Dangote Cement Stock: Analysts maintain neutral rating despite improved performance

Analysts at FBN Quest, research arm of FBN Merchant Bank Limited, have maintained a neutral rating on the shares of Dangote Cement Plc, despite its improved performance in the second quarter of 2016, Q2’16. Aliko Dangote In its latest report, the analysts said Dangote Cement’s Q2’16 Profit After Tax,   PAT, beat its forecast by a considerable margin and grew strongly (+132%   year on year ,y/y).

However, they stated: “the results were mainly driven by foreign exchange,   foreign exchange gains. Excluding the gains, the underlying results were weak. As such, we have increased our Earning Per Share, EPS forecasts by only 6 per cent on average over the 2016 period.” Continuing, the analysts said “Although, we have rolled over our valuation to 2017 earnings, our new price target of N191.10 has barely changed because (i) we have reduced the P/E multiple driving our price target to 15.5 times from 17.5 times   previously, in line with the multiple contraction of international peers, and (ii) increased our risk-free rate by 200 bases points , bps to 14.5 per cent.

Having gained +6.2 per cent Year to date, ytd (vs. -2.7 per cent Nigerian Stock Exchange, NSE   All Share Index, ASI), the shares now provide a potential upside of +5.9 per cent   from current levels. Consequently, we retain our neutral rating on the stock. “Dangote Cement’s Q2 results showed marked growth across the Profit and Loss, P&L. While sales grew by 19 per cent y/y to N151.7billion, PBT grew by 20 per cent y/y to N70.4billion despite a contraction in gross margin which led to operating profit falling by -36% y/y. The growth in Profit Before Tax,   PBT was driven by a net interest income of N28.4billion on the back of net fx gains of N38.1billion . Thanks to a positive result of N67.6 billion on the other comprehensive income (OCI) line (fx translation gains), PAT grew by 132 per cent   y/y to N123.2billion . Sequentially, sales were up by 8 per cent quarter on quarter, q/q. However, PBT and PAT grew by 29 per cent   q/q and 130 per cent   q/q respectively due to the impact of fx.

Compared with our forecasts, sales missed by five per cent. However, PBT and PAT beat by 28 per cent and 144 per cent respectively.” According to the report “core operations weighed down by disruptions to gas supplies: Despite the stellar y/y growth in PBT, Dangote Cement ’s core operating profit for Q2 declined by 36 per cent   y/y due to gas supply disruptions to Obajana and Ibese, the two largest plants in Nigeria. As such, the plants had to utilise a higher proportion of expensive low-pour-fuel-oil compared with the prior year. To mitigate the issues of fuel adequacy, management disclosed that it intends to shift its overall fuel mix in favour of cheap coal.

Consequently, it has launched coal facilities for Obajana lines 1 & 2. The addition of other coal facilities at Ibese and other lines in Obajana is expected to be completed by the end of September. “Beyond Q2, although our 2016 earnings volume forecast is down by -0.7 per cent to 25.6mmt, we have increased our   2016 earning   sales by 7 per cent .   As such, we forecast 2016 earnings sales growth of 34 per cent y/y to N658.9billion. We also see PBT growth of 24 per cent y/y to N233.5billion (vs. N188.3billion in 2015).”