November 29, 2021/CSL Research

Dangote Cement is set for an impressive FY 2021 performance, as the company reported a 33.4% y/y growth in Net Income as of 9M 2021 to N278.5bn & EPS of N16.23, exceeding its FY 2020 performance (Net Income: N276.1bn & EPS: N16.14). The frenzy for housing developments since the reopening of the economy in Q3 2020, coupled with a pick-up in government infrastructure spending amid the reflationary policies by governments in its countries of operations drove demand. Beyond that, the elevated cost pressures faced by the Nigerian cement players which gave rise to opportunities to increase prices during the review period proved supportive. On an annualized basis, 9M 2021 EPS of N16.23/s is ahead of the 2020 EPS of N16.14/s. 

Although, in Q3, due to the torrential downpour that swept through many locations in the country and routine plant maintenance, cement demand tapered, seeing Revenue decline by 7.5% q/q to N235.5bn in its Nigerian operations, we expect sustained demand for cement, higher realized prices, and increased capacity utilization to continue to support earnings growth through the year. We have however adjusted our forecasts to reflect the current run rate and the overall effect is a moderate decrease to our 2021 EPS estimate by 7.7% to N22.0/s from N23.7/s previously. We estimate a DPS of N18.70, suggesting a dividend yield of 6.7% based on the last closing price of N280.00/s.

We have adjusted our risk-free rate downwards and raised our terminal growth rate marginally. This raises our target price to N294.42 from N283.16 previously, implying a limited upside potential of 5% when compared to the last closing price of N280.00/s. Despite our optimistic earnings outlook, we downgrade to a HOLD from a BUY previously as we believe earnings expectations have been largely priced in. On a relative valuation basis, the cement producer is currently trading at a 2021e EV/EBITDA of 7.8x compared with its EM peer average of 13.7x. We arrived at our target price using a blend of discounted cash flow and relative valuation in a ratio of 60:40.

Source: Company data, CSL Research