Profit jumps on strong operations, positive tax surprise
Dangote Cement recently released its FY’18 results, reporting a 91% y/y jump in bottom line to ₦390 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 ₦16.00 dividend per share, representing a payout of 70% and a yield of 8%. Notably, the jump in PAT exceeded Consensus (₦228 billion) and Vetiva (₦211 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 ₦435 billion, ahead of Vetiva estimate of ₦427 billion. Region-wise, EBITDA in the Nigerian business remained strong, rising 10% y/y to ₦397 billion (Margin: 64.3%), driven by a stronger top line and continued improvements in fuel cost management. Similarly, EBITDA across the Pan-African operations jumped 28% y/y to ₦49 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 our 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 ₦618 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 ₦283 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 ₦901 billion.
Before tax profit expected to rise 16% y/y in FY’19
We 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, we 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, we forecast a 9% y/y increase in volumes to 15.4 million MT, translating to an FY’19 topline of ₦664 billion (FY’18: ₦618 billion). Notably, the 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, we 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 by 6% to ₦302 billion in 2019. Overall, we forecast Group volumes of 25.7 million MT and FY’19 Revenue of ₦965 billion. After making adjustments to our cost lines, we arrive at an FY’19 PBT of ₦349 billion, 16% higher than 2018. We, however, forecast FY’19 PAT of ₦279 billion, lower than FY’18 bottom line of ₦390 billion as we 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 our crude price and FX outlooks, we have raised our risk premium by 50bps to 6% across our coverage, to reflect the current realities of the country’s risk environment. Thus, taking into account the new risk premium, we value DANGCEM at ₦240.68 and maintain our BUY rating on the stock.
