disruptions to Obajana and Ibese, the two largest plants in Nigeria. As such, the plants had to utilise a higher proportion of expensive low-pour-fuel-oil compared with the prior year.
To mitigate the issues of fuel adequacy, management disclosed that it intends to shift its overall fuel mix in favour of cheap coal. Consequently, it has launched coal facilities for Obajana lines 1 & 2. The addition of other coal facilities at Ibese and other lines in Obajana is expected to be completed by the end of September.
Beyond Q2, although our 2016E volume forecast is down by -0.7% to 25.6mmt, we have increased our 2016E sales by 7%. As such, we forecast 2016E sales growth of 34% y/y to N658.9bn. We also see PBT growth of 24% y/y to N233.5bn (vs. N188.3bn 2015).
