Dangote Cement’s (Dangcem) share buyback program had long been anticipated since it was announced in October 2019 and shareholders approved it in January 2020. But as we mentioned in previous reports, the optimism over the buyback had been starting to wane, as the company repeatedly delayed carrying out the program.
Dangcem finally announced the commencement of its share buyback program yesterday, with the first tranche to be held on 30 and 31 December. This would involve the purchase of up to 85,202,537 (0.5%) of the current 17,040,507,404 outstanding shares, which would be done in the open market over the period of the first tranche. The maximum buyback for the entire programme is 10% of outstanding shares.
The announcement comes as a surprise at this time, as the share price has gained 97% since hitting its 2020 trough in April, and currently trades at a 15-month high. This makes it a more expensive purchase for Dangcem than it would have been a few months back. The buyback had been delayed due to the impact of Covid and management had stated the program was “dependent on the market environment”.
The share buyback is expected to improve Dangcem’s multiples (P/E becomes cheaper) and intrinsic valuation (target price increases), however, a 0.5% buyback would have little impact. In the table below, we show the possible impact under different scenarios assuming buybacks from 0.5% up to 10% – the maximum stated by Dangcem.
The buyback will likely: (1) help Dangcem meet its 21 January 2021 deadline (which could be extended); and (2) spark a Santa rally in the stock (already up 10% yesterday), as the open market buyback means Dangcem would purchase the stock at whatever the market price is as at 30-31 December. However, we think this could correct after the buyback, considering the stock already trades above our target price of NGN211.
The 0.5% buyback will cost Dangcem NGN19bn based on the current market price (NGN230/share). This is within the 9M 20 Free Cashflow to Equity (FCFE) of NGN543bn and cash balance of NGN177bn. A rally in the stock could make the purchase even more expensive for Dangcem.
On trailing 12-month FCFE of NGN532bn, Dangcem can buy back as much as 14% of the outstanding shares (at the current NGN230/share), assuming no dividend is declared. However, we think Dangcem is likely to declare dividends for FY20. In a case where 80% payout of our FY 20f EPS is declared as dividend, we estimate the maximum buyback accommodated by the trailing 12-month FCFE is 9%. However, should Dangcem maintain NGN16 DPS (as it has done for the past two years), we estimate the maximum buyback will be 7.8%.
That said, with a maximum of only 0.5% of outstanding shares in the first tranche of the programme, we project Dangcem could be much more conservative in how much of its shares are bought back during the program.
We downgrade DANGCEM to Sell
While we expect the stock to rally in the days leading up to the first tranche date (30 and 31 December), the buyback program has little impact on our valuation (as seen in the scenario table above). And with the stock trading well above our target price of NGN211, we downgrade our recommendation on DANGCEM to Sell.