ARM Securities Positive on DANGCEM, WAPCO Earnings, Upgrade Estimates

ARM Securities Positive on DANGCEM, WAPCO Earnings, Upgrade Estimates

Equity analysts at Asset and Resources Management Securities Limited (ARM) have expressed largely positive opinion on the recent performances of Dangote and Lafarge WAPCO, on their surprise second quarter earnings results.

According to ARM Securities, Dangote with stock ticker DANGCEM and Lafarge WAPCO’s second quarter 2020 results has an impressive turnouts.

A review of the results showed that DANGCEM earnings per share (EPS) was lifted by 11% to ₦3.85 and WAPCO increased by 60% to ₦0.95 respectively, printing ahead of ARM’s forecasts.

DANGCEM is considered a better performer in terms of return on equity (ROE), which remains quite better and stronger compare with WAPCO.

Equity analysts’ consensus estimates always rank DANGCEM as top picks compare with WAPCO, though some challengers are delving into the tight-nosed cement market already.

Asides the outperformance in topline by both companies, ARM stated that they also recorded efficiencies in operating expenses and lower than expected finance costs.

These gave the bottom line some boosts.

DANGCEM’s profit after tax (PAT) growth was also aided by a lower effective tax rate in the first quarter, as PBT was lower 2%.

ARM Securities has however updated forecasts for the companies, which resulted in an increase in DANGCEM and WAPCO’s fair value estimate to ₦219.77 and ₦23.38, from N201.05 and ₦19.65, respectively.

The investment firm stressed that while both companies have an impressive upsides from current market price of 59% and 95%, respectively, and also hold the potential for high dividend yields, DANGCEM remains its top pick in the sector, given its strong fundamentals in ROE and margins.

A resilient Topline:

ARM stated that Nigeria’s cement consumption in the second quarter turned out better than expected, with DANGCEM and WAPCO recording mild declines in sales.

Analysts noted that trade receivables remained nearly unchanged, despite impact of COVID 19 lockdown.

According to management, DANGCEM’s domestic volumes dropped as much as 28% in April – which ARM Securities said it believes would be similar for WAPCO.

However, a quick recovery in cement demand in subsequent months, together with slight support from DANGCEM’s re-entry into the exports markets via the new Apapa port, led to only a slight decline in Nigeria volumes by 6% year on year to 3.4MT4 in Q2.

On the bright side, the company’s revenue per ton was lifted 3% year on year to ₦45,118 (+1% quarter on quarter), reflecting impact of VAT increase and wound down distributor discounts.

Overall, analysts explained that Nigeria revenue was down only 3% year on year to N153 billion.

DANGCEM’s sales across the Pan-African businesses grew 8% year on year in Q2, thanks to a 3% growth in volumes especially Ethiopia and Senegal and a 4% increase in prices.

Meanwhile, WAPCO’s revenue in the quarter dropped 5% year on year to ₦57 billion in Q2, as volume dropped 4% to 1.3MT and revenue per ton also dipped 1% to ₦44,030 – though the company recorded 1.2% decline on quarter on quarter basis.

Resilient margins:

Both cement companies reported better than expected gross margins in the quarter.

However, while Dangcem’s dropped 190 basis points (bps) year on year to 57% owing to higher cost, WAPCO’s touched a record high of 42%, rising+800 bps.

Understandably, WAPCO’s recent capital expenditure on its power plants has started to yield benefits of improved energy efficiencies which drove its energy cost per tonne down by 4% to ₦6,000.

However, bulk of WAPCO’s margin growth stemmed from a 51% year on year plunge in cost of raw materials.

ARM Securities explained that ironically, the lockdown gave the companies room for operating expenses efficiencies.

DANGCEM’s operating expenses to sales dropped 130 bps year on year to 22%, thanks to lower spend on selling and distribution costs.

Meanwhile WAPCO’s dropped 450 bps to 7% thanks to savings on office and general expenses which drove admin cost down in the quarter.

Thus, DANGCEM’s earnings before interest and tax (EBIT) margin was relatively flat at 36%, while WAPCO’s rose 10 percentage points to 37%.

On this note, ARM Securities made adjustment to the companies estimate for financial year 2020.

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DANGCEM’s 2020 adjusted EPS has been revised higher to ₦13.04 from ₦10.16 as against ₦12.52 in 2019.

“Our forward EPS incorporates our expectation of a 5% share buy-back. Excluding the buy back, our adjusted EPS for the year would print at ₦12.39”, ARM Securities added.

The investment firm stated that the major revisions to its forecast are the increase in total revenue by 10% to ₦961 billion, reflecting improved optimism for both the Nigerian and Pan-African markets.

Analysts also expect boost from the ‘Bag of Goodies’ promo.

Meanwhile, ARM stated that a downward revision to finance cost to ₦50 billion, which did increase by 70% in Q2 20, but a tad lower than expected.

Also taking into account the high base of finance costs from H2:19 when DANGCEM started to issue the ₦150 billion commercial papers.ARM Securities Positive on DANGCEM, WAPCO Earnings, Upgrade Estimates

Reduced operating expenses expectations, with operating expenses to sales now lower at 22% compare to estimate of 24%; and a revision to analysts effective tax rate for the year from 30% to 25%.

ARM said: “We also estimate a higher 2020 adjusted EPS for WAPCO at ₦2.3 from previous forecast of ₦0.92 and 2019 of N0.96”.

Explaining the basis of the revision, ARM Securities said a pent up optimism for the top line to ₦238 billion from ₦200 billion; revised cost of goods sold (COGS) per ton to ₦30,500 from ₦32,700, reflecting improved energy cost savings and the plunge in Q2’s cost of raw materials.

This also include revision to finance cost to ₦9 billion, as the declines are printing faster than we previously estimated.

ARM Securities stated that overall, DANGCEM and WAPCO have BUY ratings and also trade at cheap multiples.

DANGCEM and WAPCO have a forward price earnings of 11x and 5.3x trading at a discount to their 5-year averages of 15.5x and 10x (pre-losses).

Comparing with other companies in similar business, analysts said these stocks trade below Bloomberg’s Middle East and North Africa (MENA) peer average of 16x.

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