Equity Analysis /
Nigeria

Dangote Cement: Q2: Lower effective tax rate masks weaker margin

    Ayodeji Dawodu
    Ayodeji Dawodu

    Equity Research Analyst, Industrials

    Olabisi Ayodeji
    Olabisi Ayodeji

    Equity Research Analyst, Banks (Africa)

    Tellimer Research
    30 July 2019
    Published by

    Dangote Cement's Q2 19 PBT was flat yoy, bringing the H1 19 decline to 16% yoy, tracking behind our expectation for a 2% yoy increase in full year PBT. However, the decrease in the group's effective tax rate to 23% in Q2 19, from 47% in Q2 18, led to the 44% yoy increase in PAT to NGN58.9bn. Group EBITDA fell 12% yoy due to competitive pressures, as revenues fell 5% yoy and EBITDA margin contracted to 47%, from 50% in Q2 18.

    We maintain our Buy rating on DANGCEM with an unchanged TP of NGN250, suggesting an ETR of 51%. The stock currently trades at an attractive forward EV/EBITDA of 6.5x, representing a 43% discount to its five-year historical average. Also, management expects margins to improve as the impact of price increases taken earlier in the year materialises. There could also be an improvement in volume if infrastructure spending in Nigeria, its biggest market, accelerates in H2 19. However, we highlight that competitive forces in Nigeria and other markets such as South Africa, could be a negative for margin and volume performance.

    Competition continues to pressure margins. The slide in the group's EBITDA margin was largely driven by its Nigerian operations, where average unit costs jumped 11% yoy. A major contributor to this was the 29% yoy spike in selling and distribution costs, which could be a sign that the group is trying to reach underserved segments of the market to drive volume and market share. Furthermore, average unit prices were stable, despite the group announcing price increases in Q2 19, due to discounting to support volume during the rainy season. Competition has intensified following the capacity expansion by BUA in 2018, which has pressured prices.

    Volume performance remains lacklustre. Group volumes decreased by 4% yoy, led by the 6% yoy decline in Nigeria due to heightened competition and subdued economic activity. As a result, Dangote Cement’s market share has now fallen to 64%, from 66% at the end of Q2 18. But Pan-African volumes were relatively flat yoy, suppressed by unfavourable economic conditions in South Africa, Zambia and Ethiopia, which also negatively impacted margins as the EBITDA margin for pan-Africa declined to 17%, vs 19% in Q2 19. Nonetheless, management highlighted the bright performance of its Tanzania operations on the back on increased cement demand and fuel efficiency, as well as strong volume growth in Sierra Leone.