View
35
Download
0
Category
Preview:
DESCRIPTION
Citation preview
April 15, 2015 www.dunnlorenmerrifield.com Bloomberg: < DLMN> GO
Investment Summary;
We update our share recommendation for Dangote Cement (Dangcem)
following the release of FY’14 performance numbers and hereby maintain
a cautious outlook on the company’s stock. The company’s FY’14
numbers came in below our estimates as low realizations supported by
weak pricing strategy drove the underperformance. In our view, it appears
the company has challenges in implementing pricing strategies, driven by
higher supplies and inventory build-up. As such, an improvement in
EBITDA/tonne may not be forthcoming. In absolute terms, the company
reported an EBITDA of ₦219.76billion (down 3.5% y/y) and
EBITDA/tonne of ₦6,454/tonne ($32.76) based on current capacity of
34.05mmt. The company’s financials appears to bear the risk of higher
financial charges through increase in interest rates and the impact of the
naira devaluation. On the other hand, its on-going expansion appears to be
enhancing its long term profitability and dominant presence in the market.
However, FY’14 sales volumes contracted by 0.20% to 13.97mmt despite
the pricing strategy initiated to drive volumes. Given its capacity
advantages, Dangote Cement is more favoured to benefit from the
opportunities in the industry, especially when the conditions within
domestic economy improve and industry volumes begin to accelerate.
Furthermore, visibility of investments in upgrading clinker capacity
remains strong in relation to its domestic peers.
While we retain our DCF valuation approach, valuations at 13.82x/13.20x
FY’15E/16E EV/EBITDA and P/B of 5.01x remain high in comparison with
peers. The company is trading on a 2015E EV/tonne of $418.59/tonne on the
expanded capacity which is at ~64% premium to average replacement cost of
$150/tonne. We therefore remain cautious on Dangote Cement stock and maintain a
HOLD stance with a target price of ₦177.97/share (previous target price: ₦226.63).
Since our last valuation report (Nov 2014), Dangote Cement share price has declined
13.83%.
Fig. 1: Quarterly results highlights
4Q’2014 3Q’2014 4Q’2013 Q/q Δ Y/y Δ
Revenue (N’mn) 81,424 101,306 90,520 -19.63% -10.05%
Operating profit (N’mn) 24,646 50,471 45,798 -51.17% -46.20%
Net profit (N’mn) 19,025 45,036 48,447 -57.76% -60.73%
Source: Company annual report, Bloomberg, DLM Research
Financial charges and tax further
drawback to profit Alex Ibhade
aibhade@dunnlorenmerrifield.com
Please read the Important Disclosures at the end of this report.
Dangote Cement Plc
Fig. 5: Dangote Cement vs. NSE, 52-wk movement (rebased)
Fig. 2: Stock data
FYE December Price Mov’t: YtD / 52wk -10%/-23.40%
52-week range ₦141.90- ₦250
Average daily vol./val. 1,292,592/N219.74m
Shares Outstanding (N’mn) 17,040
Market Cap. (N’mn) 3,067,291 ($18,258mn) EPS, N- 12months trailing 9.36
DPS, N- FY2013 6.00
FCF, N- FY2013 0.00
Source: Bloomberg, NSE, DLM Research
Fig. 3: Key ratios
FY’ 2014 FY’2013
Gross profit margin 63.47% 66.21%
Net profit margin 40.73% 52.10%
Equity multiplier 1.61x 1.50x
Asset turnover 0.40x 0.46x
Source: Company annual report, NSE, DLM Research
Fig. 4: Valuations
FY2014 FY2015E FY2016F FY2017F
P/Sales 7.83x 7.60x 7.38x 7.17x
P/E 19.28x 18.43x 18.07x 18.16x
PEG 0.00 0.00 0.00 0.00
EV/Sales 8.34x 7.88x 7.63x 7.43x
P/B 5.01x 4.41x 4.42x 4.38x
ROE 26.05% 23.94% 24.46% 24.11%
ROA 16.20% 16.27% 16.49% 16.27%
Div. Yield 3.33% 3.89% 3.89% 3.89%
Source: Company annual report, DLM Research
Source: NSE, DLM
Price:
- Current N180.00*
- Target N177.97
Recommendation: HOLD * As at Monday, April 15, 2015
Equity Research | Dangote Cement Plc DLM RESEARCH
April 15, 2015 2 www.dunnlorenmerrifield.com
Bloomberg: < DLMN> GO
0
20
40
60
80
100
120
1Q'13 4Q'13 1Q'14 4Q'14
sales revenue Still the most expensive cement company amongst its peers. Cement
stocks appear to be off investors’ preference in the recent times, as
overcapacity in the sector coupled with slow demand is expected to keep
profit margins of all players under pressure. Given the company current
production capacity, EV/tonne remained high at $397.41 on current capacity
– which implies high replacement cost. Although large cement companies are
expected to have high EV/tonne given their size, and integrated nature of
business. The EV/tonne is used to calculate how much of a premium is
placed on the company relative to building an identical new one, (replacement
cost). On the basis of EV/tonne, the company is the most expensive cement
company amongst its peers at $397.41/tonne for FY2014. This brings to the
fore questions bothering on whether the company could trade at a premium
by virtue of advantages such as the capacity it holds, its expansion or
upcoming capacity. Adding to this is the observed key man risk. The
company pricing power has been aided by factors such as higher breakeven
points on the back of higher capacity, production discipline, which appears
likely to be sustained despite its low capacity utilization.
