A slew of analysts have retained and maintained their Buy recommendation on the shares of Dangote Cement, thanks to attractive valuations and strong balance sheet.
Analysts at research house CSL Stock Limited in a recent note to clients retained its target price of N182.40/share; also, United Capital Research has maintained a target price of N175/share, which gives an upside of 26.50 percent at the current price of N150 as of October 10.
With the new bull market, it is not impossible for Dangote’s stock to go vertical on sustained improvement in market sentiments.
Clearly the recent rally is driven by the low-interest rates environment which dawned on the market amid the surprise rate cut by the Monetary Policy Committee of during its September policy meeting.
Listed on the Nigerian Stock Exchange Main Board, Dangote Cement has a market capitalization of N2.55 trillion, which makes it the most valuable company in Nigeria.
Interestingly, analysts are optimistic that the company’s planned share back, which has been approved by the Securities and Exchange Commission (SEC), remains a catalyst for upward reprising of its shares.
Trading at FY 2020e, EV/EBITDA of 7.0x, analysts at CSL Stock Brokers Limited believe the cement giant’s valuations re/ain attractive.
With cement production and bagging capacity of 48.55 million metric tonnes as at June 2020, Dangote Cement is the largest producer of the building materials in Africa’s largest oil producer.
Despite the whirlwind of Covid-19 pandemic that led to restriction on movements of in its markets across Africa, Dangote Cement recorded an uptick in at the bottom line (sales)
The group revenue was up 2 percent to N476.75 billion as at June 2020 from N467.73 billion the previous year.
Analysts say the surprised increase in revenue was buoyed by the better average net prices realised in Nigeria and the Pan Africa market as well as the increase in volumes sold across the Pan Africa market.
The Pan Africa business saw Earnings before Interest, Taxation, Depreciation, and Amortization (EBITDA) spike by 31.50 percent to N31.5 billion, supported by strong performance in Senegal and Ethiopia
United Capital Limited maintains their expectation for Revenue as they expect it to grow by 2.4 percent to N912.8 billion.
The investment house believes the company is on course, having achieved 52.2 percent (N476.9 billion) of our full year revenue target as at June (H1-2020) despite the COVID-19 pandemic that obstructed economic activities.
“Our optimism is buoyed by the commencement of Apapa and Onne export terminals which we believe will continue to enable the business export cement via waterways rather than land which is likely to remain closed for a better part of H2-2020,” said analysts at United Capital Limited.
“Also, we expect to see further the benefit of promotional campaigns embarked on in Q2-2020 on FY-2020 performance, especially as the majority of Federal Government capital projects are scheduled to take place in H2-2020,” said analysts at United Capital.
Moderation in cost adds impetus to profit
During the period, manufacturing cost rose due to unfavourable fuel mix which also resulted in the use of more gas whose price increased compared to half-year (H1-2019).
Also, general increase in material consumed contributed to rising manufacturing cost.
Cost of sales was up 4.78 percent to N202.24 billion in the period under review from N193.17 billion as at June 2019. The company’s cost of sales ratio increased to 42.44 percent in June 2020 from 41.29 percent the previous year.
The manufacturing cost is however lower than the 14.15 percent July inflation figure, which means the cement giant’s cost optimization strategy has paid off.
To validate the effectiveness of the company’s cost control mechanism put in place by management, total operating expenses (administrative and distribution expenses) declined by 1.50 percent to N103.75 billion as at June 2020.
A sub- component analysis of the selling and Distribution expenses showed that Haulage costs saw a significant reduction, down 9.2 percent year on year ( y/ y) to settle at N50.7 billion, and the management attributed the decline to the reduced haulage costs seen in their Tanzania and Zambia operation due to the reduced volumes when compared to half-year 2019.
As a result of an uptick in revenue and reduction in operating expenses combined in lower tax rate, profit after tax ( PAT) increased by 5.78 percent to N126.14 billion from N119.24 billion the previous year.
Overall, Analysts at United Capital estimate a 26.1 percent year on year (y/y) jump in the company’s PAT to N252.3 billion in full year (FY) 2020, buoyed by moderation in operating expenses (OPEX) and finance charges growth as seen in half year (H1-2020), exchange rate translation gains.
Track record of accessing the local debt market
Dangote Cement has tapped the debt market more than any other manufacturer as it seeks to take advantage of the favourable interest rates to raise capital to bolster working capital and fund future expansion plans.
Despite the Covid- 19 crisis, the company completed the issuance of N100 billion series 1 fixed rate 5 year bond at a rate of 12.5 percent. It also successfully completed the issuance of N100 billion series 15 and 16 Commercial Paper Notes.
Notably, Dangote Cement is the largest corporate and commercial paper bond issuer in Nigeria’s debt capital market.
On 23 January 2020, Global Credit Ratings Moody’s affirmed the long term and short- term national scale issuer ratings of AA+( NG) anda1+( NG) respectively, assigned to DCP, with the outlook accorded as stable.
On 24 March 2020, Moody’s assigned a (P)B2 local currency rating and Aa3.ng national scale rating (NSR) to the N300 billion domestic medium term note program issued by DCP.
Strong balance sheet with available liquidity
Dangote Cement’s diversified capital structure (DCP) has limited foreign currency debt exposure, with just 14 percent of total debt exposed to the dollar; also, only 25 percent of total dollar debt is for the Nigerian business.
The cement giant has defered all non-strategic capital expenditures but it paid dividends to shareholders.
As a result of effective working capital management, net operating cash flow from operations rose by 19.43 percent to N254.65 billion as at June 2020 from N213.22 billion.
Validating consistent acceleration in revenue is a 26.0 percent surge in trade receivables to N17.60 billion as at June 2020.