Dangote Cement Plc 2019FY-Price War: Unwarranted Pandemonium

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A Dangote Cement Plc logo stands on a barrier at the under-construction Dangote Industries Ltd. oil refinery and fertilizer plant site in the Ibeju Lekki district, outside of Lagos, Nigeria, on Thursday, July 5, 2018. The $10 billion refinery, set to be one of the worlds largest and process 650,000 barrels of crude a day, should be near full capacity by mid-2020, Devakumar Edwin, group executive director at Dangote Industries said in an interview. Photographer: Tom Saater/Bloomberg via Getty Images

Relative to 2019, when we were impulsive on cement prices, we struggle to any material upside for selling prices going forward. Management reiterated its commitment towards keeping prices stable while maintaining market share despite the aggressive competitive landscape especially in Nigeria; we have a contrary view. DANGCEM’s selling prices have declined by c.2.6% on average over the last 5 quarters in Nigeria alone, thanks to capacity build-up by competitors. We still see enough legroom for further price erosion as BUACEMENT sustains its drive to take market share in 2020E. This is in addition to the resurgence of WAPCO, which now focuses strictly on the Nigerian market. Thus, we have cut our target price to NGN179.89/share (Previously: NGN216.63/share) and downgraded our recommendation on the stock to a HOLD.

Higher Selling Price is a Pipe Dream At this Stage: DANGCEM attempted to raise prices in Nigeria in April (NGN+150.00/bag), but implementation was a tall order. Clearly, the need to respond to competitor’s pricing tactics necessitated the sustained “Bag of Goodies” promotion strategy, which eventually wiped off the price increase taken. Management said it raised prices by c.2.0% in January 2020, in a bid to fully pass on the higher VAT to consumers. As with the previous attempt, the needle is not likely to be moved, as we believe the company looks set to face an even tougher competitive landscape in 2020E.

Valuation: Since the announcement of its share buyback, DANGCEMs share price has gained +14.1%, outperforming the NSE All-Share Index (-0.3%) in the period. At the current market price (NGN170.00/share), we believe DANGCEM has run its course, and thus, we have cut our target price to NGN179.89/share (Previously:NGN216.63/share) and downgraded our recommendation on the stock to a HOLD.

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