May 29, 2020/Cordros Report
DANGCEM’s Q1-20 sales were higher (+3.8% y/y), supported by higher prices, but volume declined slightly, mostly on account of the COVID-19 outbreak, which impacted the company’s Pan African operations (-2.9% y/y). Given the blend of economic challenges, stronger competitive landscape, and geometrically rising cases of the virus across most of the company’s Pan African markets, we believe the decline in Q1-20 volume may not be the last. Meanwhile, at 4,018MT (+0.7% y/y), volume achieved in Nigeria is already ahead of our full-year estimate (11.5% annualized). Nonetheless, we believe the impact of the COVID-19 pandemic will reflect on the company’s Nigeria operations from Q2-20, given weaker revenue profile for the FGN which will negatively impact infrastructure spending. Management acknowledged that sales volume achieved in April already underperformed last year. This, together with the economic lockdown, with its negative connotation on private investments, should weigh on volumes from Nigeria operations over the next few quarters. Against that backdrop, we have cut our volume expectation by 4.3%. This cascaded into a 4.2% decline in our TP to NGN172.69/s. Since our last update (March 02, 2020), DANGCEM share price is down 18.5%, we now view the stock’s risk-reward as positive, and thus, presenting an attractive entry point. Therefore, we upgrade our recommendation on the stock to a BUY.
A New Line at Obajana; To What End? During our engagement, management highlighted plans to raise installed capacity in Obajana this year to 16.25MT. For a company whose best capacity utilisation rate, in Nigeria, has been about 51.7%, we struggle to see the investment case for such project, especially at a time where the company still faces the hurdle of both dividend payment (c.NGN270 billion) and share buyback (c.NGN240 billion) obligations to shareholders. Although management stated that it has begun exporting clinker to West and Central African market, we suspect that the capacity expansion in Obajana may be targeted towards supporting clinker export.
Higher Prices are Statuesque, But May Not Be Sustainable: We like that DANGCEM raised prices in Nigeria by 4.9% y/y. We believe this in a bid to fully pass on the higher VAT to final consumers. Nonetheless, we remain cautiously optimistic about price growth looking ahead, owing to an already oversupplied cement market, made worse by a weak volume growth outlook. Thus, we maintain the view that average prices in Nigeria will decline marginally by 0.2% y/y, as management extends price rebates and discounting to distributors in a bid to support volume growth.
We Are Less Upbeat on Cement Consumption: We have cut our 2020E EPS estimate by 4.4%, reflecting the downward revision we made to cement volume expectation, occasioned by our less sanguine view on cement consumption outlook across most of the countries in which the company operates. In our view, factors that are supportive of cement consumption appear broadly weak, given the combination of (1) unimpressive revenue profile of the Nigerian government, occasioned by the rapid pace of crude oil price downslide, and challenged private investment, as well as (2) the COVID-19 induced economic downturn across other African markets, with South Africa and Zambia already facing significant pressure from economic recession. We now forecast Nigeria and Pan African volumes to decline by 1.7% y/y (previously: +2.1% y/y) and 3.0% y/y (previously: +2.5% y/y). Our volume forecast implies a utilization rate of c.47.5% for Nigeria and 57.9% for the rest of Africa.
Valuations: At our revised TP of NGN172.69/s (previously: NGN179.89/s), we estimate that the stock offers a 24.7% potential upside and 30.6% potential total return after incorporating our estimate for 2020FY expected dividend yield. Thus, we upgrade our recommendation on the stock to a ‘BUY’, from a HOLD Previously.
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