EV/Tonnes 2013-₦ $ 2014-₦ $ 2015E $
Tonnes 20.30 20.30 34.05 34.05 34.05 34.05
EV(₦'b) 1,566,871 7,953.66 2,665,783 13,531.89 2,829,109 14,360.96
EV/Tonnes 77,186 391.81 78,290 397.41 83,087 421.76
Mkt CAP/Tonnes 2013-₦ $ 2014-₦ $ 2015E $
Tonnes 20.30 20.30 34.05 34.05 34.05 34.05
Market Cap (₦'b) 1,448,400 7,352.28 2,556,000 12,974.62 2,607,120 13,234.11
MKT CAP/Tonnes 71,350 362.18 75,066 381.05 76,567 388.67
EBITDA/Tonnes 2013-₦ $ 2014-₦ $ 2015E $
Tonnes 20.30 20.30 34.05 34.05 34.05 34.05
EBITDA (₦'b) 227,714 1,155.91 219,759 1,115.53 231,694 1,176.11
EBITDA/Tonnes 11,217 56.94 6,454 32.76 6,805 34.54
Still the largest cement producer in Africa. In Nigeria, Dangote Cement’s
three plants with a combined estimated production capacity of ~34.05mmt
holds c.50% of the domestic market. This is in addition to the company’s
operations on the continent in Senegal and South Africa. Also, the company
will soon commence operations in Cameroon, Zambia and Ethiopia.
Dangote Cement has an average operation of ~67% capacity utilisation in the
last four years with operating margins above industry average. Given its
strong ROCE (24.92%, although below the previous year), and above our
calculated WACC of 15.40%, further expansion or setting up new capacities
are still profitable, especially given the expected growth in cement demand
emanating from regional markets and stable prices in the years ahead.
“On the basis of
EV/tonne, Dangcem is the most expensive cement company amongst its peers at $397.41/tonne for FY2014 ,,
Equity Research | Dangote Cement Plc DLM RESEARCH
April 15, 2015 3 www.dunnlorenmerrifield.com
Bloomberg: < DLMN> GO
Revenue growth of 1.41% not reflective of pricing strategy. For the full
year audited results to December 2014, the company recorded revenue of
₦391.64billion, a growth of 1.41% y/y compared with ₦386.20billion in the
previous year. This comprises of ₦391.3billion from the sales of cement and
₦369million from the sales of other products. The slow growth in revenue
was largely as a result of decline in sales volume underpinned by muted
cement demand in the last half of 2014 on the back of prolong raining
season. Noticeably, as a result of build-up in inventory, management
introduced a lifting bonus and 14% price cut to stimulate the market.
Regardless, while domestic market sales volumes declined by 0.8% to
21metric tonnes, its Nigerian sales volume declined by 3.2% to 12.87metric
tonnes, and the group’s overall volume declined by 0.2% to 13.97metric
tonnes. In all the company delivered revenue/tonne of ₦11.50 on current
capacity. In our opinion, the result is not reflective of its price reduction
necessitated to induce customers and boost overall sales volumes. The
results came below our consensus forecast of ₦428.66billion. By our
assessment, the overall performance in the group’s revenue was impacted by
weak performance noted in the last quarter (4Q’14) –when it recorded
revenue of ₦81.42billion, 15.8% below its 8-quarters average of
₦96.70billion. This implies that its price reduction strategy did not translate
to higher sales volumes. Adding burden to lower sales numbers is the
worsening situation of power supply, occasioned by the continuous drop in
gas supply to its power generating stations. As a result of low gas supply, the
company imported Low Pour Fuel Oil (LPFO) for the most part of the year.
On plant performances, the company’s Obajana plant in Kogi State was
disrupted by gas and LPFO supplies. Consequently, Obajana sales
decelerated by 6.5% to 7.4million tonnes in the review year– with a capacity
utilisation rate of ~72% and averaged 76% gas utilisation ratio. Furthermore,
sales volume at Ibese plant, was c.3.9million tonnes, (FY’13:4.0mt) with a
capacity utilisation rate of ~65% and average gas utilisation rate of ~89%.
The company’s Gboko plant in Benue State increased sales volume by
15.7% to 1.6 million and contributed 13% of all the cement sold in Nigeria.
Operations in West & Central Africa contributed revenues of ₦6.2billion,
most of which was generated from sales of 0.3 million tonnes of imported
cement in Ghana–a decrease of 56.0% on revenues of ₦14.1billion in 2013.
Revenues from South & East Africa was ₦13.9billion (2013: ₦0.6bn)
representing 3.5% of total group revenues, with operating profits just above
breakeven.
“ While domestic
market sales volumes declined by 0.8% to 21metric tonnes, its Nigerian sales volume declined by 3.2% to 12.87metric tonnes, and the group’s overall volume declined by 0.2% to 13.97metric tonnes ,,
Equity Research | Dangote Cement Plc DLM RESEARCH
April 15, 2015 4 www.dunnlorenmerrifield.com
Bloomberg: < DLMN> GO
The first half of 2015 is expected to remain slow due to observed lower
demand necessitated by lower construction activities on the back of muted
government expenditure on capital projects.
