Analysts Downgrade Dangote Cement, Reset Target Price
Equities analysts downgraded Dangote Cement Plc to a ‘HOLD’ with a 12-month target price raised by more than 47% on expected volume recovery in Nigeria. Dangote Cement Plc has remained steady at N657.7, bucking the trend in the equities market.
The company had launched share buyback program to stem share price volatility. CardinalStone Securities Limited estimated suggests the company stock has been overpriced, given that market price is currently ahead of 12 month target set by the investment firm.
“We update our target price to N552.42 per share versus N375.58 previously…implying a potential downside of 15.9%”, analysts at CardinalStone Securities Limited stated, noting the impact of shareholder activities in driving the stock’s material volatility early in the year.
Recall billionaire Femi Otedola ramped up significant shares from the open market. This triggered a significant surge in market value of Dangote Cement Plc. The investment the firm said its target price is supported by expected volume recovery in Nigerian operations, still-high prices and the pass-through effect of FX translation on the top line from Pan-African markets.
The investment firm alter recommendation on Dangote Cement Plc to hold from buy rating, though it raise target price in light of the first quarter of 2024 earnings release, “Our revision hinges on better 2024 volume sales expectations, driven primarily by a recovery in Nigerian operations and steady growth in Pan-African markets”, CardinalStone Securities Limited said in its latest update.
Analysts said they also expect still-high prices in Nigeria and the sustained positive FX translation from Pan-African operations to be supportive of the top line. “However, we anticipate compression in margins from elevated operating and finance costs in line with the broader inflationary environment and FX volatility”.
Citing expiration of the pioneer tax incentive on Obajana Line V in December 2023, CardinalStone Securities Limited expects a higher tax charge to pressure the bottom line in 2024. On the other side, the firm revealed expectation about sales recovery in Nigerian market amidst weak macroeconomic condition. Analysts believe that 2024 performance would be propelled by recovery in Nigerian volume.
“We forecast Nigerian volumes to grow by 11.5% year on year to 18.4 million metric tonnes (MT) in financial year 2024”, analysts at CardinalStone Securities Limited stated.
The projection is expected to be driven by an uptick in business activities as the broader macroeconomic environment stabilises from the impact of policy reforms. The firm equity report stated that historical data suggest that H1 of each financial year tends to be the better-performing half for cement producers, driven by seasonal factors encouraging building and construction activities.
Dangote Cement is expected to see high volume sales due to ongoing capital projects in the country. The cement giant controls some 60% of the industry with its immediate rivals sharing the remaining balance. Analysts anchored volume growth expectation on launch of the N20 trillion Renewed Hope Infrastructure Development Fund (RHIDF).
The project includes construction of the Lagos-Calabar Coastal Highway. the Sokoto-Badagry Motorway, the Lagos-Kano Motorway; the Eastern Rail Lines; and the modernisation of ports and aviation facilities across the country.
CardinalStone Securities Limited said in the equity report that Dangote Cement aims to improve its export earnings to match its FX-linked expenses. Given the 87.2% year on year jump in Nigerian exports of clinker (178Kt) and cement (86Kt) to Cameroon and Ghana in Q1-2024, analysts said they also expect the recent reopening of the border with Niger Republic to support cement export volumes further.
“For prices, we forecast a 21.0% year on year increase in revenue per tonne to N95,787 in line with high inflationary pressure.
“We note that the Federal Government’s efforts, via the Ministry of Works, to bring down the commercial price of cement may lead to smaller price increases in the period.
“Nevertheless, we expect minimal impact on the top line as the company also aims to protect its margins from the impact of foreign currency exposures on operating costs”, the investment firm estimated Overall, analysts expect about 35.5% year on year growth in Nigerian revenue to N1.76 trillion in the financial year 2024.
The cement company’s Pan African performance in the year is expected to be propelled by positive effects of forex translation. Analysts said they expect sustained stellar performance in Pan-African operations, as seen in 2023 and Q1-2024 earnings.
CardinalStone Securities forecasts 3.5% year on year growth in volumes to 11.6MT for 2024, noting that the cement company is already operating at full capacity in Senegal, Ethiopia and Cameroon. “We also expect robust demand, especially in Congo and Zambia, while Ethiopia’s contributions to the overall performance continue to improve.”
Analysts said the group has also ramped up production at the 0.45MT Ghana grinding plant in Takoradi and has reached an advanced stage in the deployment of the 1.5MT grinding plant in Cote d’Ivoire. The firm projected that Dangote Cement Plc would grow by 8.5% year on year to 30m , culminating in a 44.7% year on year growth in revenue to N3.20 trillion in 2024.
In addition, the company’s plans to increase export earnings could also help offset other dollar-linked inputs like gas and imported input components, thereby easing gross and EBIT margin pressure. An end to tax incentives on the horizon As of 31 December 2023, pioneer tax incentives on the Obajana Line V, within Nigerian operations, expired, driving the increase in the effective tax rate to 32.3% in Q1’24 (vs 17.6% in FY’23).
At the moment, the company only enjoys the incentive on the 3.0MT Okpella line, which is set to expire on 30 June 2024. Given the federal government plans to review tax waivers given to companies operating in Nigeria stringently and phase out antiquated pioneer and other tax incentives for mature industries, we envisage an end to pioneer tax incentives for the company, a consequent reversion to a higher effective tax rate and increased PAT margin pressure.
The company announced finalising the 6.0MT Itori plant capacity expansion in Ogun state. This is expected to bring its Nigerian and group capacity to 41.25MT and 58.00MT, respectively, by 2025. Dangote Cement is Africa’s leading cement producer with 52.0Mta capacity across Africa. A fully integrated quarry-to-customer producer, Dangote Cement has a production capacity of 35.25Mta in Nigeria.
Obajana plant in Kogi state, Nigeria, is the largest in Africa with 16.25Mta of capacity across five lines; Ibese plant in Ogun State has four cement lines with a combined installed capacity of 12Mta; Gboko plant in Benue state has 4Mta; and Okpella plant in Edo state has 3Mta.
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