BusinessDay 03 Apr 2018

BUSINESS DAY
NEWS YOU CAN TRUST I TUESDAY 04 APRIL 2018
C002D5556
Insight
Dangote Cement remains quality, but stretched
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 longterm
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.
Valuation summary
Tax reversals...but this
could have been avoided
In its FY17 results DangCem
reversed the tax benefits
(NGN44bn) taken in 2016 on
some production lines. These
are still awaiting approval to be
granted initial pioneer status.
The pioneer status extension
on other production lines,
also awaiting approval, were
not reversed (NGN24bn). We
The historical tax benefits inflated 2016
earnings and we would have preferred
a more conservative approach
in accounting for this. That said, we
are confident that the approvals will
ultimately be granted given the extent
of DangCem’s investment in Nigeria.
We believe the delay was due to the
change in government
believe that the tax benefits
derived from both the extension
of pioneer status and
initial pioneer status should
have remained outside the
group’s results until approval
is granted. The historical tax
benefits inflated 2016 earnings
and we would have preferred
a more conservative approach
in accounting for this. That
said, we are confident that
the approvals will ultimately
be granted given the extent
of DangCem’s investment in
Nigeria. We believe the delay
was due to the change in government.
Changes to estimates
We increase our TP by 20%
to NGN257 given: 1) the inclusion
of sea-based clinker exports
from 2019; 2) our higher
terminal growth rate of 9%
(from 6%); 3) a lower cash
cost per tonne in the Nigerian
business; and 4) a 22% drop
in DangCem’s net debt. This
increases our five-year CAGR
EPS by 7% from an average of
NGN24.5 from NGN23.0.
Given our more positive
view on the outlook for the Nigerian
cement market and as
such stronger growth in DangCem
we upgrade DangCem
to a HOLD rating (from Sell).
Dangote’s current 2018E
P/E of 16.4x is at a 17% premium
to the frontier market peer
average of 14.0x. On 2018E EV/
EBITDA, DangCem is trading
at 10.9x, a 15% premium to
frontier peers.
We value Dangote on an
SoTP approach. We use a fiveyear
DCF model for its Nigerian
operations and 2019E EV/
EBITDA multiples of 9x and 7x
for its SSA and South African
operations, respectively.
Source: Company data,
Renaissance Capital estimates
Potential upside risks to
our TP include: 1) a stronger
contribution to margins and
EV from operations outside
Nigeria; 2) volumes in Nigeria
outperforming our estimates;
and 3) stronger cement prices
in Nigeria than our estimates.
Potential downside risks are:
1) a decline in Nigerian cement
prices; 2) continued
operational difficulties in Tanzania,
Congo and Ghana; and
3) weaker cement volume
growth in the Nigerian market.
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