94.87%
1.58%
3.55%
Nigeria
West & central Africa
South & East Africa
0
20
40
60
80
100
120
1Q'13 4Q'13 1Q'14 4Q'14
-
50
100
150
200
250
300
350
400
450
FY'11 FY'12 FY'13 FY'14 FY'15E
Revenue/Tonnes 2013-₦ $ 2014-₦ $ 2015E $
Tonnes 20.30 20.30 34.05 34.05 34.05 34.05
Revenue (₦'b) 386,177 1,960.29 391,639 1,988.02 399,472 2,027.78
Revenue/Tonnes 19,023 96.57 11,502 58.39 11,732 59.55
Fig. 7: Quarterly sales revenue (₦’billion)
Source: Company annual report, NSE, DLM Research
Source: Company annual report, NSE, DLM Research
Fig. 6: Revenue contribution by business (%)
Source: Company annual report NSE, DLM Research
Fig. 8: Annual sales revenue (₦’billion)- 2011- 2015E
Equity Research | Dangote Cement Plc DLM RESEARCH
April 15, 2015 5 www.dunnlorenmerrifield.com
Bloomberg: < DLMN> GO
However, expected increase in demand in 1H’15 stands to provide the
company with better footing to counter declining sales volume. Overall, we
expect the company to report healthy revenue CAGR of ~3.75% over the
next five years led by capacity expansion, price stability and healthy demand
in regional operation coupled with operating efficiency leading to higher
volume growth and greater profitability.
Expansion to fuel growth in future. Dangote Cement has committed over
$5billion for expannsion across 13 African countries. The company recorded
a significant investment in 2014 as capital expenditure surged significantly
by 55.14% on the back of its pan Africa investment.The company’s ongoing
greenfield project across major Africa countries is expected to come on
stream by 2015/2017 leading to total capacity of 44mtpa from current
capacity of 34.05mtpa.This, in our view will boost the overall profitability of
the company. With the current capacity, we highlight that the company has
grown its production capacity by a CAGR of 43.63% over the past five
years, which is commendable in our view. The company announced recently
that it has commenced operation in Senegal with nominal plant capacity set
at 4000MT per day and 1.2 mtpa. The plant has a total production capacity
of 1.5million tonnes annually. Senegal with a population of 14 million people
has cement market of 3mtpa which implies that the market has over-
capacity. Hence, the company planned to exports to Mali and Gambia where
demand for cement are both high through the rail. Given the over-capacity
of the market and the marketing strength of the domestic palyers, break-
even for the Senegal plant might take a little longer. However, the
company’s operational advantage lies on its ability to build modern, energy-
efficient factories that will provide strong competition for many of Africa's
ageing cement plants.
0
5
10
15
20
25
30
35
40
FY'10 FY'11 FY'12 FY'13 FY'14
Total capacity Cement sale
Fig. 9: production capacity & annual cement sales (million)- 2010- 2014
Source: Company annual report, NSE, DLM Research
43.63%
“The company’s on-
going greenfield project across major Africa countries is expected to come on stream by 2015/2017 leading to total capacity of 44mtpa from current capacity of 34.05mtpa.
Equity Research | Dangote Cement Plc DLM RESEARCH
April 15, 2015 6 www.dunnlorenmerrifield.com
Bloomberg: < DLMN> GO
Growth in cost of sales depressed gross profit. For FY2014, the
company’s cost of sales (COS) of ₦143.06billion was up by 9.6% compared
to ₦130.47billion recorded in the preceding year. The moderate growth in
COS is commendable in our view given the surge noted in 2012/2013 and
increase energy cost in the first half of 2014. In our reckoning, the
moderation in COS was a direct result of improved operating efficiency of
management on the back of improved energy mix. Based on our assessment,
energy and plant maintenance cost accounted for 51.60% (FY’13:~44.20%)
of the company’s COS. A mitigating factor to power costs is notable Coal
facilities operational at Ibese one and two and Obajana three. We are
however inclined to highlight that the management has adopted various
measures to control its operating cost and remain cost efficient. Against this
backdrop, the company’s usage of alternative fuel is expected to rise in the
year ahead. Lending credence to this is the company’s $250m investment in
coal-fired power plants in its Obajana, Ibeshe and Gboko plants. We
believed these cost saving measures would help to minimize power
disruption to the plants and ultimately expand its margins going forward.
The growth in cost of sales translated to slight increase in COS/revenue
ratio as COS/revenue ratio increased to 36.53% y/y from 33.79% in 2013.
As a result, gross profit declined by ₦7,12billion or 2.8% y/y to
₦248.58billion, (FY’13:₦255.70bn) which allowed for maintained gross
margins of 63.47%%, albeit below 66.21% recorded in 2013. Although,
FY’14 COS numbers are more reflective of future performance.
0
50
100
150
200
250
FY'10 FY'11 FY'12 FY'13 FY'14
-
20.0
40.0
60.0
80.0
100.0
120.0
140.0
160.0
FY'11 FY'12 FY'13 FY'14 FY'15E
Fig. 11: Cost of sale (₦’billion)-2011-2014
Source: Company annual report, NSE, DLM Research
Fig. 10: Capital expenditures (₦’billion)- 2010- 2014
Source: Company annual report, NSE, DLM Research
“ A mitigating factor
to power costs is notable Coal facilities operational at Ibese one and two and Obajana three. ,,
17.56%
Equity Research | Dangote Cement Plc DLM RESEARCH
April 15, 2015 7 www.dunnlorenmerrifield.com
Bloomberg: < DLMN> GO
Rising operating expenses causes a drag on operating profit. For
FY2014, the company recorded a 5.8% y/y increase in operating expenses
(Administrative, selling and distribution expenses) to ₦65.10billion compared
to ₦61.55billion recorded in 2013. The company has recorded a continuous
growth in operating expenses in the past four years, averaging 30% (2011-
2014) which is quite not impressive in our view. The growth in operating
expenses in the review period was largely driven by a 6.41% y/y increase in
administrative charges to ₦27.66billion, (FY’13:₦25.99bn) which emanated as
a result of increase in staff costs, salary increases and the start of operations at
Sephaku coupled with non-capitalizable expenses incurred for projects under
construction.This is in addition to a 5.3% y/y increase in selling and
distribution expenses as the company intensified effort to increase its selling
and distribution channels. As a result, the company now have c.4,700 trucks
for cement distribution across the country. Given the foregoing, we anticipate
a higher operating cost in the years ahead as other Africa plants becomes
operational.Consequently, operating profit (EBIT) declined by 4.5% y/y to
₦187.10billion, (FY’13:₦195.88bn), with a corresponding decrease in
operating margin to ~47.80% from 50.72% in 2013. Hence, operating
expenses as a proportion of revenue recorded a slight increase to 16.62% from
15.94% in the preceding year, while total cost as a proportion of revenue
increased to 53.15% from 49.72% in 2013.
