Dangote Cement (Dangcem) announced the commencement of the second tranche of its share buyback programme on 12 January. The company will look to buy back a maximum of 1% of outstanding shares on 19-20 January 2022, or when the entire tranche size has been sold – whichever is earlier.
The cost of the 1% share buyback programme is within Dangcem's cash position. As of 9M 21, the company's free cashflow (FCF) and cash balance printed at NGN306bn and NGN179bn, respectively. Dangcem's FCF can also accommodate the typical NGN16 full-year dividend, which would cost an additional cNGN269bn (excluding the 1% buyback). However, these fall short when compared to the company's FCFE, which printed negative: at -NGN58bn in 9M 21.
The first tranche was executed in December 2020. In line with SEC requirements, the deadline for the first tranche was set for January 2021. Another set of approvals was secured from the regulators and shareholders for the issuance of the second tranche of the buyback programme, with a deadline set for 21 January 2022. This explains Dangcem's current buyback timing.
Speaking with the management team, we understand that this is the final tranche for the programme – any more buybacks would come under a different programme, requiring a new set of approvals. It is unclear if we can expect another buyback any time soon.
So far, investors' reaction to the latest announcement has been underwhelming (unlike the first tranche, which sparked a "Santa rally"). The stock rose by only 6% (ytd: 7%) versus 17% (peak) when the first tranche was announced. This translates to a maximum purchase of 170mn share units – approved by shareholders at the AGM in May 2021 – valued at cNGN46.7bn, based on the current market price of NGN275/share.
In our view, the possible reasons for investors' tepid reaction are:
There is no surprise here: Unlike the announcement of the first tranche, the second tranche was largely expected and, as such, less surprising. As a result, some of the gains may have already been priced in.
Fundamentally, the buyback proportion is underwhelming: Although the maximum buyback of 1% is higher than the previous tranche of 0.5% (only 0.24% was eventually sold), it adds little tangible value to shareholders, in our view (see scenario table below). For example, a 1% buyback only increases our target price to NGN291, while a 5% buyback could have increased it to as much as NGN305.
Share buyback programmes are typically expected to improve multiples (P/E becomes cheaper) and intrinsic valuation (target price increases). In the table below, we highlight the possible impact under different scenarios assuming buybacks from 0.5% to 5%.
We retain our Hold recommendation on DANGCEM; we prefer Lafarge in the sector
Although we believe any further rally in the stock is unlikely leading up to 19 and 20 January, we do not entirely rule out the possibility. Regarding our valuation, the buyback programme has little impact (as shown in the scenario table above).
The stock currently trades only 5% below our target price of NGN290 and is trading at trailing 12M and FY 22 EV/EBITDA of 8x and 6x (5-year historical: 9x), compared to the median for MEA peers of 15x and 13x, respectively. We retain our Hold recommendation on Dangcem, given the limited upside. Nevertheless, we remain positive on the stock as the company retains market leadership and is de-risked by the wide spectrum of its Pan-Africa cement business. We also await the completion of the 3mmt Okpella plant, even as its leading competitor BUA, recently commissioned the new 3mmt Sokoto plant (see our recent cement report).
Among the three key cement producers in Nigeria, we prefer Lafarge (Buy, TP: NGN35), as the market is yet to fully price in the company's recent solid financial results, which were aided by a strong top line as well as lower finance costs. The stock holds a 40% upside from the current price.