Maintaining Outperform rating
- 2% increase to our price target; maintaining Outperform rating: Dangote Cement’s (DangCem) Q1 2017 results came in ahead of our forecasts across the board. The variance relative to our forecasts was driven by (i) slightly higher pricing and unit volume in Nigeria which were around 5% and 6% higher than what we had modelled and (ii) a positive surprise of 608bps in gross margin. We believe that the company should benefit from the projected increase in government capex spend in H2 2017, particularly in view of the imminent passage of the budget. Nevertheless, we have increased our 2017E unit volume forecast by just 2% and our price assumption by 5%. These, together with an average increase of 325bps to our gross margin forecasts over the 2017-19E period, underpin the 19% upward revision to our EPS forecasts over same period. Despite the upgrade to our forecasts, our new price target of N213.1 is only around 2% higher because we have reduced the P/E multiple driving our valuation to 16.5x from 18.9x previously, in line with the multiple contraction of international peers. Despite the market’s recent rally, DangCem shares have underperformed the index this year. The shares have shed -6.3% ytd compared with the +3.8% return delivered by the ASI. The shares provide a potential upside of 31% from current levels. As such, we retain our Outperform rating on the stock.
· PBT and PAT up 42% y/y and 38% y/y respectively: DangCem’s Q1 2017 results showed that PBT and PAT grew by 42% y/y and 38% y/y to N77.3bn and N74.2bn respectively. The marked y/y growth on the bottom-line was driven by stellar sales growth of 48% y/y and a 209bp y/y expansion in gross margin to 57.8%. Both positives completely offset a 69% y/y rise in opex and a 273% y/y spike in net finance costs to N5.9bn. Further down the P&L, PAT growth narrowed to 38% y/y due to a higher effective tax rate of 8.7% vs. 1.1% in Q1 2016. Sequentially, sales grew by 20% q/q. However, growth on the PBT line widened to 140% q/q on the back of a gross margin expansion of 1107bps q/q and a 79% q/q reduction in net interest expense. A tax credit of N20.9bn in Q4 2016 versus an effective tax charge of –N6.7bn in Q1 2017 resulted in PAT growth slowing down to 50% q/q. Compared with our forecasts, sales were broadly (+4%) in line with our N199.6bn forecast. However, PBT and PAT beat by 24% and 33% respectively, due to positive surprises in gross margin, net interest expense and other comprehensive income and minority interest.