August 5, 2021/Cordros Report
We maintain our positive outlook on Dangote Cement; however, we expect the momentum in earnings growth to moderate in H2-21 due to currency and inflationary pressures. That said, we expect a favourable price volume mix across its regions of operations combined with robust balance sheet management to remain supportive of earnings. Following the impressive group volume growth in H1-21 (+26.2% y/y to 15.3MMT), we have revised our 2021E volume growth estimate upwards by 10.3% to 30.0MMT (+16.9% y/y). This, alongside our expectation for a higher price per tonne for Nigeria (+11.5% y/y) and Pan Africa (+13.5% y/y), translates to 2021E revenue of NGN1.33 trillion (+28.9% y/y). Similarly, we have revised our 2021E EBITDA, and PBT estimates upwards by 24.9% and 32.1% to NGN647.80 billion and NGN516.76 billion, respectively. Accordingly, on our 2021E EPS of NGN20.67 (+27.3% y/y), we estimate a DPS of N16.50, implying a dividend yield of 6.7% based on the price of NGN248.10/share (August 5).
H1-21 EPS Beats Estimates; Volume Forecast Revised Upwards: On an annualised basis, H1-21 EPS is 37.7% ahead of the 2020FY EPS of NGN16.24 and 29.6% above our initial 2021E EPS forecast of NGN17.26. The growth in EPS was driven mainly by an impressive topline growth and higher margins, both of which neutered the impact of elevated energy cost and the surge in tax charge. Q2-21 sales grew by 57.2% y/y, supported by broad-based expansion in Nigerian (+66.3% y/y) and Pan African operations (+40.4% y/y). We believe the strong revenue growth in Nigerian Operations was driven by the combined impact of the low base in Q2-20 due to the pandemic, increased public sector demand for cement and price increments implemented during the period. Barring the re-institution of lockdown measurers across the federation, we expect public sector demand to be sustained with the ramp-up in economic activities and rally in oil prices, allowing for capital expenditure projects. On the other hand, we expect the momentum in private sector demand to slow down due to the increased yields in the fixed income market, a development that would undermine investment in real estate, in our view. On Pan African Operations, management noted that the volume growth (+15.5% y/y to 5.5MMT in H1-21) was driven by growth in all countries of operations except Senegal, which is already at full capacity. Over H2-21, we expect Pan African volumes to be supported by an increase in cement consumption from individual home builders, higher government spending on capital projects and improved optimisation of its plant performance as supply chains disruptions dissipate. Overall, we have revised our volume expectation for Nigeria and Pan African operations by 10.1% and 10.6% to 18.9MMT (+19.1% y/y) and 11.0MMT (+3.3% y/y), respectively.
Favourable Price/Volume Mix to Support 2021E Revenue: Following the upward revisions to our volume growth estimates, higher realised prices due to lower rebates (in Nigerian Operations), and translation impact of currency devaluation on Pan African revenue, we have raised our 2021E sales forecast by 18.6%, which translates to a 28.9% y/y (previously +8.6% y/y) growth over 2020. We highlight that the company recommenced the exportation of clinker from Nigeria in Q2-21 through both the Apapa and Onne terminals – this was suspended in Q1-21 due to the need to meet the high demand in the domestic market. In addition, during the conference call, management disclosed that a new plant (Okpella; 3.0MMT) would be commissioned in Q3-21. DANGCEM also commissioned the second gas-fired power plant in Tanzania (the largest plant in Pan African operations) during the second quarter of 2021.
Higher Realised Prices to Cushion the Impact of Energy Pressure on 2021E EBITDA: DANGCEM faced cost pressures in H1-21, particularly in its Nigerian Operations due to the pass-through impact of the naira devaluation on US dollar-linked inputs. For context, energy cost (+59.4% y/y) grew faster than volumes (+33.2% y/y) in H1-21. Though the group’s EBITDA margin rose by 5.1ppts to 50.8% in H1-21, it moderated significantly during Q2-21 (48.4% vs 53.5% in Q1-21). We imagine that the alignment of the official rate to the I & E window rate in May amplified pressures on energy cost. For 2021E, we estimate EBITDA growth of 36.0% y/y, but forecast EBITDA margin will moderate to 48.6% by year-end from 50.8% in H1-21. In H2-21, we expect pressures on margins to be partly offset by the price increments implemented at the start of the year amid efficiency gains associated with the company’s new production plants.
Valuation: The net impact of the changes to our model is an increase in our target price to NGN272.55 (previously: NGN255.54/s). Based on the limited potential upside of 9.9%, we have changed our rating from a “BUY” to “HOLD”. On our estimates, DANGCEM is currently trading on a 2021E P/E of 10.6x and EV/EBITDA multiple of 7.8x.
