By FBNQuest Research,
Single-digit cuts to our 2019-21E EPS forecasts
Dangote Cement’s (DangCem) Q3 2019 PBT missed our forecast by a significant margin due to negative surprises in gross margin, opex and interest expense. From an earnings standpoint, the company’s Q3 PBT of N42.2bn is the lowest quarterly earnings it has reported since Q4 2016. Excluding the y/y spike in interest expense, gross margins were significantly lower (-126bps y/y) during the quarter, due to downward pressure on cement prices in Nigeria.
This was mainly due to increased price discounting by a major rival seeking to gain market share on the back of its significant capacity additions over the past year. In addition, a more expensive fuel mix skewed in favour of gas relative to coal and increased haulage cost weighed heavily on gross margin and opex respectively. Cement dispatches grew strongly by 9% y/y in Q3, but only because of the company’s promotion activity. As such, we expect demand growth to be subdued in Q4 due to the slow pace of economic recovery.
Given the strong demand growth in Q3, we have increased our 2019 unit volume forecasts by 3% and 2% for Nigeria and the Group respectively. Our volume forecasts imply flattish unit volume and sales growth y/y for both Nigeria and the group respectively. Beyond 2019E, we forecast average (Group) sales growth of 11% y/y over the 2020-21E period.
However, given the pressure on margins and the rise in finance costs, we have cut our 2019-21E earnings forecasts by -6% on average. Our new price target of N216.4 is also -5% lower. Having shed -24.6% ytd vs. -14.7% ASI, DangCem shares still provide a decent potential upside of 51% from current levels. As such, we retain our Outperform rating on the shares.
Q3 2019 PBT down -32% y/y
DangCem’s Q3 sales were up by 5% y/y on the back of a similar y/y growth in unit volumes to 5.7 million metric tonnes (mmt). In contrast, PBT declined by -32% y/y to N42.2bn. The y/y decline in PBT was underpinned by a combination of factors including a gross margin contraction of 126bps y/y to 54.3%, a 14% y/y rise in opex and a 316% y/y surge in net interest expense. Below the tax line, PAT fell by a much wider margin of -51% y/y, driven by a negative result of â€“N9.8bn in other comprehensive income (OCI) vs +N9.3bn in the comparable quarter of 2018.
Sequentially, sales declined by 7% q/q, mainly a reflection of seasonality. However, PBT and PAT fell by much wider margins of 45% and 53% q/q respectively. Relative to our forecasts, although sales were broadly in line, PBT and PAT missed by significant margins.