March 6, 2019/Cordros Report

Update: We make slight adjustment to our 2019 estimates following the 2018FY results and call. Given the high-base of 2018FY, we now look for -36% EPS in 2019. Our theme for 2019 are (1) 17% group effective tax rate, (2) mid-single digit volume growth, and (3) stable prices. Overall, we retain BUY recommendation on 27.47% expected total return, with a TP of NGN237.38/s.

Pioneer status set to expire in 2019: DANGCEM’s 2018FY EBITDA and PBT came in line with our expectation. However, EPS printed way ahead of our forecast, largely on account of larger-than-expected tax credit. Adjusting the tax effect, we estimate that EPS would have grown by only 1.2% y/y to NGN11.8, with effective tax rate at 33% (9M-18: 36%). We estimate effective tax rate of 17% in 2019E, being the final year of tax exemptions from the Nigerian lines. Our ETR estimates for 2020-2025E are unchanged at 30%.

We see broadly stable prices: Elsewhere, we see a more competitive Nigeria cement market in 2019, especially with the onstream of BUA’s facilities (1.5 MT in Sokoto and 3.5MT in Edo). Yet, we look for fairly stable local prices (+0.5% achieved in 2018FY), given that the industry has become an effective oligopoly which should not immediately usher price competition. Further supporting our view of relatively flat per/bag prices, management, in its last communication, guided to a no price reduction in the interim. We hold similar view for prices across Pan-African markets (+9.7% achieved in 2018FY), as increasing number of government policies in the countries of operation are now restricting the importation of clinker/bagged cement.

Positive volume outlook: On volumes, we forecast 6.2% y/y to 14.93MT in Nigeria in 2019. Our view on volume growth is anchored on the continued fairly-strong government infrastructure activities. Already, management has hinted to a strong start to volume growth in the first two months of the year, at more than 10% ahead of the corresponding period of last year. Across offshore operations, we expect ramp up of sales in Tanzania, post-crisis Ethiopia, and post Ebola crisis in Sierra Leone to drive 11.2% y/y volume growth to 10.26MT. Beyond 2019, we see no major risk to DANGCEM’s competitive advantage as we expect the combination of its market-leading position in Nigeria, strong market share in virtually all non-Nigerian markets, and ability to compete on prices with low cost production, to protect earnings for the company. We forecast volume CAGR of 4.2% over 2020-2025E for the Nigerian business and 3.0% 2020-2025E CAGR volume growth for the off-shore business.

Currency and energy efficiency to keep cost subdued: We remain constructive of gross margin, from currency stability and energy efficiency perspectives. We consider the return of the Tanzania production lines to gas power as notable margin tailwind. Overall, we expect EBITDA to expand by 12.4% for the group, with EBITDA margin at 50.01% (vs. 48.3% in 2018FY). Having adjusted for tax expenses and finance charges, we now look for PAT of NGN249.94 billion (-36% y/y).

Valuation: DANGCEM currently trades at EV/EBITDA   of 7.86x, relative to 16.77x for its Middle East & Africa peers. On current market price of NGN196.00, our revised TP implies an upside of 21.11%, and expected total return of 27.47%, after incorporating our 2019E dividend yield of 6.36%. We have a BUY recommendation on the stock.

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