Dangote Cement PLC FY’19 Earnings Release – Still A Buy Despite Competitive Pressures

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After one of the most competitive years in the history of the Nigerian cement sector, we take a look at the market leader, DANGCEM’s FY’19 result as well as its restructuring and expansion plans. While the operating landscape in Nigeria remains challenging due to heightened competition, we see sustained value in the stock as it continues its Pan-African expansion push. We also see value in the tax advantage of the company’s debt strategy as a semi-replacement for the expiring pioneer tax status in 2020. We value DANGCEM at ₦199.06 and maintain a BUY rating on the stock.

Proposes ₦16.00 dividend on ₦11.79 EPS

Last week, Dangote Cement PLC released its FY’19 results, reporting a 17% y/y jump in PBT to ₦250.5 billion, 5% behind our estimate. However, after accounting for a tax expense of ₦50.0 billion in 2019 versus a tax credit of ₦89.5 billion in 2018, PAT dropped 49% y/y to ₦200.5 billion (Vetiva: ₦202.3 billion). Despite the fall in PAT and EPS, the board of directors proposed to retain FY’19 dividend at ₦16.00 (FY’18: ₦16.00, Vetiva: ₦10.09),
representing a payout of 136% and yield of 9%.

Sea-based exports, Public sector spend should support Nigeria volumes in FY’20

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While the broader cement industry continued to face pressures from heightened competition, slow Capex disbursement and torrential rainfalls (Cement GDP only expanded by 3% y/y), sales of Dangote cement in Nigeria remained resilient, rising 2% y/y in the domestic market to 13.7 million MT. We note that after a challenging H1’19, the launch of the bag of goodies promo in H2 helped push sales upwards. However, overall sales of the Nigerian business came in flat y/y at 14.1 million MT, following a slowdown in exports after land borders were closed. All in, Nigeria Revenue fell by 1% y/y to ₦610.2 billion, following a 1% y/y drop in average revenue/tonne to ₦43,221.69. While average pricing was down at the start of the year, price increases totalling c.₦200/bag in April (₦150/bag) and October (c.₦50/bag) helped temper the slowdown in pricing. Given the success of the bag of goodies promo in 2019, we expect the company to sustain a similar initiative in 2020. We also see volume support for the Nigerian business as the export jetties are expected to be up and running in H1’20, opening up sea-based export opportunities to West African countries. Based on this and an expected improvement in public infrastructure spending in 2020, we foresee a 4% y/y growth in cement volumes in Nigeria to 14.7 million MT.

Furthermore, with competition in the sector showing no sign of letting up, we see no relief for prices and expect average revenue/tonne to moderate a further 2% y/y to ₦42,357.3. Overall, we expect Nigeria Revenue to rise 2% higher y/y to ₦623.3 billion. Key risks to this forecast however lie in weak revenue generation and Capex financing abilities of the Federal Government of Nigeria due to a sustained (bear case) dip in crude prices.

Dangote Cement PLC FY'19 Earnings Release - Still A Buy Despite Competitive Pressures - Brand Spur

Tanzania, Senegal, Sierra Leone volumes will continue to drive Pan African Revenue

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While South African, Cameroonian, Ethiopian and Ghanaian volumes dropped, Pan African volumes still expanded 2% y/y to 9.6 million MT, boosted by a 94% y/y jump in Tanzanian volumes as well as an 8% y/y growth in Senegal’s volumes. Notably, production in Senegal exceeded nameplate capacity (104% capacity utilization) at the end of the year, while stronger public sector spends supported volumes in Tanzania. Revenue, however, came in flat y/y at ₦282.7 billion, following weak pricing in South Africa and Zambia. We have a more positive revenue outlook for 2020, supported by continued growth in Tanzania, Senegal (grinding plant still has capacity), Congo and Sierra Leone. Overall, we forecast a 10% y/y jump in Pan African volumes to 10.4 million MT in FY’20 and a 10% y/y growth in Revenue to ₦310.3 billion.

Overall, FY’20 Group volumes came in c.1% higher y/y at 23.7 million MT, while Group Revenue fell 1% y/y to ₦891.7 billion after the slowdown in Nigeria Revenue. Group EBITDA also fell 9% y/y to ₦395.4 billion, translating to an EBITDA margin of 44% (FY’18: 48%, Vetiva: 44%). We note that apart from the weaker pricing, EBITDA margin was affected by rising haulage costs and promotion expenditure amidst a stronger competitive environment in Nigeria. Furthermore, following a rise in borrowings in the year, Net finance
costs surged 32% y/y to ₦50.1 billion, taking PBT 17% lower y/y to ₦250.5 billion.

