We update our view on Dangote Cement (DANGCEM NL) following the release of Q2 20 results where EPS grew by 7% yoy to NGN3.85. Going into the rest of the year, we project EPS (ex-FX impact) at NGN13.41 for 2020, 7% higher yoy than NGN12.56 in 2019. This puts DANGCEM’s forward P/E and EV/EBITDA at 10.1x and 6.0x – a discount to its 5-year medians of 15.7x and 9.5x, respectively. The company’s plan for a share buyback (max 10%) could place the multiples at even steeper discounts. However, the company’s continued delay on the buyback programme tames our optimism. We lower our target price for DANGCEM to NGN191 (from NGN250) and maintain our Buy recommendation.
Our EPS forecast is largely based on a projection of 10% top-line growth, as Nigeria and Pan-Africa markets show resilience, despite Covid-19. In Nigeria, besides the growth expected from the resilient domestic sales (after a solid bounce-back from the lockdown in April 2020), growth is also expected to stem from the resumption of exports via both the newly commissioned ports in Apapa and Onne as well as via land borders, upon approval. As a result, volume is expected to print 8% higher over FY 20 to 14.7mt. Revenue per tonne is also expected to close the year 3% higher, as DANGCEM wound down discounts to distributors – steadily passing on increased costs from the NGN devaluation – and also reflecting the 2% increase in VAT enforced in February 2020. Meanwhile, management recently announced a 3.0mtpa increase in capacity to 32.3mtpa in Nigeria (despite 52% idle capacity as at FY 19). We believe the added capacity could allow DANGCEM to enjoy tax credits on the Obajana Line-5 before Pioneer Tax credits to cement players end in August 2020.
The Pan-African markets also showed resilience in Q2 20 with a 3% yoy growth (H1 20: +1% yoy to 4.7mt) in volumes owing to increased sales in five out of the nine markets (especially in Senegal and Ethiopia). We expect the volume growth to persist for the rest of the year. In addition, the resolution of the power issues in Tanzania (which weighed on Q1 volumes) should support more Pan-African volume growth in H2 20. Meanwhile, the depreciation of the NGN (against the US-Dollar) makes for a higher revenue per tonne for the Pan-African business; we expect 5% yoy higher unit revenue in FY 20.
Still some value in DANGCEM? Like other Nigerian equities, DANGCEM trades at very cheap multiples. Moreover, its FY 20f EV/tonne of US$145 is much lower than the 5-year median of US$250/tonne. DANGCEM’s FY 20f EV of US$6.8bn is c20% lower than its estimated replacement cost of US$8.4bn.
The share buyback programme, which was approved by shareholders in January 2020, has until January 2021 to be completed, according to SEC rules. However, we find the company’s continued postponement of the programme unsettling. Despite being in a comfortable FCFE position (NGN554bn as at H1 20) to afford the cNGN239bn share buyback (assuming 10%), management has continued to state that they are waiting for the perfect market timing and liquidity position (H1 20 cash: NGN50bn) before carrying out the programme. While, we await further developments before incorporating in our model, a 5% buyback this year would put our FY 20f EPS at NGN14.9, and FY 20f P/E at 9.1x.
Key downside risks to our recommendation include: (1) the market share tussle among the triad cement players – mainly DANGCEM (the market leader) and BUA (the disruptor); and (2) the impact of further NGN devaluation on cash cost. The key upside risks include: (1) possible increase in cement prices; (2) a more aggressive export strategy than our 500kt estimate for FY 20f; and (3) tax credit.