Nigeria | Dangote Cement Plc. Q1:2016 Earnings Update

LAGOS, Nigeria, Capital Markets in Africa — Dangote Cement Plc (“DANGCEM” or “the Group”) released its Q1:2016 result on Monday 25th April. Revenue growth was strong and broadly in-line with estimates at 22.2% Y-o-Y and 11.3% Q-o-Q to N140.5bn while PBT declined 22.3%Y-o-Y (to N54.5bn) against the backdrop of high base impact of FX Gains recorded in Q1:2015 on Naira devaluation, as well as weaker operating margins as a result of price competition in key markets. Highlights of the result, our outlook, and valuation of the Group are presented below.

Strong Volumes drive Revenue Growth despite Pricing Headwind
Sustaining its dominance of the African cement Market, DANGCEM’s Q1:2016 revenue grew markedly by 22.5% to N140.5bn from N114.7bn in Q1:2015. The Group’s revenue growth was mainly driven by market share gains across all reporting segments which notched up Group sales volume in the Quarter by 69.6% Y-o-Y and 10.4% Q-o-Q to 6.4m MT. The improvement in volumes buffered the impact of lower prices of cement across all the segments on sales, especially in Nigeria and South & East Africa (SEA) where price competition has gained traction due to a weaker economy and increasing supply capacity. Price/ton fell by 27.3% Y-o-Y in Nigeria and 21.4% Y-o-Y in SEA. Sales contribution from Ethiopia, Cameroon and Senegal drove up West & Central Africa (WCA) volumes and  revenue by 448.9% and 401.5% Y-o-Y to 1.2m MT and N23.5bn respectively while SEA volumes and revenue were up by 49.2% and 17.4% to 0.7m MT and N10.2bn respectively.

Nigeria, surprisingly accounted for 53.4% of Group sales volumes growth, despite macroeconomic headwinds, weakening per-capital income growth and fiscal spending. We believe price competition strategy embarked on last year is achieving the desired strategy in driving both industry volumes and DANGCEM’s market share. Volumes and sales in the home market (Nigeria) grew 45.4% and 5.7%   Y-o-Y to 4.5m MT and N107.2bn accounting for 70.1%% and 76.3% of the Group’s volume and revenue respectively.

Base Impact of FX Gains and Weaker Operating Margins Depress Earnings
The full impact of price actions taken in Nigeria and other reporting segments led to a contraction in operating margins. Operating expense increased faster than revenue by 27.4% to N22.4bn from N17.6bn to pressure OPEX margin to 15.9% from 15.3%. The Group’s EBITDA margin declined by 11.2% to 51.5% but improved modestly by 0.6% Y-o-Y in absolute terms. Operating profit (EBIT) trimmed 4.0% Y-o-Y to N56.1bn and EBIT margin was down by 11.0% points to 39.9%. We had anticipated the weakness in operating margins to have been partly offset by economies of scale benefits from higher volumes, but gas shortages in Nigeria exacerbated the pressure on margins as Group fuel & power costs doubled. The high base impact from FX gains recorded in Q1:2015 (following Naira devaluation), led to a contraction in net margin by 22.2% to 37.6%; hence the 23.1% Y-o-Y decline in PAT.

Outlook: Margins Pressure will subside on Base Effects in H2:2016; Nonetheless, we revise Earnings Estimates
The contraction in net margins was expected given the stronger prices in cement in H1:2015 and the higher base effect of FX gains which partly accounted for the pressured net margin. Yet, we are impressed by the strong  volume numbers which defied macroeconomic headwinds witnessed in the quarter; and consequently revised volume forecasts upward by 2.2m MT to 25.5m MT (implied 35.2% Y-o-Y growth from 18.9m MT in FY:2015). Y-o-Y volumes and revenue growth will likely trim in subsequent quarters as the base year starts to account for the start of production activities in plants in Zambia, Cameroon, Ethiopia and Senegal in the last 9 months of 2015. Despite the impact of price actions on Q1:2016 operating margins, we largely expect margins pressure to subside in H2:2016 as sales made in the corresponding period of 2015 were at near-comparable prices. There is a high probability a devaluation will occur in Nigeria before FY:2016 which could bolster FX gains. Nonetheless, we expect margins to weaken than earlier forecast as prices are materially weaker in Nigeria and SEA; hence trimmed FY:2016 Y-o-Y EBITDA growth forecast to 3.4% from 6.0% and also revised FY:2016 EPS to N10.48 from N11.25 (N10.86 in FY:2015).

Valuation: Neither Pricey nor too Cheap; Target Price cut to N170.82 from N176.79, “Hold”
We continue to value DANGCEM at a premium to peers based on relatively higher volume growth prospects and profitability margins. The Nigerian cement market is positioned for demand growth as Nigerian government is  prioritizing capital projects, especially in the 2016 budget. However, price competition, operating and finance costs pressure remain headwinds on Nigeria margins. Production ramp-up in WCA has led to improvement in its margins but SEA operating margin development remains discomforting. Our blended implied P/E and EV/EBITDA valuation multiples of 15.5x and 12.2x respectively yielded a value target of N170.82 for the stock compared to current price: N161.00 & trailing multiples (P/E – 15.3x and EV/EBITDA – 11.5x) and a cut from Previous TP: N176.79. Thus, we have reviewed our rating of the stock downwards from an “ACCUMULATE” to a “Hold”.

Source: Afrinvest (West Africa) Limited Research Team