October 26, 2018/Cordros Update
Update: Following the September 30 result wherein sales volume in Q3 was lower than our expectation, we revise our 2018E EBITDA and PBT estimates for DANGCEM lower by 6% and 11% respectively to NGN444 billion and NGN300.7 billion. Our new estimates are now higher by 14% (previously 22%) and 4% (previously 17%) respectively vs. 2017FY. We also cut estimates for 2019-2020E by 4% and 9% respectively on average. Our view is that continued low economic growth in the group’s biggest market (Nigeria), combined with high utilization rates – with increasing competition – in the rest of Africa (RoA), does not suggest that the group will sustain volume growth at the high single-digit achieved YtD in 9M-2018. And while we expect cement prices to be fairly stable in both Nigeria and the RoA markets in the short term, we note that risk to the outlook is somewhat stronger than at the beginning of the year.
Our volume growth forecast is rightly conservative: We revise our group volume growth forecast for 2018E lower to 8% (previously c.10%), and maintain 5% growth forecast for 2019-2020E (2012-2017 CAGR: 17%). For 2019-2020E, we forecast volume to grow by 6% average in Nigeria (2012-2017 CAGR: 5%) and for RoA by 5% (2013-2017 CAGR: 91%). We are not alone on the cautionary view about the growth of the Nigerian cement market, as one the biggest producers in the country also confirmed this view in a recent analysts’ call. And while noting the strong demand for cement especially in East Africa, the (1) already high utilization rates in Senegal (97%), Cameroon (79%), Ghana (83%), South Africa (72%), Ethiopia (82%), and Zambia (81%), accounting for 68% of RoA volume and (2) growing competition with new plant commissions, suggest the group’s volume has little legs to run in the region.
But energy efficiency gains will be supportive: All kilns in Nigeria are now running on locally sourced fuel, cheaper than imports, and eliminates both FX volatility risk and the need for LPFO. Management said that up to 90% of the coal it uses is sourced from the relatively cheaper (vs. gas and imported coal) mine operated by a related company. For the RoA operation, the completion of power switch to gas in Tanzania in Q4-2018 is expected to strengthen margin via reduction of costs (which management guided to about USD25/tonne) and improvement in output (which management guided to about 300kts, from about 180kts average in 9M-2018).
The implication of tax concession: Management said at the recent call that it is awaiting receipt of the pioneer tax certificate by the end of October 2018 to enable it enjoy tax concession in Nigeria. According to management, the tax concession will reduce the effective tax rate for the group from 28% as at 9M-2018 to 15% by end-2018, and by implication, +20% and +16% 2018E and 2019E net profit compared to our current estimates, respectively.
Valuation: On our DCF-derived TP of NGN232.99/s, DANGCEM’s stock offers 16% potential upside – and expected total return of 21% after incorporating 2018E dividend yield of 5% – with BUY recommendation. Based on our estimates, the stock is trading on a 2019E P/E and EV/EBITDA multiples of 13.8x and 7.4x, which compares with Asian (16.0x and 8.6x) and Middle Eastern (15.7x and 9.6x) peers.
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