Moving to Neutral after strong rally
- Downgrading to Neutral on valuation grounds: Dangote Cement’s (DangCem) Q2 2017 unit volumes declined by around 16% y/y to c.5.5 million metric tonnes (mmt). Despite this, the results showed strong y/y growth in sales and PBT. The results were driven by elevated cement prices (up 59% y/y) which underpinned a gross margin expansion of 5,949bps y/y to 56.1%. Management disclosed that margins were also boosted by a “more favourable fuel mix” for its Nigerian operations, due to the higher utilisation of coal and gas as opposed to low-pour-fuel-oil. However, the claim remains unsubstantiated given that total fuel and power costs increased by around 22% y/y on a per tonne basis. Although, we have reduced our unit volume forecasts by around 3% on average over the 2017-19E period, these reductions are offset by average increases of 7% and 181bps to our pricing and gross margin assumptions respectively. As such, we have increased our EPS forecasts by around 7% on average over the forecast period and our price target by 5% to N243.8. On a relative basis, the shares are trading on a 2017 P/E multiple of 14.9x for 14% EPS growth in 2018E. These compare with the 7.6x multiple for a -26.5% decline in EPS for rival Lafarge Africa. Having gained around 52.2% in the last 3 months (vs. 43.0 NSE ASI), the shares are now trading close to our fair value estimate. Consequently, we downgrade our rating on the shares to Neutral from Outperform.
- Sales and PBT up by 35% y/y and 11% y/y respectively: DangCem’s Q2 PBT grew by 11% y/y to N78.3bn despite Q2 2016 PBT being boosted by net fx gains of N38.1bn. The key drivers behind the y/y growth in PBT were sales growth of 35% y/y to N204.5bn and a 5,949bp expansion in gross margin to 56.1%. These positives were strong enough to offset a negative swing in net interest expense to –N2.0bn (from a net interest income of N28.5bn in the prior year). Despite the y/y growth in PBT, PAT declined by 24% y/y due to the strong result of N67.6bn on the other comprehensive income line (OCI) line that the company delivered in Q2 2016. Sequentially, sales dipped by 2% q/q, while PBT was flattish. However, PAT expanded by 27% q/q because of a positive result of N24.9bn on the OCI line. Compared with our forecasts, sales were in line while PBT beat slightly by 6%. However, PAT came in significantly ahead (43%) of our forecast due to the strong result on the OCI line.