Dangote Cement Distributes 93.3% of Profits to Shareholders over 5years
Analysts have advised dividend seeking investors to buy Dangote Cement Plc share after a solid track record of distributing over 93% of its profits over the five year as dividend to shareholders.
On that note, analysts at Cardinalstone expressed optimism that the cement giants would continue towing the path in 2020 despite economic challenges.
In a note, equity research analysts at Cardinalstone Partners advised its clients to buy Dangote cement shares following an expectation that domestic output, pan-African efficiency will drive earnings in 2020.
The cement giant (Ticker: Dangcem) traded at ₦135 per share on the Nigerian Stock Exchange yesterday with total market capitalisation worth ₦2.3 trillion.
Suffice to say, Dangote Cement currently accounts for 17.2% of the Nigerian Stock Exchange.
Meanwhile, analysts forecasted its 12-month target price to settle at ₦177.44 per share.
In its equity note, the investment firm stated that the company’s return on equity (ROE) and price earnings (PE) tell differing tales.
In 2019, DANGCEM reported a decline in ROE to 21.3% from 25.9% in 2017 due to a plunge in net profit margin.
However, the company’s resilient H1:2020 earnings and proposed share-buyback programme could drive a recovery by financial year 2020 end.
“Our estimated financial year 2020 ROE of 26.4% compare to 5-year mean of 24.5%1 also suggests that the current 23.6% PE discount (relative to historical average) may be unjustified”, Cardinalstone said.
Analysts however remained optimistic that the cement company’s capacity expansion and export terminal would support volumes in 2020.
“In our view, profit after tax (PAT) margin is likely to increase by 2.2 percentage point year on year to 24.7% in 2020.
“This performance could partly reflect the group-wide sales rebound observed since May 2020 that appears to be eroding the impact of the 28.0% volume contraction in April”, analysts explained.
Specifically, Cardinalstone stated that for the Nigerian segment, the firm now expects volumes to grow by 1.5% by full year compare to –2.4% year on year contraction in the first half of the year.
Analysts detailed that their view is consistent with expectations around the newly commissioned 3MTA Obajana Line 5 and the Apapa export terminal.
They believe that both of the terminals are likely to boost output from Nigeria.
The company notably began exporting clinker through the Apapa terminal with its maiden 27.8KT shipment to Senegal in June.
Elsewhere, analysts explained that the Pan African segment is likely to sustain its strong earnings before interest, tax, depreciation and amortisation (EBITDA) growth in 2020 on the reduction of cash costs across 6 Pan African operations as well as improvements in route to markets and plant uptime.
“We, therefore, adjust our group EBITDA margin forecast to 45.4% from 44.3% in 2019 on lower Pan African costs and volume ramp-up in Nigeria”, analysts explained.
Cardinalstone reckoned that the impact of the duo could also offset the effect of higher gas and promotional expenses in Nigeria.
In addition, Cardinalstone stated that buyback portends some upside risks to earnings per share (EPS) growth.
Since the Securities Exchange Commission approval in May 2020, the share buyback process has been mostly quiet.
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Analysts said yet, the company’s current cash position and the untapped portion of the ₦300 billion bond program suggest that the business can obtain the required cash kitty to buy back up to 10.0% of its shares.
“At current market price, it would cost about ₦228.3 billion to complete the share repurchase programme.
“This amount is also 10.3% lower than the company’s net operating cash balance as at half-year 2020.
“While the market awaits further communication from management, we highlight that the share buyback programme portends some upside risk to EPS growth in the near term”, Cardinalstone explained.
Expressing its optimistic view, the investment firm said healthy dividend yield may be on the cards for 2020.
“We expect DANGCEM to remain committed to dividend payment on growth in earnings, existing bond program, and a historically high dividend payout ratio”, analysts said.
Over the last five years, Cardinalstone said the group has returned an average of 93.3% of profits in dividend payment to shareholders.
In 2020, Cardinalstone revealed expectation that the firm will maintain dividends at financial 2019 levels of ₦16 per share.
“We maintain a BUY rating on DANGCEM with a 12-month target price (TP) of ₦177.44.
“Our target price is at a 32.4% premium to our reference price of ₦134.00.
“DANGCEM is trading at 2020 enterprise value to operating income (EV/EBITDA) and price earnings ratios of 4.2x and 10.0x compared to selected peer averages of 7.1x and 14.1x respectively.
“The ticker is trading below its 5-years average EV/EBITDA and P/E ratios of 14.38x and 10.23x apiece even though its ROE is considerably higher than historical mean levels”, Cardinalstone explained.
Dangote Cement Distributes 93.3% of Profits to Shareholders over 5years
