13% incr. to price target driven largely by reduction to risk free rate: 

Dangote Cement’s ( DANGCEM ) Q1 2018 results surprised positively across all key headline items. Although sales were broadly in line (+2%) with the analyst’s forecast, PBT beat by 27% because of positive surprises in gross margin, opex and net interest expense. In terms of volume trends, growth was underscored by the 5% y/y growth delivered by the Nigeria division. 

The growth in Nigeria marks the first quarter of growth after five consecutive quarters of y/y volume contraction. At the current run-rate, management sees strong unit volume growth of over 10% y/y for 2018E on the back of government’s infrastructure spend and a recovery in private demand. Longer term, the completion of DangCem’s export terminal situated in Onne, in the Niger-Delta region by end-2018 will also help drive volume growth. 

Consequently, the analysts have increased their unit volume forecasts for Nigeria by c.3% on average over the 2018-19E period. The upward revisions to Nigeria underpin the average sales growth of 15% y/y that the analysts forecast for the Group over the period. Management is confident that the pioneer tax relief for Ibese lines 3&4 will be approved later this year. Nevertheless it guided to an effective tax rate of 20%+ for 2018E. As such, the analysts have increased their 2018E tax rate assumption by 500bps to 20%. These changes underpin the 2% average increase to the analyst’s EPS forecasts over the 2018-19E period. 

Despite the modest increases to the analyst’s EPS forecasts, their new price target of N277.2 is up by 13% because the analysts have lowered their risk free rate assumption by 100bps to 13.0% to reflect the lower yields on federal government bonds. The analyst’s new price target implies a potential upside of 24% from current levels. As such, the analysts upgrade their recommendation on the stock to Outperform from Neutral.

Strong Q1 2018 results; PBT up 40% y/y: 

DangCem’s Q1 2018 results showed that PBT grew strongly, by 40% y/y to N108.4bn. The stellar results were driven by a combination of factors including sales growth of 16% y/y, a gross margin expansion of 197bps y//y to 59.8% and a net finance income of N4.6bn (compared with a net interest expense of –N5.9bn in Q1 2017). 

The net finance income was driven by fx gains of N12.5bn. Despite a 572bp y/y increase in the effective tax rate to 33.5%, PAT advanced by 35% y/y to N80.0bn, thanks to a positive result of N10.8bn in other comprehensive income (OCI) compared with N1.3bn in Q1 2017. Sequentially, although the trends mirrored the y/y ones, the growth was amplified.