Dangote Cement: Strong Q3-17 Result, Slight Downward Revision of Estimates
By Cordros Research
Following Q3-17 results, we revise both DANGCEM’s 2017 and 2018-2019 EPS slightly downward by 1% and 0.5% respectively relative to previous estimates.
While we look for continued strong margins on stable Nigerian prices and energy efficiency (including the eventual resolution of power challenges in Tanzania), we see the gain being slightly offset by lower volumes (than previously expected) and higher effective tax rate.
On net, we reduce TP for the stock by 1.3% to NGN215.56/share. Over the medium term, we continue to see value in DANGCEM and maintain HOLD rating.
We cut group sales volume forecast for 2017 by 2%, and over 2018-2019 by 1.7% average, primarily on the back of expected lower output in Nigeria. Amidst continued high selling prices, we believe the recovery of private sector cement consumption will be very modest.
And we are in a wait-and-see mode on public sector demand which has failed to make an impact in two years of Nigeria’s huge infrastructure budget.
Specifically for DANGCEM, we are mindful of the impact of competition, (1) upon delivery of the speculated BUA’s 1.5Mts capacity in Sokoto next year and (2) with LAFARGE likely to experience less production challenges.
We left volume forecast for Rest of Africa (RoA) unchanged, having previously factored Congo into our model. Broadly in this segment, selling prices (+19% q/q in Q3-17) have also been increasing (both directly and through reduced discounts, as confirmed by management) and utilization rate is above 70% in more than half of the markets.
Overall, we forecast Group sales volume will decline 5.2% in 2017 and grow by 7% average over 2018-2019. Over the latter period, we forecast volume will grow in mid-single-digits of 8% and 5% respectively in Nigeria and RoA.
At the Q3-17 analysts call, management guided to Nigerian effective tax rate of 10% and Group ETR of 12% for 2017F, vs. 2.5% and 0.3% average in the last two years. Tax over H1-17 was under-reported and subsequently reviewed higher in Q3-17 while concession on Obajana line 3 will be expiring in the current year, according to management.
We have consequently revised ETR over 2018-2019 higher to 11.1% average, from 7.4% previously. On net, we forecast net profit of N258.8 billion in 2017F (previously NGN261.4 billion), and NGN281.3 billion and NGN311.11 billion in 2018 and 2019 respectively (previously NGN283.4 billion and NGN312 billion).