Bull & Bear case for Dangote Cement

Nigeria’s largest listed company by market capitalisation is a commodity maker with a compelling story, but is it a buy?.

Source: FT markets data

Nigeria’s Dangote Cement (DANGCEM) is a behemoth valued at N2.829 trillion on the local stock market and no other listed company comes close with the second largest firm on bourse (Nigerian Breweries) just garnering about 37 percent of DANGCEMs valuation at N1.03 trillion.

Dangote’s lofty valuation comes from a dominant position in its home market Nigeria, fast growth and hefty margins.

The company which operates in Nigeria and 14 other African countries released FY 2016 results last month.

The numbers show what we may term 2 companies (Nigeria and Rest of Africa) in one with different trajectories.

While Nigerian operations reported profit after taxes of N379.3 billion, the Pan African operations once again reported a second consecutive year of losses totalling N38.5 billion following the N23.5 billion loss recorded for 2015 (see chart).

For bullish investors the FY 16 results show non-Nigerian operations contributing to top-line and providing some buffer for earnings over the reporting period via tax credits.

ARM research for example notes:

“Going into 2017, we expect higher prices and improved cost efficiency to underpin earning resilience after a challenging 2016. We see 25% upside from current market price given our FVE of N195.26. Accordingly, we upgrade our recommendation on DANGCEM to STRONG BUY (vs. OVERWEIGHT previously).

The bullish case could be further cemented by DANGCEM reporting a 26 percent top-line growth in Nigeria from the impact of raised cement prices which offset volume softness (-20% YoY to 3.22MT) t0 N118 billion in Q4 16.

Elsewhere, revenues surged in DANGCEM’s pan-African businesses (+75% YoY to N58 billion) after an over 50% YoY increase in average price per ton to N26,692 and 17% increase in cement volumes to 2.2MT in Q4 16.

The group reported strong jump in revenue (+37% YoY to N173 billion) in Q4 16 which helped push FY 16 sales to N615 billion (+25% YoY).

For the other (Bearish) side of that trade we note that from the numbers that losses are mounting for African operations as a result of razor thin EBITDA margins compared to Nigerian operations.

EBITDA margin is a measurement of a company’s operating profitability as a percentage of its total revenue.

For Nigerian operations EBITDA margins came in at a hefty 56.7 percent, while the rest of Africa operations had EBITDA margins of 13.5 percent.

This means that any incremental surge in Rest of Africa production will ultimately drive down group revenues.

DANGCEM already trades at a hefty price to sales ratio of 4.6Xs compared to 1.32Xs for Lafarge Holcim.

Dangote Cement stock peaked at N250 per share in mid-2014 (see chart).

With African operations that continue to be a drag on the company for bears the upside for Dangote Cements share price is limited.

 

PATRICK ATUANYA