41.00% 39.64% 33.79% 36.53% 35.00%
59.00% 60.36% 66.21% 63.47% 65.00%
0%
20%
40%
60%
80%
100%
FY'11 FY'12 FY'13 FY'14 FY'15E
COS/revenue Gross margin
40.00
50.00
60.00
70.00
80.00
90.00
100.00
FY'11 FY'12 FY'13 FY'14 FY'15E
Revenue COS Gross profit
Fig. 12: Annual COS/Revenues ratio and gross profit margins (%)-2011-2014
Source: Company annual report, NSE, DLM Research
Fig. 13: Revenue, COS and gross profits growth trend analysis (%) -2011-2014
Source: Company annual report, NSE, DLM Research
“ The growth in
operating expenses in the review period was driven largely by a 6.41% y/y increase in administrative charges to
₦27.66billion,
(FY’13:₦25.99bn) which emanated as a result of staff costs increased across the group on the back of increased staff numbers, inflationary salary increases and the start of operations at Sephaku
,,
Equity Research | Dangote Cement Plc DLM RESEARCH
April 15, 2015 8 www.dunnlorenmerrifield.com
Bloomberg: < DLMN> GO
Significant increase in financial charges and introduction of a 13.64%
income tax depressed pre-tax and post-tax profits. The increase recorded
in finance charges (140.4%, ₦32.98bn) has severely affected profitability
during the period under review on the back on a 31% growth in borrowings.
We note however that lower financial charges will be beneficial to the cement
manufacturer who appears to be increasing its balance sheet leverage. While
lending rate is unlikely to be reduced in the near term by the apex bank, a
further increase in its debt obligation will take its toll on it pre-tax profits. In
addition, given that much of the company’s loans are dollar denominated, we
anticipate a further pressure on the firm’s pre-tax profit on account of naira
depreciation or exchange rate loss, causing net profit depletion. On the
contrary, the obligation of meeting debt payments is likely to mitigate the
anticipated price war as the company strive to maintain improved net profit.
Specifically, in spite of a notable 109% y/y surged in line item ―other income‖
to ₦3.61billion, (FY’13: ₦1.72bn), a contraction of 3.2% y/y was noted in
pre-tax profit to ₦184,69billion, (FY’13: ₦190.76bn) with a corresponding
decrease in pre-tax profit margin to 47.16%, (FY’13: 49.40%). Furthermore,
following the expiration of pioneer tax credit in 2013, the introduction of a
13.64% tax rate resulted in post-tax profit declining by 20.7% y/y to
₦159.50billion, (FY’13: ₦201.20bn). Consequently, net profit margin declined
to 40.73%, (FY’13:52.10%).
0%
10%
20%
30%
40%
50%
60%
-
50
100
150
200
250
300
350
400
450
FY'11 FY'12 FY'13 FY'14 FY'15E
Revenue Operating margin Operating exp/revenue Total cost/revenue
43%
44%
45%
46%
47%
48%
49%
50%
51%
50
70
90
110
130
150
170
190
210
230
FY'11 FY'12 FY'13 FY'14 FY'15E
PBT PBT margins
Fig. 15: Pre-tax profit (₦’billion) and margins (%)-2011-2014
Fig. 14: Operating margins, operating exp/revenue and total cost/revenue ratios (%)
Source: Company annual report, NSE, DLM Research
Source: Company annual report, NSE, DLM Research
“ While lending rate
is unlikely to be reduced in the near term by the apex bank, a further increase in its debt obligation will take its toll on it pre-tax profits. ,,
Equity Research | Dangote Cement Plc DLM RESEARCH
April 15, 2015 9 www.dunnlorenmerrifield.com
Bloomberg: < DLMN> GO
Growth in assets and shareholder’s fund accompanied by increasing
financial leverage. For the FY’14, the company’s total assets increased by
16.78%/y to ₦984.72billion, (FY’13: ₦843.20bn), predominantly driven by
investment in non-current assets on the back of ₦217billion investment across
the Africa continent. Although we see this increasing further as the company
continue its Pan Africa investment. In addition, shareholders’ fund recorded a
growth of 8.94% y/y to ₦612.34billion, (FY’13: ₦562.1bn). This is even as
current and long term liabilities accelerated by 40.60% and 18.27%
respectively. Cash position remains relatively weak at ₦20.60billion, (FY’13:
70.50 billion), a decline of 70.80%. We believe this was as a direct result of
the company’s increase in credit sales, relaxed credit policy and slow pace of
cash collection as indicated by the 52.35%% increased in trade debtor.
However, gross indebtedness increased by 31% y/y to ₦222.14billion,
(₦169.16bn). This led to a debt-to-equity ratio of 36%, (FY’13:30%). The
company’s D.E appears to be increasing but still at a comfortable level (i.e
below 40% threshold) given that cement industry is highly capital intensive.
Debt to asset ratio increased marginally to 22% from 20% in the preceding
year.
Hence, as a result of the increase in gross debt, equity multiplier increased to
1.61x from 1.50x in 2013. This in our view indicates gradual increase in overall
financial risk profile. .In addition, debt to EBIT and EBITDA ratios increased to
1.19x, (FY’13: 0.86x) and 1.01x, (FY’13: 0.74x) which in our view fair as the
company seems to be generating enough cash to pay its interest expenses.
