Dangote Cement’s Q4 19 EBITDA fell by 6% yoy, 14% lower than we expected, as EBITDA margin decreased by c200bps yoy to 44% while volumes were down 3% yoy. The group’s poor performance in Q4 19 was because of the decline in margin and volume in Nigeria and lower volumes in Pan-African operations. PAT decreased by 80% yoy due to an income tax expense in FY 19 versus an income tax credit in FY 18.
We reiterate Buy on DANGCEM with an unchanged TP of NGN250, suggesting an ETR of 52%. The stock currently trades at an attractive forward EV/EBITDA of 6.2x, representing a 41% discount to its five-year historical average. Also, management-proposed share buybacks should be positive for the stock. In Nigeria, the absence of elections this year, which disrupted activities in 2019, as well as the commencement of clinker exports via ports could lead to stronger volume growth in 2020. But competitive forces in Nigeria, with BUA Cement adding up to 3.0mt of capacity over the next 12 months, as well as economic challenges in South Africa and Zambia, could all still weigh on margins and volumes.
Nigeria margin weakness continues as border closure hinders volume growth. EBITDA margin fell 200bps to 60% largely due to cost pressures, mainly from higher selling and distribution cost. We believe margin deterioration continues to reflect a highly competitive environment with management trying to increase market penetration. Volume performance was down 3% yoy due to competition and from the impact of the border closure – exports decreased in the last few months of 2019. Nonetheless, management expects the absence of election disruptions and the start of clinker exports via ports to support volume performance in 2020.
Pan-African volumes fell by 2% yoy while margins remain unchanged. According to management, this was led by the depressed economic environment in South Africa and Zambia, which accounted for c25% of its Pan-Africa volumes in 2018. Furthermore, challenges such as power rationing in Ethiopia (15% of Pan-Africa capacity) weighed on the potential improvement in profitability as EBITDA margin was flat yoy at 14%. However, further energy efficiency gains and clinker exports from Congo to neighbouring countries could lead to margin expansion and volume growth in 2020.
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