By Temilade Aduroja
TUE, APRIL 3 2018-theG&BJournal-We increase our Dangote Cement TP by 20% to NGN257 (from NGN214) as we now include sea-based clinker exports to West African countries from 2019 and increase our long-term growth rate to 9% (from 6%), incorporating our SSA economist’s revised 2019 Nigeria GDP growth forecast of 3%. On the back of this, we upgrade our rating to HOLD (from Sell) as our TP now implies downside of 3%. We think Dangote is a quality name to hold in Sub-Saharan Africa (SSA) cement, supported by strong margins, a healthy balance sheet, pan-Africa exposure and the pick-up in growth in Nigeria (the largest cement market in SSA). Despite this, we think the valuation is full, trading on 16.4x 2018 P/E, a 17% premium to peers, on our estimates.
A good set of numbers
DangCem released good FY17 results, in line with our estimates. In dollar terms, Nigeria EBITDA/t increased 36% YoY to $85/t, from $59/t, supported by stronger cement prices and a lower cash cost per tonne. Group margins were up an encouraging 636 bpts, although the Pan-Africa EBITDA margin came in below our estimate of 18%, at 15%, owing to currency devaluation in Ethiopia, start-up costs in Congo and significant losses in Tanzania in 4Q17. We expect a c. 10% price increase in Ethiopia to c. $90/t to offset this devaluation and believe that once gas is provided for the Tanzanian plant (expected in May), the average margin in Pan-Africa will be in the low 20%s. Positively, Nigerian cement exports by road more than doubled to 0.7mnt and DangCem is still on track to begin clinker shipment to other West African countries by year-end. This, in addition to strong cement growth, should support margins as fixed costs per tonne fall on higher utilisation, due to the export of c. 2-3mnt of clinker in 2019.
Expecting a stronger 2018
Management has guided for strong growth of 7-10% in the Nigerian cement market, in line with our 9% estimated market growth – supported by government contractors resuming work and an increase in individual demand. According to management, demand in the Nigerian market picked up strongly from February 2018 and has continued into March. We think 2018 will be a good year for the Nigerian cement market boosted by stronger prices and growth, in line with management’s guidance to keep cement prices flat in the medium term. In Nigeria, the company’s long-term strategy is to be the sole supplier of clinker to West African countries beginning from 4Q18. For Pan-Africa, Senegal, Cameroon and Ethiopia remain strong markets and we believe resolving the significant losses ($2.5mn a month) in Tanzania will be the biggest upside. DangCem plans to raise a local bond of NGN50bn (NGN300bn approved by SEC) for refinancing, and a eurobond for expansionary capex subject to approval by the board.
Upgrading to a HOLD
We upgrade DangCem to HOLD on the back of a positive growth outlook for the company. Our TP implies 3% downside but our FY18E dividend yield of 5% implies a total return of 2%. The main upside risk to our estimates include a stronger contribution to margins from Pan-Africa and a stronger cement price than our estimates. Potential downside risks are a decline in Nigerian cement prices and continued poor operations in Tanzania, Congo and Ghana. Dangote is trading at a 2018 P/E and EV/EBITDA of 16.4% and 10.9% a 17% and 15% premium to frontier peers, on our estimates.
Temilade Aduroja is research analysts at Renaissance Capital
