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Analysis: DANGCEM remains top pick in the cement universe

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By Audrey Lotechukwu

MON 03 MAY, 2021-theGBJournal- In the Nigerian Industrial Goods Sector, DANGCEM remains top pick in the cement universe, and Cordros Securities analysts have placed a ‘BUY’ rating with a TP of NGN255.54/s on the continent’s largest cement company.

‘’ Our positive outlook on the company is further strengthened by its robust funding structure, strong cash-generating ability, industry-leading margins and consistent dividend payment history,’’ Cordros said in their latest evaluation of the Nigerian Industrial Goods Sector.

DANGCEM’s revenue grew at a CAGR of 16.0% from 2015 to 2020, supported by expansion across its key markets; Nigeria (2015-2020 CAGR of 13.1%) and Pan African Operations (2015-2020 CAGR of 24.7%). Save for 2019, when Group revenues declined marginally by 1.0% y/y due to slowdown in the Nigerian market stemming from reduced activities in the construction sector owing to the general elections; the company has consistently recorded double-digit growth in revenue from 2015 to 2020.

This is reflective of its market leadership position in the Nigerian market and its growing presence across the nine major African countries it currently operates. Despite the pandemic induced slowdown in the construction sector across its key markets in 2020, Group revenue grew by 16.0% y/y to NGN1.03 trillion in FY 2020, on the back of volume expansion in Nigeria (+12.9% y/y) and Pan African Operations (+4.5% y/y).

Revenue is now forecast to grow slower by 5.8% y/y to NGN1.12 trillion in 2021 due to normalisation in demand conditions across the key regions it operates. Over our forecast period, we estimate a revenue CAGR of 7.5% over FY2021E – FY2025E.

Despite episodes of devaluation of the local currency in the Nigerian market, tactical price adjustments, efficient energy mix and economies of scale associated with large scale production have supported margins. DANGCEM’s EBITDA grew at a CAGR of 12.7% from 2015 to 2020, with an accompanying EBITDA margin averaging 47.0% over the same period. In 2020, DANGCEM faced cost pressures in Nigeria due to the naira devaluation’s pass-through impact on dollar-linked inputs. In absolute terms, energy cost (for Nigerian operations) rose by 22.5% y/y in FY 2020. However, on a per tonne basis, energy cost/tonne grew slower by 8.5% y/y due to higher sales volumes.

According to Management, increased fixed cost absorption due to the higher volumes helped limit the decline in Nigeria FY 2020 EBITDA to 58.5% (FY 2019; 59.2%). However, the Group’s EBITDA margin rose by 200bps to 46.6% in 2020 due to cash cost improvements and higher realised prices across Pan African Operations.

We estimate Group EBITDA margins will moderate by 44 bps to 46.6% in 2021, owing to the full impact of the prior year devaluation of the Naira and limited ability to entirely pass on the cost to the consumers amid higher realised price across Pan African Operations.

Farther out, we estimate EBITDA will grow at a CAGR of 9.4% over FY2021E – FY2025E, with an accompanying average EBITDA margin of 47.9% over the same period.

Robust Growth from Pan African Operations to Drive Long Term Profitability

DANGCEM’s PAT and EPS grew at a CAGR of 8.8% between 2015 and 2020. The steep decline of 48.6% in PAT in 2019 was due to the absence of Pioneer Tax Status exemption compared to 2018. This resulted in a tax expense of NGN49.9 billion in 2019 compared to the tax credit of NGN89.5 billion in 2018.

For 2021E, we estimate PAT of NGN294.02 billion (+6.5% y/y) and EPS of NGN17.30 (+6.5% y/y). Beyond 2021, we estimate PAT will grow at a CAGR of 11.5% over 2021E- 2025E, higher than 8.8% achieved between 2015 and 2020.

The higher CAGR forecast over the forecast period (2021E-2025E) is driven by expectation of improved profitability from Pan African Operations supported by management efforts towards gaining market share and improving capacity utilisation.

We also expect gains associated with the exportation of clinker via Apapa and Onne ports to West African countries to buoy profitability. In 2020, exports out of Nigeria declined by 27.3% y/y to 346kt due mainly to the land borders’ closure. However, the company could commence clinker exports by sea and resumed land cement exports in H2- 2020 after securing the government’s approval.

The company impressed analysts with their drive towards exploring the sea for the exportation of clinker and believe the large export market holds significant prospects for it.-With Cordros Research

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