However, with cash position depleting and current liabilities rising too in the
same direction, cash ratio remains relatively weak at 0.09x from 0.43x in
FY’13. The weak cash position indicates the company’s inability to repay its
current liabilities by relying on its cash position alone. In addition, quick ratio
decreased significantly to 0.40x from 0.73x in FY’13.
0%
10%
20%
30%
40%
50%
60%
-
50
100
150
200
250
FY'11 FY'12 FY'13 FY'14 FY'15E
PAT PAT margins
Fig. 16: Profit after tax (₦’billion) and margins (%)-2011-2014
Source: Company annual report, NSE, DLM Research
“The company’s total
assets increased by 16.78%/y to
₦984.72billion, (FY’13:
₦843.20bn), predominantly driven by investment in non-current assets on the
back of ₦217billion investment across the Africa continent ,,
Equity Research | Dangote Cement Plc DLM RESEARCH
April 15, 2015 10 www.dunnlorenmerrifield.com
Bloomberg: < DLMN> GO
Industry Debt (short and long term debt ₦'billion)
Company Debt % of industry
CCNN 1.28 0.54%
LAFARGE 14.65 6.15% DANGOTE 222.14 93.31%
Total Industry debt 238.07 100.00%
Industry assets (₦'billion)
Company Assets % of industry
CCNN 15.78 1.21% LAFARGE 305.88 23.41% DANGOTE 984.72 75.38%
Total Industry debt 1,306.38 100.00%
Outlook and valuation. In anticipation of an absolute market price war, the
company has diversified its product offering by producing different grades of
cement, concrete blocks and ready-mix concrete. The company tried to use
discount pricing as a tool to segment the market in anticipation that the
industry is likely to face more pricing pressure on the back of excess
production capacity, but the sustainability of this strategy remains doubtful.
With excess capacity expected to remain in the Nigeria market, the company
will have to continue to absorb increasing production costs. For 2015 financial
year, demand for cement in Nigeria is likely to be affected by declining
government spending on the back of dwindling crude oil prices.
-
200
400
600
800
1,000
1,200
FY'11 FY'12 FY'13 FY'14
Total assets Fixed assets
0.00
0.20
0.40
0.60
0.80
1.00
1.20
1.40
FY'11 FY'12 FY'13 FY'14
D/A Proprietary raio D/E Debt/EBIT Debt/EBITDA
Fig. 17: Total assets and fixed assets (₦’billion)-2011-2014
Fig. 18: Solvency ratio(x) 2011-2014
Source: Company annual report, NSE, DLM Research
Source: Company annual report, NSE, DLM Research
Equity Research | Dangote Cement Plc DLM RESEARCH
April 15, 2015 11 www.dunnlorenmerrifield.com
Bloomberg: < DLMN> GO
With all capacity concentrated in Africa with massive infrastructural
development, we expect expansion in demand in other regions of the
continent to boost overall profit in the years ahead with improved margins
due to economies of scale. In addition, changes in energy mix along with other
cost measure are expected to keep margins at higher levels than industry peers.
With the benefit of new cement capacity of 34.05MT, we expect sales volumes
to grow to 14.5MT on the back of stronger demand in regional operations;
this is in addition to the newly commissioned Senegal plant which began
operation December 2015. We anticipate improvement in capacity utilisation
to reach 80% on the back of expected improvement in power supply due to
expected energy mix across its Nigeria plants. Further, we expect realisations
to improve progressively due to limited capacity addition coming on stream in
Nigeria. In our view, the ban of cement importation in Cameroon is
favourable to the company. Hence, we expect the company to take advantage
of this initiative to drive sales volume with aggressive market penetration and
consolidation. With improved utilisations, we expect EBITDA/tonne to
improve to $34.28/tonne from the current level. After witnessing a declined
post-tax profit, mainly due to higher interest cost on debt of expansion and
higher tax, we expect the company to report a higher profit by FY’15.
However, rise in energy cost inflation and end of tax-exemptions will pressure
margins and profitability across the board.
On the multiples front, the company currently trades at 18.3x FY’15 P/E,
which is a sizeable 74% premium to the domestic peer average of 11.02x. On
an EV/tonne basis, the stock is trading at $397.41/tonne (on capacity of
34.05MT), which is relatively high in our view with much improvement
needed. From valuation perspective, we use a blend of DCF, EV/tonne and
peer multiple comparisons to value the company’s stock. However, we
retained our DCF valuation approach but adjusted the way we compute our
terminal value in place of using absolute terminal growth. Hence, given our
valuation, we believe the stock is fully priced at current level. Hence, we
maintain our HOLD stance on the stock and revise our target price
downwards to ₦177.97 per share. (i.e. valuing Dangote Cement stock at
13.82x FY’15E EV/EBITDA and $418.59 EV/tonne on combined capacity
of 34.05MT.
