Profit jumps on strong operations, positive tax surprise 

05 March 2019 : Dangote Cement recently released its FY’18 results, reporting a 91% y/y jump in bottom line to N390 billion, buoyed by a Group tax credit from the authorization of the pioneer tax status on the Ibese Production lines 3&4 as well as Obajana line 4. Consequently, management proposed a N16.00 dividend per share, representing a payout of 70% and yield of 8%. Notably, the jump in PAT exceeded Consensus (N228 billion) and Vetiva (N211 billion) estimates. Apart from the obvious impact of the tax credit, the impressive earnings growth was driven by a 12% y/y increase in Group EBITDA (Margin:48.3%) to N435 billion, ahead of Vetiva estimate of N427 billion. Region-wise, EBITDA in the Nigerian business remained strong, rising 10% y/y to N397 billion (Margin: 64.3%), driven by a stronger topline and continued improvements in fuel cost management. Similarly, EBITDA across the Pan-African operations jumped 28% y/y to N49 billion, with margin also expanding 250bps to 17.3%. This was driven by higher average prices as well as efficiency improvements across many regions. Specifically, civil unrest in Ethiopia was tamer in H2’18 and following the arrival of Gas turbines, Tanzanian operations resumed at the end of Q3’18, replacing the relatively expensive diesel in the production process. Overall, in spite of higher Net finance costs, PBT still came in 4% higher y/y, albeit 3% lower than analyst's projection. 

Nigerian cement sales, Pan African pricing drive topline 

Cement sales came in strong y/y in Nigeria, rising 11.4% y/y to 14.2 million MT in FY’18 (FY’17: 12.7 million MT, Q4’18: 3.4 million MT). Furthermore, with average Revenue/tonne staying largely flat y/y, topline for the Nigerian business similarly rose 12% y/y to N618 billion. Meanwhile, cement volumes were largely flat across the Pan African regions, mostly impacted by disruptions in operations in certain regions during the year (Ethiopian sales were impacted by unrest in the first half of the year, Tanzanian operations were halted due to high costs, Ghanaian operations were halted due to logistics inefficiencies). Overall, volumes sold in the region came in flat y/y at 9.4 million MT (Q4’18: 2.3 million MT). However, with average prices across the region rising 10% y/y, Revenue grew 10% y/y to N283 billion. Overall, total cement sales for the Group in FY’18 rose 7% y/y to 23.5 million MT, translating to a 12% y/y increase in Revenue to N901 billion. 

Before tax profit expected to rise 16% y/y in FY’19 

Analysts remain convinced about the long-term potential of the Nigerian cement sector but foresee somewhat weak growth in 2019, dragged by distractions to public sector consumption. That said, analysts still project decent growth in volumes for DANGCEM’s Nigerian operations as sales from new product lines in previously underserved markets are ramped up. Thus, analysts forecast a 9% y/y increase in volumes to 15.4 million MT, translating to an FY’19 topline of N664 billion (FY’18: N618 billion). Notably, performance so far has been decent, with sales across the Nigerian business rising 10% in the first two months of 2019, in spite of a mild price decline in December’18. However, analysts expect stronger growth from the Pan-African region, with volumes hitting 10.6 million MT (FY’18: 9.4 million MT), amidst expectations of uninterrupted operations, resumption of sales in Ghana and overall ramp up in sales. Accordingly, topline is projected to rise 6% to N302 billion in 2019. Overall, analysts forecast Group volumes of 25.7 million MT and FY’19 Revenue of N965 billion. After making adjustments to analyst's cost lines, they arrive at an FY’19 PBT of N349 billion, 16% higher than 2018. Analysts however forecast FY’19 PAT of N279 billion, lower than FY’18 bottom line of N390 billion as analysts do not expect another net tax credit in the year. 

Valuation revised amidst re-evaluation of risk environment 

Following significant changes in the external environment as well as a revision to their crude price and FX outlooks, analysts have raised their risk premium by 50bps to 6% across their coverage, to reflect the current realities of the country’s risk environment. Thus, taking into account the new risk premium, analysts value DANGCEM at N240.68 and maintain their BUY rating on the stock. 

Company Bio:

Dangote Cement PLC is Nigeria's leading cement producer with three plants in Nigeria and expansions in 15 other African countries. The Group is a fully integrated quarry-to-depot producer with production capacity of 45.6 million tonnes as at 2015. 

Reporting for EasyKobo on Tuesday , 05 March 2019 in Lagos, Nigeria

Source: Onyeka Ijeoma from Vetiva Capital Management Limited