Rolling over to 2019E; price target up 2%

25 July 2018 ( Lagos ) : Dangote Cement’s ( DANGCEM ) Q2 2018 PBT missed analyst's forecast by around 12% due to a negative surprise in net interest expense. In addition to the reversal of fx gains recognised for the pan-African operations in 2017, translation losses arising from the appreciation of the US dollar relative to other currencies contributed to the spike in net interest expense. Further down the P&L, PAT was weighed down by a higher tax rate (vs Q2 2017) due to delays in securing the tax relief for Ibese lines 3&4 and Obajana line 4. 

Consequently, analysts have cut their EPS forecasts by around 9% on average over the 2018E-20E period. Despite the cuts to their EPS forecasts, their new price target of N283.8 is 2% higher than their previous price target because analysts have rolled forward their valuation to 2019E. In terms of volume trends, group unit volume grew by around 12% y/y to 6.2 million tonnes (mt) in Q2 2018, underpinned by strong volume growth of 25% y/y delivered by the Nigerian market. 

Following the positive outlook for cement demand in Nigeria, analysts now expect unit volume growth of c.10% in Nigeria, particularly on the back of a recovery in government infrastructure spend. On its conference call, management was optimistic that the pioneer tax relief for Ibese lines 3&4 and Obajana line 4 will be approved later this year. Nevertheless, management reiterated its tax rate guidance of +20% for 2018E. DangCem’s shares have outperformed the NSE ASI over the last 1 month, gaining 4.9% compared with the -3.0% delivered by the ASI.  The shares imply a potential upside of +20% from current levels. As such, analysts retain their Outperform recommendation on the shares.

Q2 2018 PAT down 42% y/y, due to fx losses

DangCem’s Q2 2018 results showed that PAT declined by 42% y/y to N45.7bn. The y/y reduction in earnings was mainly driven by a spike (+887% y/y) in net interest expense, on account of fx related losses of -N15.4bn arising from the reversal of fx gains recognised for the pan-African operations in 2017. A higher effective tax rate of 46.8% (vs. 18.7% Q2 2017) also contributed to the lower earnings y/y. 

Further up the P&L, although sales grew by 18% y/y and gross margin expanded by 217bps y/y to 58.3%, PBT came in flat y/y, because of the spike in net interest expense. Sequentially, sales were flat q/q. However, PBT and PAT were around 29% and 43% lower q/q, largely because of the negative surprise in net interest expense.

Source : Gregory Kronsten, Olubunmi Asaolu, Chinwe Egwim from FBNQuest Capital Limited.

Reporting for EasyKobo on Wednesday, 25 July 2018 in Lagos, Nigeria