“ We maintain our
HOLD rating on the stock and revise our target price downwards
to ₦177.97 per share. (i.e. valuing Dangcem at 13.82x FY’15E EV/EBITDA and $418.59 EV/tonne on combined capacity of 34.05MT.. ,,
Equity Research | Dangote Cement Plc DLM RESEARCH
April 15, 2015 12 www.dunnlorenmerrifield.com
Bloomberg: < DLMN> GO
Fig.20: Valuation metrics
Capital structure (Equity) 73.38%
Capital structure (Debt) 26.62%
Forecast period 5year
Beta (2 years ) 1.21
Long term growth rate 4.00%
Risk free rate 15.80%
Risk premium 2.20%
Tax rate 13%
WACC 15.40%
Outstanding shares (Million) 17,040
Fig.21: Sensitivity analysis of enterprise value to changes in EV/EBITDA multiple and WACC
(₦’billion)
Fig.22: Sensitivity analysis of enterprise value to changes in growth rate and WACC (₦’billion)
Terminal perpetual growth rates
2.0% 2.5% 3.0% 3.5% 4.0%
Discount 13.50% 3,157,517 3,260,087 3,372,427 3,496,000 3,632,580
Discount 14.50% 2,884,806 2,968,325 3,059,106 3,158,140 3,266,605
Discount 15.00% 2,764,378 2,840,140 2,922,215 3,011,428 3,108,751
Discount 16.50% 2,453,592 2,511,175 2,573,024 2,639,630 2,711,565
WACC 15.40% 2,674,553 2,744,790 2,820,691 2,902,970 2,992,466
Fig.23: DCF Valuation method
FY2015E
FY2016F
FY2017F
FY2018F
FY2019F
EBIT(₦’mn) 197,660 207,745 213,977 226,987 243,010
Operating FCF 164,370 345,239 369,605 390,595 430,652 Present Value of Op FCF 153,009 278,490 258,358 236,594 226,046 EV 3,620,082
Equity Value 3,397,946
Price/Share ₦199.41
20.0
30.0
40.0
50.0
60.0
70.0
80.0
90.0
100.0
110.0
10-Apr-14 10-Jun-14 10-Aug-14 10-Oct-14 10-Dec-14 10-Feb-15 10-Apr-15
CCNN DANGCEM WAPCO ASHAKACEM
EV/EBITDA multiples
11x 12x 13x 14x 15x
Discount 13.50% 2,548,781 2,677,797 2,806,813 2,935,830 3,064,846
Discount 14.50% 2,457,464 2,580,943 2,704,423 2,827,903 2,951,383
Discount 15.00% 2,413,442 2,534,261 2,655,080 2,775,899 2,896,717
Discount 16.50% 2,287,558 2,400,796 2,514,035 2,627,273 2,740,512
WACC 15.40% 2,378,967 2,497,705 2,616,444 2,735,182 2,853,920
Fig. 19: Dangcem vs. industry peers, 52 –wk price movement (rebased)
Source: Company annual report, NSE, DLM Research
Equity Research | Dangote Cement Plc DLM RESEARCH
April 15, 2015 13 www.dunnlorenmerrifield.com
Bloomberg: < DLMN> GO
Fig.24: Sensitivity analysis of target price to changes in EV/EBITDA multiple and WACC
EV/EBITDA multiples
11x 12x 13x 14x 15x
Discount 13.50% 136.54 144.11 151.68 159.25 166.83
Discount 14.50% 131.18 138.43 145.67 152.92 160.17
Discount 15.00% 128.60 135.69 142.78 149.87 156.96
Discount 16.50% 121.21 127.86 134.50 141.15 147.79
WACC 15.40% 126.57 133.54 140.51 147.48 154.45
Fig.25: Sensitivity analysis of target price to changes in perpetual growth and WACC
Terminal perpetual growth rates
2.0% 2.5% 3.0% 3.5% 4.0%
Discount 13.50% 172.26 178.28 184.88 192.13 200.14
Discount 14.50% 156.26 161.16 166.49 172.30 178.67
Discount 15.00% 149.19 153.64 158.46 163.69 169.40
Discount 16.50% 130.95 134.33 137.96 141.87 146.09
WACC 15.40% 143.92 148.04 152.50 157.33 162.58
Fig26; Comparable valuation method Company Country P/B
(x) P/S (x)
EV/ EBITDA
(x)
P/E (x)
ULTRATECH USA 4.78 3.83 18.06 37.36
AMBUJA CEMENTS Indian 3.75 3.8 17.7 22.61
ANHUI CONCH China 2.01 2.2 7.37 12.2
LAFARGE AFRICA NIGERIA 1.46 1.36 5.06 8.12
HOLCIM Switzerland 1.4 1.29 9.88 19.05
HEIDELBERGCEMENT Germany 1.08 1.13 7.61 21.5
ITALCEMENTI Italy 0.82 0.44 8.66 28.07
Average multiples
Dangcem Nigeria 5.01 7.83 14.87 19.23
Prices
High 37.36
Low 8.12
Mean 21.27
Median 21.50
Harmonic mean 16.43
Illiquidity discount 0.00
Adopted P/E 18.30
Dangcem
Dangcem -P/E, on current Price 19.23
Forward - P/E on current price 18.43
Projected 2015 EPS 9.76
Implied Price Per Share 178.72
Equity Research | Dangote Cement Plc DLM RESEARCH
April 15, 2015 14 www.dunnlorenmerrifield.com
Bloomberg: < DLMN> GO
Fig. 27: Statement of Profit or Loss, N’mn
FY2014 FY2015E FY2016F FY2017F
Turnover 391,639 403,388 415,490 427,955
Change %
3.00% 3.00% 3.00%
Cost of Sales (143,058) (141,186) (145,421) (149,784)
Change %
-1.31% 3.00% 3.00%
Gross Profit 248,581 262,202 270,068 278,170
Change %
5.48% 3.00% 3.00%
SG&A (65,088) (68,576) (66,478) (68,473)
Change %
5.36% -3.06% 3.00%
EBITDA 219,759 229,931 240,984 252,493
Change %
4.63% 4.81% 4.78%
Core operating Profit 183,493 193,626 203,590 209,698
Change %
5.52% 5.15% 3.00%
Other Operating Income 3,609 4,034 4,155 4,280
EBIT 187,102 197,660 207,745 213,977
Change %
5.64% 5.10% 3.00%
