We raise our target price (TP) for Dangote Cement to NGN245 after impressive Q1 21 results which beat our forecast. Dangote reported EPS growth of 48% yoy to NGN5.3, driven by 34% growth in revenue and strong margins which offset the increase in finance cost. The adjusted EPS for the quarter beat our expectations following a better-than-expected turnout in revenue and other income. We upgrade our recommendation to Buy.
Dangote grew domestic sales by an impressive 19% yoy and increased its market share by 2ppts to 63% in the quarter (see details on market dynamics and Q1 results below).
Higher TP, upgrade to Buy
We raise our target price to NGN245, from NGN230. This, together with an 8% foward FY21 dividend yield translates to an expected total return of 21% based on the current market price and hence we upgrade to a Buy recommendation from Hold.
The increase in our TP stems from: (1) increase in Nigeria volumes for 2021f to 18.5Mt (previously 17.6Mt) following the impressive domestic growth in the quarter, (2) increase in other income to NGN8bn (previously NGN4bn) after Q1 21 numbers came in at 89% of our previous forecast (we were yet to get clarification for the 3x yoy increase in other income at the time of writing); and (3) increase in net finance cost (ex-FX impact) to NGN43bn (previously NGN36bn) following an increase in the effective interest rate of 11% (previously 9%) after restructuring the debt book to recognise the new NGN300bn bond issuance (previous forecast: NGN200bn).
The culmination of our model updates leads to an increase in our FY 21f and FY 22f adj. EPS to NGN18.5 and NGN20.2, from NGN17.3 and NGN18.8, respectively. As a result, the forward multiples are more discounted, with the FY 21 P/E and EV/EBITDA printing at 11.7x and 6.8x, a discount to the 5-year median of 14.5x and 9.1x, and MEA peer median of 20x and 12.8x, respectively.
Management call key highlights
A return of the share buyback: According to management, Dangote is currently seeking shareholder and regulatory approvals for another share buyback programme. You will recall that Dangote bought back 40.2mn units of shares (0.24% of total outstanding shares) in December under the previous buyback programme which expired in January 2021. No further detail was provided but we will monitor progress on this.
The NGN300bn bond issuance: Dangote is currently in the market offering a new NGN300bn bond programme split into three tranches: 3-yr, 5-yr and 7-yr bonds. This will likely be Nigeria's largest corporate bond single issuance and comes after earning an 'AAA' indicative rating from Global Credit Ratings. The proceeds of the loan will be used for the company's expansion plans and to refinance existing short-term debt.
Increasing operating capacity to meet growing demand: Management stated that Dangote is looking to debottleneck the old 4Mt Gboko plant (Dangote's oldest Nigeria plant) and should commission the new 3mt Okpella plant by Q3 21. This was deemed even more necessary after the impressive Nigeria market demand in Q1 21 (+12% yoy to 7.6Mt) forced Dangote to halt exports via the new seaports in the quarter. As we stated in our recent sector report, the outlook for the Nigeria cement market is positive after growing 13% in 2020 despite Covid.
Q1 2021 result highlights
Impressive topline growth: Dangote grew total revenue by 34% yoy to NGN333bn in Q1 21 following growth in both Nigeria (+34% yoy) and Pan Africa (+33% yoy) segments. The growth in Nigeria revenue was driven by increases in both volume (+22%) and revenue per tonne (+9%). The growth in Nigeria volumes was impressive as it not only surpassed our projection for the quarter but domestic sales outweighed that of competitors by a significant margin — BUA grew by only 3% and Lafarge by only 1%. As a result, Dangote's market share increased 2ppts to 63% in the quarter. The increased revenue per tonne was due to wound down discounts to distributors.
As we mentioned in our last sector report, we have a positive outlook for the Nigeria cement market. We now expect the market could grow by 12% in 2021 (previously 8%) after impressive 13% growth in 2020, despite Covid. According to management, Dangote was able to ramp up production on the new Obajana line 5 (commissioned in Q2 21) to meet the increased demand in the quarter. This eased our concerns on the unimpressive market share increase in 2020 despite the new plant's commissioning.
Interestingly, growth was also strong across the Pan African markets with volumes growing 13% yoy to 2.6Mt. This stemmed from an impressive post-Covid recovery across all the markets, especially in Ghana (+18% yoy, imports from Nigeria), Senegal (+6% yoy), Cameroon (+16%), Zambia (+47%) and Tanzania (+29%). This, together with an 18% increase in revenue per tonne, pushed revenue up 33% yoy to NGN93bn.
Tepid Nigeria exports: The slight downside to the rapid demand increase in Nigeria was that Dangote was unable to meet export demand. As a result, Dangote was only able to export 100 kilotonnes (kt) during the quarter, all of which was done via road and none via the newly commissioned export terminals. This comes despite having 39% unutilised plant capacity in the quarter (we now believe this could be due to structural inefficiencies). As a result, the company plans to increase operating capacity by carrying out the Gboko plant debottlenecking and commissioning the new Okpella plant, as explained above.
Record-high margins: Gross, operating and EBITDA margins came in at 62%, 46% and 54%, respectively. These were the highest on record, owing to the higher revenue per tonne in both Nigeria and Pan Africa buisinesses, as well as contained costs. COGS/tonne and opex/tonne were down 8% and 10% qoq, respectively.