Dangote Cement Shares Outperform the ASI; Gains 5.9% YTD as PBT Grows by 20% in Q2’16

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dangote logoThis morning the NSE published Dangote Cement’s (Dangote) Q2 2016 result which showed marked growth across the P&L. While sales grew by 19% y/y to N151.7bn, PBT grew by 20% y/y to N70.4bn despite a contraction in gross margin. The growth in PBT was driven by a net interest income of N28.4bn on the back of net fx gains of N38.1bn arising from the translation of foreign currency denominated balances.

Thanks again to a positive result of N67.6bn (related to the translation of non-cash related investments in overseas operations) on the other comprehensive income (OCI) line, PAT grew by 132% y/y to N123.2bn.

Sequentially, the trends mirrored that observed on a y/y basis. While sales were up by 8% q/q. PBT and PAT grew by 29% q/q and 130% q/q respectively due to the impact of fx translations. Compared with our forecasts, sales missed by 5%. However, PBT and PAT beat by 28% and 144% respectively, DangCem’s fx gains, though at variance with the fx losses posted by other companies that have reported  so far, is understandable given the multinational scope of its operations.

The marked growth in sales during the quarter was driven by volume growth across all the major regions, particularly those of the West and central African region. While total volume despatches grew by around 60% y/y to c. 6.7 million metric tonnes (mmt), in Nigeria, unit volume grew by 32% y/y to about 4.2mmt.

On an H1 basis, the trends were similar, with Group and Nigeria unit volumes growing by 60% y/y and 39% y/y to 8.8mmt and 13.0mmt respectively. Zooming down on the Nigerian operations, output was slightly affected by disruptions to gas supply following the vandalisation of the gas supply infrastructure.

This resulted in a 24% q/q (+6% y/y) decline in unit volume to 1.9mmt for the Obajana plant,  lower gas-to-total fuel utilsation ratio and the higher use of Low-Pour Fuel Oil (LPFO), which is almost 3x more expensive than gas. During the quarter,  gas utilisation fell to 33% and 18% for both Obajana and Ibese respectively.

For the first time, unit volumes for Ibese surpassed that of Obajana at around 1.93mmt (+61% y/y). In terms of output for both plants, we believe that Ibese fared better due to its higher utilisation of coal (52%), compared with Obajana (13%). Unit volumes for Gboko also grew by a remarkable 120% y/y to around 0.36mmt.

Pending comments from management, we believe that production was deliberately ramped up at Gboko to make up for the lower unit volumes by Obajana. One outcome of the lower pricing y/y ad higher fuel costs was that EBITDA margin fell by around -1960bps to 40.0%.

When annualised and adjusted for seasonality, DangCem’s Q2 PBT of N70.4bn tracks ahead of consensus 2016 PBT forecast of N214bn. As such, we expect to see upward revisions to to consensus and a positive reaction from the market.

DangCem shares have outperformed the index this year. The shares have gained 5.9% ytd compared with the -1.6% return delivered by the ASI. At current levels, on our published estimates, DangCem shares are trading on a 2016E P/E multiple of 15.5x for 24% EPS growth in 2017E.