Equity Analysis /
Nigeria

Dangote Cement: Q1 19: Margin weakness drags PAT

    Ayodeji Dawodu
    Ayodeji Dawodu

    Equity Research Analyst, Industrials

    Tellimer Research
    6 May 2019
    Published by

    Dangote Cement’s Q1 19 PAT fell by 16%, trending below our estimate for 2% growth in FY 19. The miss was partly the result of lower volumes as well as weaker EBITDA margin compared to our FY 19 forecast. While group revenues were relatively flat yoy, the decline in PAT was largely the result of weaker EBITDA margins in both Nigeria and Pan-Africa.

    We have a Buy rating on DANGCEM with an unchanged TP of NGN250, suggesting an ETR of 39%. Valuation looks attractive, with the stock trading at an EV/EBITDA of 7.0x, which is 38% lower than its 5-year historical average. We expect to see an improvement in volumes and margins in Nigeria with the disruptive impact of the election now past us, while there remains the potential for higher margins in Pan-Africa due to the use of a more efficient energy mix. 

    Delay in elections and increased competition weighs on Nigeria operations. Volumes in Nigeria were relatively flat yoy due to the delays in elections, which disrupted three weekends’ worth of sales. Furthermore, management highlighted that the increased competition witnessed in Q4 18 continued into Q1 19, resulting in increased discounting. This led to EBITDA margin falling to 61%, from 66% in Q1 18, as well as a 10% yoy decrease in EBITDA.

    Volume performance was stronger in Pan Africa. Volumes increased in Pan-Africa by 5% yoy but EBITDA margin fell to 17%, from 19% in Q1 18. The decline in EBITDA margin was the result of lower pricing.

    Management optimistic on Q2 19 performance. Following the 7% price increase implemented in Nigeria in April 2019, management expects margins to improve in the coming quarters. There is also the potential for margin expansion in Pan-Africa, with Dangote Cement’s Tanzania operation breaking even for the first time in Q1 19, as well as improved energy mix in both Ethiopia and Tanzania. Furthermore, volume performance in Nigeria may also increase on the potential passage of the 2019 budget, which is focused on infrastructure development. 

    You can access the investor presentation here.