23 October 2018 : Dangote Cement (DANGCEM) released Q3 18 result this morning, reporting EPS growth of 1.6% YoY to N2.64 (missing analyst's estimate of N3.55). The variance between actual and expected stemmed from a lower than expected growth in revenue (+6.3% YoY vs. +13.8%) and a faster growth in cost of sales (+9.5% YoY vs. +8.0%) which combined resulted in a lower growth in gross profit of 3.8% YoY (vs. 18.3% estimate). However, following the revision of prior year’s cash tax, reported Q3 18 effective tax rate came in lower at 27% (Q3 17: 31.2% and Q2 18:46.8%), thus providing support for PAT.

Going by the breakdown, group revenue grew by 6.3% YoY to N202.9 billion driven by higher volumes in Nigeria and the Pan African businesses, despite relatively softer prices across markets. Starting off with the Nigeria, while the business recorded price erosion of 3.9% YoY to N43,187 per tonne, sales volume grew 6.2% YoY to 2.5mt, thus neutering the moderation in price to record revenue growth 2.01% YoY to N127.2 billion. For the rest of Africa, volumes grew by 15.9% YoY to 2.5mt taming the effect of a 1.4% decline in average prices to N30,728 per tonne – driving the revenue higher by 14.3% YoY to N75.6 billion

However, input cost grew at a much faster pace (+9.46% YoY to N 90.1 billion) buoyed by higher salaries and depreciation expense. Peculiarly, salaries and related staff costs rose by 39.4% YoY to N8.7 billion while depreciation expense rose by 13.8% YoY to N16.2 billion – moderating the impact of declines in energy cost per tonne (8.9% YoY N4,860) and materials consumed per tonne (7.1% YoY to N5,674). Consequently, gross margin contracted by 1.3% YoY to 55.6% (Forecast: 59.1%).

Elsewhere, operating expense grew by 19.1% YoY to N48.4 billion, driven by higher haulage and depreciation expenses. Particularly, haulage cost per tonne in Nigeria rose 44.4% YoY to N4,541, a development analysts will be seeking clarification from management. As a result, OPEX to sales grew to 23.9% (+2.6% YoY). The depressed margins coupled with higher operating expense drove operating income lower by 4.7% YoY to N66.3 billion with respective margin at 32.7% (-3.8% YoY). Further down, net finance cost moderated by 10.4% YoY to N4.5 billion hinged on a decline in both its finance income and cost. For clarity, finance income declined by 32.9% YoY to N7 billion, while the finance expense declined by 25.6% YoY to N11.6 billion.

A feed through of the pressure from its input and operating cost drove PBT lower by 4.3% to N61.8 billion (forecast: N75 billion). However, the lower tax reported in the period (-17.2% YoY to 16.7 billion) after restating its Q3 17 tax, drove PAT higher by 1.59% to N45.1 billion. For context, effective tax rate dropped to 27.0% (vs 31.2%).

DANGCEM trades at a P/E and EV/EBITDA of 21.9x and 8.9x compared to Bloomberg Middle and East Africa Peers at 30.8x and 9.3x respectively. Analyst's last communicated FVE of N278.54 translates to a BUY rating on the stock.

Reporting for EasyKobo on Tuesday ,23 October 2018 in Lagos, Nigeria

Source: Olamide Adeboboye and Oluwasegun Akinwale fromARM Securities Limited

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