Dangote Cement (DANGCEM) released Q1 18 result this afternoon showing a double-digit growth of 29.1% YoY growth in EPS to N4.23 (missing our estimate of N4.29). Performance stemmed largely from improved margins, better cost management and a surprise foreign exchange gain (+305% YoY to N12 billion) which combined neutered a higher effective tax rate of 33.5% (vs. 27% in Q1 17) reported in the review period.
Going by the breakdown, much of Q1 18 margin expansion (+197bps YoY to 59.8%) stemmed from relatively higher prices in the Nigerian business (+8% YoY to N43,816/tonne) and a rebound in volumes (+5.3% YoY to 4.0MMT) both of which pushed Nigerian revenue 14.2% YoY higher to N173.9 billion. For the non-Nigerian business, despite a decline in volumes (-4.4% YoY to 2.2MMT) – a fallout of the civil unrest in Ethiopia, as well as weaker sales in Ghana and Tanzania –, revenue from the region rose 16.8% YoY to N68.6 billion underpinned by higher average pricing (+22.1% to N30,620/tonne) in the region. Consequent on the improvement in volumes in Nigeria as well as pass-through from still high per tonne prices across markets, group revenue printed higher 16.3% YoY at N242 billion – missing our estimate by only 5.4%.
Additionally, over the review quarter, the company’s cost of sales rose slower than revenue (+10.9% YoY to N98.7 billion) a development management attributed to the pass-through of the naira weakness relative to same period last year (₦337/$ as at the end of Q1 2018 compared to ₦305/$1 in Q1 2017).
Also, the gains from energy efficiency continued to materialize with cash cost per tonne (+9.2% YoY to N15,682) and energy cost per tonne (+9.9% YoY to N5,173) rising single digit. Overall, gross profit was 20.3% higher YoY to N144.7 billion with related margin expanding 200bps YoY 59.8% (forecast: 58.0%) – the highest level in eleven quarters.
Over the quarter, selling and distribution expenses rose 6.5% YoY to N29.6 billion which drove operating expenses upwards 9.6% YoY to N41.4 billion (forecast: N38.4 billion) albeit, slower than revenue growth. As a result, OPEX to sales contracted 360bps YoY to 17.1% which together with robust gross margin led operating margin higher 769bps YoY to 42.9% – the highest level in twelve quarters. Elsewhere, the company booked N12.5 billion net foreign exchange gain resulting from intergroup loans. The gain combined with a decline in finance cost (9.4% YoY to N10.5 billion) resulted in a net finance income of N4.6 billion.
A feed through of the overall positives translated to a 40.2% YoY PBT growth to N108.4 billion (forecast: N89 billion). However, the impact of the change in tax treatment on the Ibese 3&4 and Obajana line 4 (hitherto assumed as qualified for a pioneer status incentive) resulted in a surge in tax provisions to N36.3 billion (effective tax rate of 33.5% in Q1 18 vs. 27.7% in Q1 17) which significantly dampened the aforementioned gains, with PAT rising 2.2% YoY to N72.1 billion (forecast: N73.0 billion).
On balance, for the rest of the year, we remain broadly positive on DANGCEM and expect the company to sustain earnings growth, albeit at a much slower pace than 2017. Specifically, we see volume induced revenue growth – specifically in Nigeria – and lower energy as key drivers of earnings in FY 18, relative to the price-induced growth story in the prior year.
DANGCEM trades at a P/E and EV/EBITDA of 21.4x and 11.5x compared to Bloomberg Middle and East Africa Peers at 18.0x and 11.5x respectively. Our last communicated FVE of N256.85 translates to a NEUTRAL rating on the stock. Our model is under review.