SAT, MAY 30 2020-theG&BJournal- Cordros Securities cut the outlook for cement consumption, and struggles to see the investment case for Dangote Cement’s (DANGCEM) planned installed capacity expansion in Obajana this year to 16.25MT.
Their assessment of DANGCEM is fuelled by the hurdle of both dividend payment (c.NGN270 billion) and share buyback (c.NGN240 billion) obligations to shareholders the company currently face.
Besides, the factors that are supportive of cement consumption appear broadly weak, given the combination of unimpressive revenue profile of the Nigerian government, occasioned by the rapid pace of crude oil price downslide, and challenged private investment, as well as the COVID-19 induced economic downturn across other African markets, with South Africa and Zambia already facing significant pressure from economic recession.
‘’We now forecast Nigeria and Pan African volumes to decline by 1.7% y/y (previously: +2.1% y/y) and 3.0% y/y (previously: +2.5% y/y). Our volume forecast implies a utilization rate of c.47.5% for Nigeria and 57.9% for the rest of Africa,’’ Cordros says.
DANGCEM’s Q1-20 sales were higher (+3.8% y/y), supported by higher prices, but volume declined slightly, mostly on account of the COVID-19 outbreak, which impacted the company’s Pan African operations (-2.9% y/y).
‘’Given the blend of economic challenges, stronger competitive landscape, and geometrically rising cases of the virus across most of the company’s Pan African markets, we believe the decline in Q1-20 volume may not be the last,’’ Cordros says.
Meanwhile, at 4,018MT (+0.7% y/y), volume achieved in Nigeria is already ahead of full-year estimate (11.5% annualized).
Nonetheless, it is believed the impact of the COVID-19 pandemic will reflect on the company’s Nigeria operations from Q2-20, given weaker revenue profile for the federal government which will negatively impact infrastructure spending.
According to Cordros, DANGCEM management acknowledged that sales volume achieved in April already underperformed last year.
‘’This, together with the economic lockdown, with its negative connotation on private investments, should weigh on volumes from Nigeria operations over the next few quarters.’’
Against that backdrop, Cordros cut the volume expectation by 4.3%. This cascades into a 4.2% decline in TP to NGN172.69/s.
On the company’s valuations, Cordros said: At our revised TP of NGN172.69/s (previously: NGN179.89/s), we estimate that the stock offers a 24.7% potential upside and 30.6% potential total return after incorporating our estimate for 2020FY expected dividend yield. Thus, we upgrade our recommendation on the stock to a ‘BUY’, from a HOLD Previously.
The company reported profit after tax (PAT) earnings of N60.6 in Q1 2020 but losses in its Pan-African operation dragged its joint PAT performance down to N48.1 billion. The Nigerian operation performed better in terms of revenue which grew 3.8% to N249.2 billion in Q12020. Revenue growth was 5.0% YoY supported by prices increase in Nigeria by 4.9% y/y.
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