Read Also:  Capital Inflow in H2-2020: Q1-2020, as good as it gets for 2020

Dangote Cement PLC FY'19 Earnings Release - Still A Buy Despite Competitive Pressures - Brand Spur

In search of an optimum WACC

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On January 24, 2019, shareholders of Dangote Cement approved a management scheme proposing to buy back up to 1,704,050,741 units of fully paid up ordinary ₦0.50 shares (10% of the total issued share capital). The program will be completed within 12 months of the EGM and will be stretched out over the period. The transaction could happen in the open market or through a self-tender offer. At the open market, transactions will be done at market price, while the premium on a self-tender offer will be capped at 5% above the average market price over the preceding 5 days.

According to management, the buyback will serve as an alternate avenue to return cash to shareholders while helping to optimize the capital structure. Specifically, in our recent meeting with the CFO, he revealed that the company had a long-term strategy to rebalance their capital structure towards debt in order to reduce its WACC. This appears to be in line with that strategy. In our opinion, the strategy appears prudent as post-2020, the company would no longer have any assets enjoying pioneer status in Nigeria. The tax shield characteristic of debt should, therefore, provide some cover for earnings. Going forward, we expect to see the company issue even more debt in the medium term as it attempts to meet this goal. In this regard, we have forecasted a ₦500 billion total debt increase over the next four years for DANGCEM, leading to an additional ₦165.0 billion in interest expense (10% average effective interest rate expectations due to lower rate environment) and an additional tax savings of ₦40.7 billion over the period.

Still playing the Pan-African Agenda

Even with the largest capacity in the region, Dangote Cement continues to actively expand its capacity on the continent. In West Africa alone, the company is expected to add a 3 million MT plant in Ivory Coast this year, while it is expected to add up to 6 million MT in Nigeria (Okpella: 3 million MT, Obajana: 3 million MT) before the end of next year. We are also aware that the company plans to build grinding plants in Ghana and Gabon as well as a plant in Niger to service the Francophone Africa regions. We expect these moves to further strengthen the Group’s dominance across the region and see this as a strong case for investment in the company.

Expect mild growth in PAT as competitive pressures remain Driven by improvements across both the Nigerian and Pan African businesses, we forecast a 7% y/y growth in Group volumes to 25.1 million MT in FY’20, translating to a 5% y/y growth in Group Revenue to ₦933.6 billion. With competition unlikely to let up in Nigeria and pricing challenges expected to remain in South Africa and Zambia, we expect further pressure on EBITDA margin, taking FY’20 margin 30bps lower to 44.3%. However, given the larger topline, FY’20 EBITDA is expected to grow 5% y/y to ₦416.6 billion. With DANGCEM signalling an intent to increase debt levels, we expect Net finance cost to remain flat around ₦51.2 billion, taking PBT 6% higher to ₦264.9 billion and PAT 3% higher to ₦206.6 billion. We estimate a 12-month TP of ₦199.06 and maintain a BUY rating on the stock.

Dangote Cement PLC FY'19 Earnings Release - Still A Buy Despite Competitive Pressures - Brand Spur

Dangote Cement PLC FY'19 Earnings Release - Still A Buy Despite Competitive Pressures - Brand Spur

Dangote Cement PLC FY'19 Earnings Release - Still A Buy Despite Competitive Pressures - Brand Spur

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Dangote Cement PLC FY'19 Earnings Release - Still A Buy Despite Competitive Pressures - Brand SpurDangote Cement PLC FY'19 Earnings Release - Still A Buy Despite Competitive Pressures - Brand Spur

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Dangote Cement PLC FY'19 Earnings Release - Still A Buy Despite Competitive Pressures - Brand SpurDangote Cement PLC FY'19 Earnings Release - Still A Buy Despite Competitive Pressures - Brand Spur

Latest News

Cityneon Raises S$235 Million; Well Positioned for Next Growth Chapter

  • The global experience entertainment company gets a S$235 million shot in the arm, closes its private fund raising in April 2021
  • Investors both new and existing include Singapore's Pavilion Capital, Seatown Holdings International and EDBI, Qatar's Doha Venture Capital and financial institutions and family offices in Singapore and China
  • These now join other existing Cityneon shareholders CITIC Capital, veteran entrepreneur and investor Mr. Johnson Ko, and Executive Chairman & Group CEO Mr. Ron Tan
  • Funding comes just after the Group acquired multi-year licensing rights for James Cameron's AVATAR touring exhibition, and two original artefacts IP on the ancient civilization Machu Picchu from Peru and Ramses the Great (Ramses II) from Egypt
  • Investments position the Group well to bring experiences across the globe, targeting to launch six experiences in China and five in the U.S. by the end of 2021, with more in other parts of the world

SINGAPORE - Media OutReach - 21 April 2021 - Cityneon Holdings ("Cityneon", the "Company"/collectively with its subsidiaries, the "Group") raised S$235 million in the most recent round of private funding. The latest round of funding adds seasoned investors to Cityneon's already strong stable of shareholders.

