May 3, 2024/Cordros Report
In this report, we update our views on DANGCEM and outline our expectations for the rest of the year. The group’s Q1-24 result revealed a robust growth in aggregate revenue (+101.0% y/y), which as we envisaged was driven by the 78.9% y/y hike in prices and a 26.1% y/y uptick in Nigeria sales volume. We revise our TP upwards by 3.4% to NGN476.44/s but maintain our “SELL” rating at the present market price (NGN656.70/s). The TP adjustment was driven by our improved outlook of topline performance (+46.5% y/y) to be buoyed by price increases (+41.9% y/y) and volumes (+3.2% y/y). Accounting for the impact of rising costs on the group’s profitability, we now forecast an EPS growth of 2.8% y/y to NGN27.21 and a DPS of NGN30.84, translating to a dividend yield of 6.5%. Based on our estimates, DANGCEM is trading on a 2024E P/E of 17.5x and EV/EBITDA of 7.6x.
Lingering cost challenges to dampen earnings growth: As witnessed in Q1-24, we believe construction activities has fully recovered and we expect DANGCEM to leverage on the public and private sectors’ demand in growing sales in the local market and exporting to various regional markets. Also, with the Pan-African region almost at full production capacity, we believe any group volume growth in 2024E would largely depend on the outturn in the Nigerian operation. Thus, we forecast a revenue growth of 46.5% y/y, to be driven mostly by higher cement prices (+41.9% y/y), while we anticipate group volumes to settle higher at 3.2% y/y. Notwithstanding, we note that rising costs remain a major headwind impacting earnings and subduing cost control efforts. As a result, we think cost pressures will remain in the near time and forecast gross and EBITDA margins to weaken by 300bps y/y and 524bps y/y to 51.4% and 34.9%, respectively. Factoring our projections for net FX losses (NGN205.17 billion | 2023FY: NGN164.08 billion) in 2024E, we project higher net finance cost (+26.3% y/y) and thus, an EPS print of NGN27.21 (+2.8% y/y | 5-year CAGR: 23.1%).
Naira depreciation to further boost solvency ratios: We note improvements in DANGCEM’s debt-to-equity (-428bps to 61.8% | 5-year average: 58.7%) and debt-to-capital (-1.07ppts to 37.7% | 5-year average: 36.4%) ratios in 2023FY supported by the effect of FX depreciation on foreign currency translation reserve (+720.2% y/y). Although we do not envisage a shift in the group’s dependence on debt financing, we however think the solvency picture is poised to improve further given the anticipated depreciation this year (currency translation reserve so far in Q1-24: +64.3% q/q). Subject to this, we forecast debt-to-equity and debt-to-capital ratios to improve to 51.1% and 33.4%, respectively for 2024E. Furthermore, we envisage 5-year average forecast for both ratios to settle at 45.8% and 31.1%, respectively, and we think this will help the group maintain its financial health.
Valuation: Our target price is NGN476.44/s, derived from a 60/40 blend of DCF and sector relative valuation (P/E & EV/EBITDA) estimates. Our DCF FV is derived from an equal blend of FCFF (NGN378.99/s) and FCFE (NGN405.41/s) estimates, assuming a 21.4% WACC and a 4.0% terminal growth rate. On P/E, we utilised the Bloomberg Middle East & African (MEA) peer average 2024E multiple of 19.3x. Applying this to our 2024E EPS estimate of NGN27.21/s gives a FV of NGN524.53/s. Similarly, for EV/EBITDA, we also utilised the 2024E Bloomberg MEA peer average (10.7x) and derived a fair value estimate of NGN681.06/s.
