CardinalStone Research
The Nigerian cement sector may be set for a difficult FY’20 on account of the coronavirus pandemic. We also expect the sector’s full recovery to take at least 2 years, in line with the macro guidance of African finance ministers. These expectations result in a 12-month Target Price of N191.56 (vs. N200.00 previously) for industry giant, Dangote Cement Plc (DANGCEM).
However, our new TP still implies a 63.7% capital appreciation on the last market close due to aggressive selloffs of equities and other risk assets globally. The company’s relatively strong cash flow position and ROAE also support an unchanged BUY rating on the stock
COVID-19 may also mean lower cement volumes for producers
Clearly, the spread of COVID-19 has altered the global economic outlook for 2020. The pandemic has led to border closures as well as restrictions on construction and other non-essential business activities largely at the behest of authorities. Thus, CW Group expects African cement demand to moderate by c.5.0% in 2020. In our view, Nigerian cement market (-16.0% YoY to 18.2Mt in FY’20E) is likely to underperform the rest of Africa, given that imposed restrictions in its country of domicile have been concentrated in key construction hubs (Lagos and Abuja), which cumulatively account for c.48.0% of the country’s GDP. We believe the shutdown of activities in these zones is likely to last till the end of Q3’20 (base case expectation) in one form or the other, in line with global expectations. We expect DANGCEM to report 15.0% YoY and 10% YoY contractions in cement volumes in Nigeria and across its pan African operations in FY’20, apiece. If prices remain largely stable, Nigerian and Pan African sales are also likely to approximate N506.7 billion (-17.0% YoY) and N253.6 billion (-10.3% YoY) respectively in FY’20.
On Pan African markets, we note that the pandemic has cast a dark cloud on growth outlook in oil-producing countries like Cameroon and Ghana. We also expect a drawback in other commodity-reliant economies such as Ethiopia and Zambia due to the drastic fall in prices of coffee & oilseeds and copper respectively.
Higher effective tax rate to compound earnings woes
Earnings will likely be pressured by greater income tax deductions going forward, following the expiration of pioneer tax grants on Ibese Lines 3 & 4 and Obajana Line 4 in February 2020. In our view, an effective tax rate of c.30.0% in FY’20 (vs. 19.9% in FY’19) will likely offset the high base effect from elevated operating expenses last year. Notably, the company recorded a surge in distribution cost in FY’19 as a result of an increase in its number of truck fleet and the proportion of sales distributed by trucks to customers. Even though promotional and marketing initiatives are also likely to be high in FY’20 as manufacturers strive to minimize inventory accretion as a result of the movement restriction enforced in Nigeria, EBITDA margin could remain flat YoY at 43.2% on the impact of the high base effect. However, margin pressures are likely to resume after the operating line with drags coming in the form of higher interest expense N63.8 billion (vs N50.1 billion in FY’19) and effective tax. Our view on the former is premised on the assumption of greater debt buildup to part-finance the proposed share buyback (c.N199.4 billion) while the latter is linked to the expiration of pioneer tax status already highlighted. We forecast net profit margin at 15.7% for FY’20 (compared to 22.5% in FY’19).
Valuation
Our post-adjustment TP of N191.56 still implies a 63.7% capital appreciation on the last market close due to aggressive selloffs of risk assets globally. The company’s traditionally strong cash flow position (positive closing cash balance even during 2016 recession) and ROAE (16.5% in FY’20E) also support an unchanged BUY rating on the stock.
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