March 26, 2018/FBNQuest Research
Price target up slightly despite 7% avg. cut to our EPS forecasts
Dangote Cement’s (DangCem) Q4 2017 PBT was broadly in line with our forecast. However, PAT surprised negatively because of a higher-than expected tax rate of 84% (vs. our 11% estimate) and a negative result of – N21.8bn in other comprehensive income (OCI). On its Q4 2017 results conference call, management disclosed that the tax rate was due to delays in getting approvals for pioneer tax reliefs for Ibese lines 3&4 and Obajana line 4.
Although management is optimistic that approval will be granted, the firm had to take additional tax provisions of N62.2bn in 2017. In Nigeria, despite lower volumes, 2017 EBITDA margin expanded by c.850bps y/y, driven by; i) strong pricing (+ c.50% y/y) ii) the utilisation of locally mined coal vs. imported coal and iii) the near elimination of low-pour-fuel-oil in the fuel mix of Obajana and Ibese.
Going forward, management sees a strong demand outlook for 2018 in the 5-10% range driven by a combination of government infrastructure spend and strong private demand. Although we have cut our 2018 unit volume forecast for Nigeria by -3%, our y/y growth forecast of 10% is broadly in line with guidance. We have also cut our unit volume forecast for the Group by a similar margin of -3%. Our 2018-19E EPS forecasts are 7% lower on average (we expect that the tax provisions which weighed on Q4 2017 results will be reversed).
However, our price target is up by just a touch because we have increased the P/E multiple driving our price target to 16.8x from 16.1x, in line with peer multiples. Our new price target implies a potential downside of -4% from current levels. We retain our Neutral rating on the stock.
Q4 2017 PBT up 116% y/y
DangCem’s Q4 PBT grew by a stellar 116% y/y to N69.4bn. The underlying drivers behind the marked y/y growth in earnings were a 17% y/y expansion in sales, a 799bp y/y expansion in gross margin to 54.7% and an -86% y/y reduction in net interest expense.
To a lesser extent a N2.2bn profit from associates related to DangCem’s investment in Onigbolo Cement in Benin Republic also contributed. These positives completely offset a 53% y/y rise in opex.
In contrast to the stellar earnings growth posted above the tax line, DangCem reported an after-tax loss of –N16.1bn, driven by a negative result of –N21.8bn in OCI and a significant increase in income tax rate to 84% (vs. 11% Q4 2016). Sequentially, Sales and PBT grew by 6% q/q and 7% q/q respectively. However, the after-tax loss of –N16.1bn was a complete divergence from the PAT of N43.2bn that the company reported in Q3 2017.