October 26, 2018/FBNQuest  Research  

Limited changes to our EPS forecasts and price target: 

Although Dangote Cement’s (DangCem) earnings surprised negatively relative to our estimates, we have made limited revisions to our EPS forecasts over the 2018-20E period. Our new price target of N274.5 represents a cut of just 3%. On its earnings conference call, management stated that it has received confirmation that its much awaited pioneer tax relief for Ibese lines 3&4 and Obajana line 4 has been approved by the government, and that it expects the final step – receipt of the certificate – will be over in a matter of weeks. 

As such, the anticipated tax credits from excess tax charges taken in prior periods are expected to result in a lower effective tax rate of c.15% for 2018E compared with a tax rate of 36% for 9M 2018. On the back of this, we have lowered our 2018E tax rate assumption by -800bps to 22%, though still higher than guidance. This reduction underpins the 9% increase to our 2018E EPS forecast. 

However, our tax rate assumptions for the 2019-20E period are unchanged. As such, our EPS forecasts for the 2019-20E period are only 3% lower on average. In terms of volume trends, group unit volume growth decelerated to 8% y/y to 5.4 million tonnes (mt) from the 12% y/y growth posted in Q2 2018 due to weaker unit volume growth of c.6% y/y in Nigeria compared with 25% in Q2 2018. The Pan-African operations delivered volume growth of c.9% y/y. 

Our new forecasts now translate to 2018E sales and PBT growth of 12% y/y and 26% y/y to N903.8bn and N14.60 respectively. On a relative basis, DangCem shares are trading on a 2018E P/E multiple of 13.7x for EPS growth of 21.4% in 2019E. The shares imply a potential upside of 36.9% from current levels. As such, we retain our Outperform recommendation on the shares.

Q3 PBT down 4% y/y due to gross margin contraction & opex.: 

DangCem’s Q3 2018 PBT declined by -4% y/y to N61.8bn.  The key drivers behind the y/y decline in earnings were a gross margin contraction of -130bps y/y to 55.6% and a 19% y/y rise in opex. These negatives completely offset sales growth of 6% y/y and a -10% y/y reduction in net interest expense. 

Thanks to the combination of a positive result of N9.2bn in other comprehensive income (compared with –N7.9bn in Q3 2017) and a lower effective tax rate of 27.0% (vs. 31.3% in Q3 2017), PAT grew by 58% y/y to N54.2bn. Sequentially, sales and PBT declined by -16% q/q and -20% q/q respectively. Compared with our forecasts, sales missed by around 7%. However, PBT missed by a wider margin of 13% because gross margin surprised negatively.  PAT also came in around 6% behind our forecast.