Profit Before Taxation 184,689 191,249 195,092 194,168
Change %
3.55% 2.01% -0.47%
Income tax expenses (25,187) (24,862) (25,362) (25,242)
Profit After Taxation 159,502 166,387 169,730 168,927
Change % 4.32% 2.01% -0.47%
Source: Company’s annual reports, DLM Research
Fig. 30: DuPont Analysis
FY2014 FY2015E FY2016F FY2017F
Total assets turnover 0.40x 0.39x 0.40x 0.41x
Net income margin 52.10% 46.53% 48.42% 49.45%
Equity multiplier 1.61x 1.47x 1.48x 1.48x
ROCE 33.55% 26.68% 28.66% 30.01%
Fig. 29: Profitability & return
FY2014 FY2015E FY2016F FY2017F
Gross profit margin 63.47% 65% 65% 65%
Operating profit margin 47.77% 49% 50% 50%
Net profit margin 40.73% 41.25% 40.85% 39.47%
ROCE 24.92% 23.65% 24.78% 25.35%
ROE 26.05% 23.94% 24.46% 24.11%
ROA 16.20% 16.27% 16.49% 16.27%
Source: Company’s annual reports, DLM Research
Fig. 31: Efficiency ratios
FY2014 FY2015E FY2016F FY2017F
Fixed assets turnover 0.52x 0.54x 0.55x 0.57x
Current assets turnover 2.86x 2.42x 2.46x 2.44x
Total assets turnover 0.40x 0.39x 0.40x 0.41x
Inventory turnover 2.03x 2.06x 5.45x 5.45x
Receivables turnover 25.04x 26.07x 30.42x 30.42x
Payables turnover 1.42x 1.40x 1.40x 1.40x
Days inventory outstanding 108.91 67 67 67
Days collection outstanding 14 14 12 12
Days payable outstanding 257 260 260 260
Operating cycle (days) 0.00 0.00 0.00 0.00
Source: Company’s annual reports, DLM Research
Fig. 32: Liquidity ratios
FY2014 FY2015E FY2016F FY2017F
Working capital (N’mn) (96.70) (20.43) (21.48) (19.43)
Current ratio 0.59 0.89 0.89 0.90
Quick ratio 0.40 0.75 0.75 0.76
Cash ratio 0.09 0.32 0.33 0.33
Source: Company’s annual reports, DLM Research
Fig. 33: Long-term solvency & stability ratios
FY2014 FY2015E FY2016F FY2017F
Gearing 0.00% 0.00% 0.00% 0.00%
Equity multiplier 1.61x 1.47x 1.48x 1.48x
Total debt-to-equity 0.36x 0.25x 0.26x 0.26x
Total debt-to-assets 22% 17% 17% 17%
Proprietary 62% 67.95% 67.41% 67.46%
Interest coverage 0.00x 0.00x 0.00x 0.00x
Cash coverage 0.00x 0.00x 0.00x 0.00x
Source: Company’s annual reports, DLM Research
Fig. 34: Shareholders’ investment ratios
FY2014 FY2015E FY2016F FY2017F
EPS, N 9.36 9.76 9.96 9.91
DPS, N 6.00 7.00 7.00 7.00
Pay-out 64.10% 71.69% 70.28% 70.61%
FCFPS, N 0.00 0.00 0.00 0.00
Source: Company’s annual reports, DLM Research
Fig.28: Statement of Financial Position (N,m)
FY2014 FY2015E FY2016F FY2017F
Non-current assets:
Fixed Assets 747,793 751,465 751,965 752,165
Other non-current assets 99,823 104,881 108,027 111,268
Total noncurrent assets 847,616 856,346 859,992 863,433
Current assets:
Inventories 42,688 25,916 26,694 27,495
Trade Debtors 15,640 15,472 13,660 14,070
Prepayment 58,183 60,508 62,323 64,193
Bank and Cash Balances 20,593 60,508 62,323 64,193
Other current assets - 4,034 4,155 5,135
Total current assets 137,104 166,439 169,156 175,086
Total Assets 984,720 1,022,785 1,029,148 1,038,519
Current Liabilities:
Overdraft 856 856 856 856
Trade payable 100,930 100,571 103,588 106,696
Short term loan 110,640 60,434 60,434 60,434
Other current liabilities 21,371 25,010 25,760 26,533
233,797 186,871 190,638 194,519
Non-current Liabilities
Long term loans 110,640 110,640 115,640 115,640
Other noncurrent Liabilities 27,944 30,254 29,084 27,817
138,584 140,894 144,724 143,457
Total Liabilities 372,381 327,765 335,363 337,976
Shareholders’ equity 612,339 695,020 693,785 700,544 Source: Company’s annual reports, DLM Research
Equity Research | Dangote Cement Plc DLM RESEARCH
April 15, 2015 15 www.dunnlorenmerrifield.com
Bloomberg: < DLMN> GO
Equity research methodology employed in this report
Views documented in this equity research report stem from conclusions reached through the use of multiple valuation
methodologies, industry-wide knowledge, company specific information and our near to medium term expectations of industry
and company performance, as well as market outlook. Our forecasts are based on a combination of top down and bottom up
analysis, alongside historical trends in industry and company financials. Where appropriate, we factored in available forecasts and
business direction provided by company management. This equity research report qualifies as an initiation research report on the
company whose stock has been analysed, hence the level and depth of details documented herein. Further updates on this
company, or its stock, or both, will be communicated to investors via brief research notes or earnings-flash emails, as occasion
demands.