This funding round was led by Singapore's Pavilion Capital, Seatown Holdings International, EDBI, and Cityneon's Executive Chairman & Group CEO, Mr. Ron Tan. EDBI and Pavilion Capital are existing shareholders of Cityneon whilst new investors include Seatown Holdings International, Qatar's Doha Venture Capital, which will now own approximately 4 per cent of the Group, and other financial institutions and family offices in Singapore and China.

These now join other existing Cityneon shareholders CITIC Capital, veteran entrepreneur and investor Mr. Johnson Ko, and Executive Chairman & Group CEO Mr. Ron Tan to form a new and strong shareholder base for the Group. Mr. Johnson Ko and Mr. Ron Tan remain as the largest shareholders of the company via their combined entity, West Knighton Limited.

The Group is now well positioned for its next growth chapter and will use the proceeds for capital expenditure that includes building more of its various intellectual property (IP) exhibition sets, totaling 24 travelling and four semi-permanent sets under the Studio IP partnerships and three travelling sets under the original artefact IP partnerships by the end of 2022.

Already, the Group just signed its fifth IP rights with Avatar from 20th Century Studios last year. Amidst the anticipation from Avatar fans worldwide, Cityneon will debut a multi-sensory Avatar exhibition in Chengdu, China in May 2021, ahead of the Avatar movie sequel which is slated for release in 2022. Avatar is the world's top grossing film of all time at over US$2.8 billion, and adding millions more after its successful re-release in China in March 2021. Avatar's director James Cameron has announced that he will be producing four sequels with 20th Century Studios, with the first sequel slated for release next year. Disney acquired 20th Century Studios for US$71 billion in 2019.

The Company also recently entered the original artefacts IPs space and will stage international exhibitions of the treasures of the ancient civilization Machu Picchu from Peru in Boca Raton, Florida and Pharaoh Ramses II from Egypt in Houston, Texas. These two experiences will start welcoming visitors in October and November 2021, respectively.

Other IP rights that the Group holds include partnerships with Universal Studios for Jurassic World: The Exhibition, Marvel for Avengers S.T.A.T.I.O.N., Lionsgate for The Hunger Games: The Exhibition and Hasbro for Transformers Autobot Alliance. All in, Cityneon holds the IP rights for five of the top 10 worldwide box office hits and two artefacts IP from Peru and Egypt. The Group expects to have six sets of its various IP rights travelling across China, and five travelling and permanent sets in the United States, with a few more in other parts of the globe.

The Group will also be reopening experiences that were temporarily closed in 2020, aiming to provide visitors with a safe entertainment option. These include the Marvel Avengers S.T.A.T.I.O.N. in Toronto, Canada that will be re-opening in May 2021; and the Marvel Avengers S.T.A.T.I.O.N. exhibition in Lotte Mall in Seoul, Korea in April 2021; the same exhibition space which previously housed Jurassic World: The Exhibition, another IP experience exhibition by the Group in 2019. In the past month, the Group also witnessed record visitor numbers at their semi-permanent installations in Las Vegas, USA, signaling a strong comeback and demand for their immersive experiences, as they step into the 6th year of operations there.

While there are exciting plans lined up, the Group is not resting on its laurels. More Hollywood IPs and artefact IPs can be expected, and there will be further announcements on new IP verticals in entertainment experiences that the Group is looking to enter.

Mr. Ron Tan, Executive Chairman & Group CEO of Cityneon, said: "It is exciting that the Company is going through such strategic expansion as one of the largest providers of exhibition entertainment experiences globally. The S$235 million funding round sets a solid foundation for us to invest in developing more of our entertainment experiences, to stage even more exhibitions of the five box office hits and two artefact IPs that we hold the rights to all over the world. I'm thankful that our strong investors base, now from Singapore, Hong Kong, China and the Middle East, have trust in our vision, and believe alongside us that this space of big ideas and big experiences will only grow."

By the end of this year, Cityneon will arguably be the largest provider of exhibition entertainment experiences internationally; with global footprints in more than 50 cities and welcoming 10 million unique visitors across the world by 2022.

Cityneon Holdings

With its global reach and international partnerships, Cityneon has the capability to serve its clients anywhere in the world. Cityneon was listed on the Mainboard of the Singapore Stock Exchange since 2005, and was privatized on February 2019 by West Knighton Limited, a company wholly owned by Cityneon's Executive Chairman and Group CEO, Ron Tan, together with Hong Kong veteran entrepreneur and investor, Johnson Ko Chun Shun. Johnson is a capital markets veteran and has held controlling interests and directorships in many listed companies. In May 2019, Cityneon welcomed CITIC Capital as a new shareholder, who holds approximately 10% shares in Cityneon. CITIC Capital is part of CITIC Group, one of China's largest conglomerates, and has over US$25b of assets under its management across 100 funds and investment products globally. Other institutional shareholders of the Group include EDBI - a Singapore government-linked global investor, and Pavilion Capital - a Singapore-based investment institution which focuses on private equity investments, that made strategic investments in August and October 2019 respectively, to support the Group's further expansion globally. For more information, please visit www.cityneongroup.com.


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