April 29, 2018/
Vetiva Research
Strong operating earnings underline Q1 outperformance
DANGCEM released its Q1’18 earnings, reporting impressive earnings, with bottom line coming in at ₦72 billion, 29% higher y/y and ahead of our estimate of ₦55 billion. The earnings beat was driven by strong operating performances across the Nigerian and Pan African businesses, with Group EBITDA rising 22% y/y to ₦126 billion (52% margin), 8% ahead of our estimate.
On a regional basis, Nigerian operations remained strong, with Q1’18 EBITDA (₦115 billion) easily outpacing Q1’17 (₦99 billion) and Q4’17 (₦90 billion) figures on the back of still-strong cement prices as well as continued ramp up in use of cheaper fuels.
Notably, the company has eliminated the use of LPFO (2.5x the price of gas) and imported coal (1.12x the price of gas) for locally sourced and own-mined coal (0.67x the price of gas). Consequently, EBITDA margin in the region remained stable q/q at 66%, albeit rising 160bps y/y. Contribution from Pan African operations also came in decent, with EBITDA rising 77% y/y to ₦13 billion.
Driven by stronger cement prices as well as improving operations, EBITDA margin hit a high of 19% in the quarter. Furthermore, bottom line was supported by a Net Finance Income of ₦5 billion coming from a 9% moderation in finance costs as well as a ₦12 billion foreign exchange gain arising from translation of foreign currency denominated debt balances. Overall, PAT came in 29% higher y/y despite being tempered by a higher effective tax rate of 33%.
Volume acceleration supports topline beat
Cement sales were also up in Nigeria. Revenue from the region rose 14% y/y to ₦174 billion due to stronger volume rollout in the quarter (Q1’18: 3.97 MT, Q4’17: 3.10 MT, Q1’17: 3.77 MT). Meanwhile, whilst volumes across Pan African operations moderated 4% q/q and y/y to 2.24 MT, Revenue (₦69 billion) still came in 17% higher y/y and 3% higher q/q on the back of stronger pricing across certain regions (South Africa, Ethiopia, Tanzania) as well as the impact of strong currency from some regions.
Notably, volume decline in the region was driven by weaker volume rollout from Ethiopia (shut down due to social unrest), Tanzania (shut down due to high costs) and Ghana (Clinker importation from Nigeria halted due to rising costs).
Management has stated that the Ethiopian business is back up and expects to resume Tanzanian operations this quarter after installation of the gas gensets. Exports to Ghana are however expected to resume anytime from Q4’18 when sea-based exports would be operational. All in all, the Group reported a 16% y/y increase in Revenue to ₦242 billion (Vetiva: ₦227 billion) and a 3% y/y rise in volumes to 6.20 MT (Vetiva: 6.00 MT).
Estimates revised higher on impressive first quarter
Following impressive volume rollout in Q1, we are more optimistic about cement sales in Nigeria in 2018, especially as management attributed the bulk of growth to public sector demand. We therefore revise our Nigeria volumes estimate to 15.3 MT from 14.5 MT. Meanwhile, with management raising prices by ₦50/bag in April, we adjust our pricing estimate to reflect current price. We therefore raise our Revenue estimate for Nigeria to ₦681 billion (Previous: ₦583 billion).
Despite the slower Q1, we also raise our Pan African volumes expectation to 11.2 MT (Previous: 10.8 MT) – after adjusting for expected recovery in certain operations – translating to FY’18 Revenue of ₦279 billion (Previous: ₦261 billion). All in, we raise our volume forecast for the Group to 26.5 MT (Previous: 25.3 MT) and our Revenue to ₦960 billion (Previous: ₦874 billion).
We have also adjusted our cost estimates to reflect the Q1’18 run rate, translating to a ₦499 billion EBITDA for the Group (Previous: ₦421 billion). After adjusting for interest and tax expenses, we estimate a higher FY’18 PAT of ₦278 billion (Previous: ₦212 billion) and a target price of ₦289.45.
We note the recent addition of Cherie Blair and Mick Davies to the board of DANGCEM and see this as an indication of improving corporate governance in the company. Hence, we expect this move and improving earnings to keep investor interests strong.