Our recommendation is slightly biased towards value investing. Therefore, our investment rank gauge—a customized scale we
use to judge how well a firm under coverage has performed—is determined using major value parameters as well as relevant
ratios and multiples computed with figures from the company’s most recent financials. The investment rank or grade given to a
company is an alphabet which falls in the set {A+, A, B, C+, C, D, E, F}, where
• Grade A+ means the company has done excellently well on all fronts that form the basis of our consideration, and has a
strongly positive performance outlook.
• Grade A means the company’s performance is of high quality, but can be made better. Outlook for the company is positive.
• Grade B means the company performed marginally above average, at least relative to its peers, but faltered on some fronts.
Outlook is weakly positive.
• Grade C+ means the company’s performance is exactly average; outlook is neither positive nor negative.
• Grades C and D indicate that dwindling performance is the company’s fate at the current time. Outlook for the company is
mildly negative.
• Grades E and F mean the company is headed for towards jeopardy, which might impair its ability to continue as a going
concern. Outlook for the company in this case is alarmingly negative.
The variables used to arrive at the company’s investment rank cover a wide range of measures which characterize liquidity,
operational efficiency, profitability, profitability margins, growth, economic profitability, gearing, relative valuation ratios, capital
structure and management performance. Our investment recommendation is underpinned by the upside or downside potential
of a stock under coverage. This potential is estimated by comparing the stock’s current market price to its price target and fair
value, on a percentage increase or decrease basis as summarized below:
Deviation from current price Recommendation
>30% STRONG BUY
10% to <30% BUY
-10% to < 10% HOLD
<-10% SELL
Source: Company Financials, DLM Research
In our analysis, we distinguish between fair value and price target. Fair value is our opinion of the actual fundamental worth of a
stock, irrespective of what the market thinks of the stock or what investors are willing to pay for it. Value investors purchase stocks
way below their fair values, while income investors might purchase stocks at their fair values at the very maximum.
Price target, on the other hand, is the estimated price we opine the stock will trade in the near to medium term. It is the price that, if
realized, could result in the best investment returns, given prevailing market conditions. It gives an idea of the price other investors
might be willing to pay for a stock regardless of its actual worth. We employ fair value, price target or both to determine a stock’s
upside or downside potential.
A BUY recommendation directly means what it says; purchase the stock according to your wallet and appetite for risk. A SELL recommendation prompts investors to exit their positions in the stock, as the analyst believes the stock is not worth investors’ time and capital commitment. A HOLD recommendation generally tells investors to do nothing; if you have not bought the stock, do not buy it and if you have bought it, do not sell it.
Equity Research | Dangote Cement Plc DLM RESEARCH
April 15, 2015 16 www.dunnlorenmerrifield.com
Bloomberg: < DLMN> GO
IMPORTANT DISCLOSURES.
This research report has been prepared by the analyst(s), whose name(s) appear on the front page of this document, to provide
background information about the issues which are the subject matter of this report. It is given for informational purposes only.
Each analyst hereby certifies that with respect to the issues discussed herein, all the views expressed in this document are his or her
own and reflect his or her personal views about any and all of such matters. These views are not necessarily held or shared by Dunn
Loren Merrifield Limited or any of its affiliate companies (―DL Merrifield‖). The analyst(s) views herein are expressed in good faith
and every effort has been made to use reliable comprehensive information but no representation is made as to its accuracy or
completeness. The opinions and information contained in this report are subject to change and neither the analysts nor DL Merrifield
is under any obligation to notify you or make public any announcement with respect to such change.
This report is produced independently of DL Merrifield and the recommendations (if any), forecasts, opinions, estimates, expectations
and views contained herein are entirely those of the analysts. While all reasonable care has been taken to ensure that the facts stated
herein are accurate and that the recommendations, forecasts, opinions, estimates, expectations and views contained herein are fair and
reasonable, none of the analysts, DL Merrifield nor any of its directors, officers or employees has verified the contents hereof and
accordingly, none of the analysts, DL Merrifield nor any of its respective directors, officers or employees, shall be in any way
responsible for the contents hereof.
With the exception of information regarding DL Merrifield, reports prepared by DL Merrifield analysts are based on public
information. Facts and views presented in this report have not been reviewed and may not reflect information known to professionals
on other DL Merrifield business areas including investment banking. This report does not provide individually tailored investment
advice. Reports are prepared without regard to individual financial circumstances and objectives of persons who receive it. The
securities discussed in this report may not be suitable for all investors. It is recommended that investors independently evaluate
particular investments and strategies. The appropriateness of a particular investment or strategy will depend on an investor’s individual
circumstances or objectives. Neither the analyst(s), DL Merrifield, any of its respective directors, officers nor employees accepts any
liability whatsoever for any loss howsoever arising from any use of this report or its contents or otherwise arising in connection
therewith. Each analyst and/or any person connected with any analyst may have acted upon or used the information herein contained,
or the research or analysis on which it is based prior to its publication date. This document may not be relied upon by any of its
recipients or any other person in making investment decisions.
Each research analyst certifies that no part of his or her compensation was, or will be directly or indirectly related to the specific
recommendations (if any), opinions, forecasts, estimates or views in this report. Analysts’’ compensation is based upon activities and
services intended to benefit clients of DL Merrifield. As with other employees of DL Merrifield, analysts’ compensation is impacted by
the overall profitability of DL Merrifield, which includes revenues from all business areas of DL Merrifield.
DL Merrifield does and seeks to do business with companies/governments covered in its research reports including market making,
trading, risk arbitrage and investment banking. As result, investors should be aware that DL Merrifield may have a conflict of interest
that could affect the objectivity of this report.
Elephant House
214 Broad Street,
Lagos, Nigeria
Tel: 234 1 462 2683-4
www.dunnlorenmerrifield.com
Recommended