Dangote Q1 17 results – Strong results.
Dangote Cement published its Q1 17 numbers last Friday, posting EPS of NGN4.25, +36% yoy. Other highlights were: (1) revenue, +48% yoy and +20% qoq, to NGN208.1bn; (2) operating income, +48% yoy and 38% qoq, to NGN83.2bn; (3) pre-tax income, +42% yoy and 140% qoq, to NGN77.3bn; (4) net operating cash flow, +13% yoy to NGN99.0bn; and (5) gross debt down 11% ytd to NGN332.2bn.
Dangote Cement’s performance was commendable, in our view, driven by marked gains from selling price increases (+58% yoy) particularly those implemented in Nigeria. Earnings for the year are shaping up well, in line with management’s renewed commitment to improving the group’s profit margins even as the contribution from lower margin businesses increases. On a regional basis, the flagship Nigerian business drove group earnings, with operating profit up 62% yoy and an operating margin of 55%, up 7ppt yoy. The Pan African operations continue to record operating losses due to the high cost base in markets such as Tanzania and new operations such as Sierra Leone.
Key positives
§ Selling price increases – (+58% yoy and +4% qoq in Q1 17). Gains on selling price increases in Nigeria (+79% yoy and +10% qoq) really came through for the group during the period. Management intends to keep prices relatively stable to higher in order to maintain a robust level of EBITDA in dollar terms. In our view, there isn’t much room for further price increases until volumes react more drastically. That said, we note that Dangote Cement’s exports to neighbouring markets will continue to support volumes at current price levels.
§ Improvement in margins, sequentially – profit margins were mixed on a yoy basis with a slight improvement (+2ppt yoy) in our gross and EBITDA margins, while pre-tax margins declined 2% to 37%, which we believe was a result of higher contribution from the lower margin non-Nigerian businesses. Nonetheless, we find the sequential trend in key profit drivers encouraging, particularly pre-tax margins which were up 19ppt qoq to 37%. We expect a follow through in the next few quarters.
Key negatives
§ 6% yoy decline in volumes to 6.03mt, which includes the maiden contribution from Sierra Leone, that highlights the impact of: (1) sharp price adjustments on revenues; (2) a high base effect – volumes in Nigeria declined 16% yoy to 3.8mt (vs Q1 16 volumes of 4.5mt) but recovered by 17% qoq; and (3) moderating volumes in most non-Nigerian operations.
§ 51% yoy increase in group cost per tonne on account of new high-cost-base subsidiaries, the impact of devaluation on dollar-linked costs and translation of subsidiaries, albeit cost per tonne declined 18% qoq, reflecting strong cost management in Nigeria. This was a result of the use of its own coal to substitute LPFO; we note that local coal costs only 32% of LPFO and is not dollar-linked, unlike LPFO.
§ Higher net financing costs on account of shorter-term debts and the transfer to P&L of previously capitalised interest of new operations. In addition, interest rates were 3% higher and external debt rose due to the refinancing of Pan African funding.
§ Higher effective tax rate of 9% vs 3% in Q1 16 as a result of the expiration of some tax incentives related to Ibese.
Investment conclusion
§ The performance of the group supports our BUY recommendation and target price of NGN192. Our recommendation is based on: (1) the relatively strong earnings growth outlook; and (2) Dangote’s best-in-class operating model in Sub Saharan Africa – better profitability, regional footprint, its ability to consolidate market share in key markets, proactive cost management and FX risk mitigation in Nigeria.
Stock price performance (DANGCEM NL)
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