Dangote Cement Plc Q1 2018 – Improved Margins Underpin Earnings Growth

L-R: Eng Ahmed Mansur, Executive director, Stakeholder, Management and Corporate Communications, Dangote Industries Limited, who represents the Chairman/Founder of Aliko Dangote Foundation, Oyo State Commissioner of Education, Prof. Joseph Adeniyi Olowofela, who represents the State governor, Member of Board of Trustees, Aliko Dangote Foundation, Halima Aliko Dangote, MD/CEO, Aliko Dangote Foundation, Zouera Youssoufou, Vice Chancellor, University of Ibadan, Prof. Abel Olayinka at the unveiling ceremony of the N.3bn Aliko Dangote Business school, donated to the University of Ibadan Business school
Dangote Cement (DANGCEM) released Q1 18 result this afternoon showing a double-digit growth of 29.1% YoY growth in EPS to N4.23 (missing our estimate of N4.29). Performance stemmed largely from improved margins, better cost management and a surprise foreign exchange gain (+305% YoY to N12 billion) which combined neutered a higher effective tax rate of 33.5% (vs. 27% in Q1 17) reported in the review period.
Going by the breakdown, much of Q1 18 margin expansion (+197bps YoY to 59.8%) stemmed from relatively higher prices in the Nigerian business (+8% YoY to N43,816/tonne) and a rebound in volumes (+5.3% YoY to 4.0MMT) both of which pushed Nigerian revenue 14.2% YoY higher to N173.9 billion. For the non-Nigerian business, despite a decline in volumes (-4.4% YoY to 2.2MMT) – a fallout of the civil unrest in Ethiopia, as well as weaker sales in Ghana and Tanzania –, revenue from the region rose 16.8% YoY to N68.6 billion underpinned by higher average pricing (+22.1% to N30,620/tonne) in the region. Consequent on the improvement in volumes in Nigeria as well as pass-through from still high per tonne prices across markets, group revenue printed higher 16.3% YoY at N242 billion – missing our estimate by only 5.4%.
Additionally, over the review quarter, the company’s cost of sales rose slower than revenue (+10.9% YoY to N98.7 billion) a development management attributed to the pass-through of the naira weakness relative to same period last year (337/$ as at the end of Q1 2018 compared to 305/$1 in Q1 2017).
Also, the gains from energy efficiency continued to materialize with cash cost per tonne (+9.2% YoY to N15,682) and energy cost per tonne (+9.9% YoY to N5,173) rising single digit. Overall, gross profit was 20.3% higher YoY to N144.7 billion with related margin expanding 200bps YoY 59.8% (forecast: 58.0%) – the highest level in eleven quarters.
Over the quarter, selling and distribution expenses rose 6.5% YoY to N29.6 billion which drove operating expenses upwards 9.6% YoY to N41.4 billion (forecast: N38.4 billion) albeit, slower than revenue growth. As a result, OPEX to sales contracted 360bps YoY to 17.1% which together with robust gross margin led operating margin higher 769bps YoY to 42.9% – the highest level in twelve quarters. Elsewhere, the company booked N12.5 billion net foreign exchange gain resulting from intergroup loans. The gain combined with a decline in finance cost (9.4% YoY to N10.5 billion) resulted in a net finance income of N4.6 billion.
A feed through of the overall positives translated to a 40.2% YoY PBT growth to N108.4 billion (forecast: N89 billion). However, the impact of the change in tax treatment on the Ibese 3&4 and Obajana line 4 (hitherto assumed as qualified for a pioneer status incentive) resulted in a surge in tax provisions to N36.3 billion (effective tax rate of 33.5% in Q1 18 vs. 27.7% in Q1 17) which significantly dampened the aforementioned gains, with PAT rising 2.2% YoY to N72.1 billion (forecast: N73.0 billion).
On balance, for the rest of the year, we remain broadly positive on DANGCEM and expect the company to sustain earnings growth, albeit at a much slower pace than 2017. Specifically, we see volume induced revenue growth – specifically in Nigeria – and lower energy as key drivers of earnings in FY 18, relative to the price-induced growth story in the prior year.
DANGCEM trades at a P/E and EV/EBITDA of 21.4x and 11.5x compared to Bloomberg Middle and East Africa Peers at 18.0x and 11.5x respectively. Our last communicated FVE of N256.85 translates to a NEUTRAL rating on the stock. Our model is under review.

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