Dangote Cement

Analysts See DANGCEM Share Price Going Vertical, Maintain BUY Rating  

Dangote Cement Plc maintains BUY rating as analysts at Cardinalstone see stock going vertical, though coronavirus pandemic has cut its growth outlook for 2020.

Despite the ravaging pandemic, the stocks 12-months target price has been set at ₦191.56, though adjusted downward by about ₦9.

Investment analysts at Cardinalstone think that the CEMENT Company might have been hammered, but the company’s stock still enjoying its BUY rating.

Based on fundamentals, analysts estimated to see DANGCEM vertical move becoming steep due to strong cash flow position.

In a research report, Cardinalstone held that the Nigerian cement sector may be set for a difficult year on account of COVID-19.

The investment firm analysts expect the sector’s full recovery to take at least 2 years, in line with the macro guidance of African finance ministers.

“These expectations result in a 12-month Target Price of ₦191.56 as against ₦200.00 previously for the industry giant, Dangote Cement Plc”, analysts estimated.

Cardinalstone stated that the new TP still implies a 63.7% capital appreciation on last market close due to aggressive selloffs of equities and other risk assets globally.

The company’s relatively strong cash flow position and ROAE also support an unchanged BUY rating on the stock COVID-19 may also mean lower cement volumes for producers, analysts remarked

Clearly, the spread of COVID-19 has altered global economic outlook for 2020.

Cardinalstone held that the pandemic has led to border closures as well as restrictions on construction and other nonessential business activities largely at the behest of authorities.

Thus, CW Group expects African cement demand to moderate by about 5.0% in 2020.

“In our view, Nigerian cement market estimated to drop 16.0% to 18.2Mt in FY’20 is likely to underperform the rest of Africa.

Given that imposed restrictions in its country of domicile have been concentrated in key construction hubs (Lagos and Abuja), which cumulatively account for about 48.0% of the country’s GDP.

Analysts at Cardinalstone believe the shutdown of activities in these zones is likely to last till the end of Q3’20 in one form or the other, in line with global expectations.

However, Cardinalstone said it expects DANGCEM to report 15.0% and 10% year on year contractions in cement volumes in Nigeria and across its pan African operations in FY’20, apiece.

“If prices remain largely stable, Nigerian and Pan African sales are also likely to approximate ₦506.7 billion which represents a 17.0% contraction and ₦253.6 billion (-10.3% YoY) respectively in FY’20.

On Pan African markets, we note that the pandemic has casted a dark cloud on growth outlook in oil producing countries like Cameroon and Ghana.

Analysts expect a drawback in other commodity-reliant economies such as Ethiopia and Zambia due to the drastic fall in prices of coffee & oil seeds and copper respectively.

Cardinalstone said that higher effective tax rate to compound earnings woes.

“Earnings will likely be pressured by greater income tax deductions going forward, following the expiration of pioneer tax grants on Ibese Lines 3 & 4 and Obajana Line 4 in February 2020.

“In our view, an effective tax rate of about 30.0% in FY’20 as against 19.9% in FY’19 will likely offset the high base effect from elevated operating expenses last year”, the firm held.

Notably, the company recorded a surge in distribution cost in FY’19 as a result of an increase in its number of truck fleet and proportion of sales distributed by trucks to customers.

Analysts explained that though promotional and marketing initiatives are likely to be high in FY’20 as manufacturers strive to minimize inventory accretion.

They linked this to movement restriction enforced in Nigeria, say EBITDA margin could remain flat at 43.2% on impact of high base effect.

However, margin pressures are likely to resume after the operating line with drags coming in the form of higher interest expense ₦63.8 billion as against ₦50.1 billion in FY’19 and effective tax.

“Our view on the former is premised on the assumption of greater debt buildup to part-finance the proposed share buyback of about ₦199.4 billion while the latter is linked to the expiration of pioneer tax status already highlighted.

“We forecast net profit margin at 15.7% for FY’20 compared to 22.5% in FY’19”, Cardinalstone stated

Analysts See DANGCEM Share Price Going Vertical, Maintain BUY Rating