DANGCEM Sees Higher Valuation as Analysts Show Confidence in Earnings Strength
Aliko Dangote, Chairman, Dangote Group

DANGCEM Sees Higher Valuation as Analysts Show Confidence in Earnings Strength

If analysts estimate come true, the Nigerian local bourse could re-rate Dangote, Africa’s largest cement producer valuation to about N5 trillion amidst the share buyback program. With buckets of buy recommendations, growing numbers of equity analysts have remained positive on the cement company’s stock with the increasing expectation that the share could climb the Rubicon to N292. 

Following its earnings beat in the first half of the financial year 2021, some equity analysts feed the bull on DANGCEM with a steep upgrade to the company’s target price. Could DANGCEM hit N292?

Equity analysts at Meristem Securities could not agree less with the target price of N290, while WSTC turns rather bullish with price target sets at N292. United Capital sets N270.3 as the target price while CardinalStone places N257 as its fair value estimate.

The most valuable company on the Nigerian Exchange actually closed the week at N245 and analysts are paying attention to the absence of sharp increases and decreases in price.

Market trackers show the pricey stock has steadied at N245 in the last seven trading sessions amidst a bearish outturn in the local bourse – NGX down N177 billion in a week.

In the first half of 2021, Dangote Cement made N27.80 on every N100 cement sold in the period compare with N26.50 per N100 sales in the comparable period. Meanwhile, analysts are showing a positive disposition to the company’s full-year earnings in 2021.

Pretax profit expanded 72.7%, from N162.871 billion in the first half of 2020 to N281.254 billion a year after. After-tax payment consideration, the company goes home with N191.63 billion, about a 52% jump when compared with N126.143 billion delivered in the comparative period.

Nothing has changed so much in terms of the shareholding structure except that the cement company continues to consolidate its footprint across the African continent where its hold forte.

Key shareholders in the company did not see significant change as of the first half of 2021, with Aliko Dangote, the Group Chairman, maintaining 0.16% direct holdings of the group outstanding shares.

Also, Dangote Industries Limited account for 85.80% of the entire 17 billion outstanding shares in Nigeria’s largest cement company. At a 5.65% equity stake, Stanbic IBTC Nominees is among the largest shareholders and ‘others’ take 5.89% interest in the company.

Could DANGCEM hit N290 by December?

Meristem Securities actually pitched the number in its latest equity report and some analysts are backing it up, asking rhetorically why would a N4 trillion market cap company not ambitious to list in London, NYSE etc.?

The N290.06 price tag isn’t an overprice; sources in the investment banking space told MarketForces Africa, though Broadstreet is divided on the future fair value of the stock.

In its equity report, WSTC Securities Limited took the price target further to N292, while CardinalStone Securities is expecting N257.88. Equity analysts at United Capital Plc in their report put the company’s target price at N270.30, upgraded from N253.70 when the stock price was hovering at N241.

Speaking about the company’s share buyback, MarketForces Africa gathered that ‘among all associated benefit of the program, the company is seeking low price volatility. The ticker shakes, the Nigerian Exchange swings depending on the sides which it takes, another analyst told MarketForces Africa in a move to unravel the move behind the cement company share buyback.

“With only 0.24% of its shares outstanding recalled in 2020, the company stated its commitment to purchasing up to about 10% of its total shares outstanding, after getting regulatory approval in July.

“A share buyback of 9.76% would translate to an EPS of about N27.20 based on Meristem 2021 PAT profit after tax forecast.

“At the current price, this would imply an estimated cash outflow of N412.63 billion. Although the buyback is expected to be staggered, considering the company’s cash balance of N151.71bn, we do not expect full adherence to the 9.76% target in the year”, Meristem Securities said.

Dangote Cement deep footprint in African soil makes it a candidate for stock investment but just about 20% of the company’s entire valuation are on the mainboard of the Nigerian bourse for trading. With more than 60% market share in the Nigerian market, the leader in the cement oligarchs has consistently maintained dividend payments to shareholders.

Read Also: Dangote Cement: Analysts Forecast 13% Increase in Dividend

In the last 10 years, Dangote has paid a cumulative sum of N100 on each share outstanding but with inflation eroding naira value, a possibility exists the Aliko brand would be more likely to raise payout in 2021.

While most investment banking firms continue to feed the bulls, the management has continued to engage in capital spending, not to propel volume capacity but to keep the brand quality – the key attraction for consumers.

MarketForces Africa gathered from channel checks conducted with industry’s stakeholders that the cement product ranks ahead it peers in the market.

Meristem Securities believes, going by its projections that Dangote Cement will deliver earnings before interest, tax payment before consideration for depreciation and amortisation charges of N699.05 billion in 2021.

Again, WSTC Securities thinks the cement giant will hit a N1.46 trillion sales mark in 2021. The cement company recently crossed N1 trillion mark in 2020 amidst heavy capital spending during the pandemic breaks.

The 3mta Okpella plant is expected to commence operations in the third quarter of 2021. Analysts said they expect to see more volume sales given the capacity addition.

Thus, analysts anchored this rather bullish revenue projection on expected upward price adjustment in the latter of the year.

“We see further room for price increments during H2-2021 as demand remains strong and inflationary pressures persist”, United Capital analysts noted. 

But Dangote Cement spokesperson, Anthony Chiejina, told MarketForces Africa the company has not raised price since 2019.

Though prices of various brands of cement have spiked amidst steep inflationary position, a situation affirmed by many developers.

Dangote Cement spokesperson attributes the price adjustment development to their distributors who appears to be out of control.

In what appears to be a positive disposition to the company’s performance, United Capital projects revenue growth of 28.7% to N1.33 trillion in 2021 and expect EPS to grow by 31.9% year on year to N21.4.

Supporting this, WSTC Securities forecast a N22.91 EPS for FY 2021 and analysts expect this to be driven by sustained cost optimisation and higher pricing.

“We expect the Group to increase the dividend by 13% to N18.00 for 2021”, WSTC added.

United Capital said going into H2-2021, the firm remains optimistic on DANGCEM and expect the company to sustain double-digit growth, albeit at a slower pace relative to H2-2020, given the relatively high base from the period.

On a macro-scale, analysts at United Capital revealed their optimism about economic recovery in Nigeria and Sub-Saharan Africa, as well as sustained cement demand, which has driven capacity expansion plans.

Additionally, price increases actioned in the first half of the year will help sustain topline growth and margins, as costs remain pressured, analysts added.

In the first Half of 2021

Dangote Cement raked in a total of N434.14 billion from the Nigeria market, a 48.66% year on year jump when compared with a reported figure in the first half of 2020. Its Pan-Africa revenue printed at NGN198.50bn, an increase of 36.87% year on year from the comparative period last year.

Meristem Securities said while cement demand in Nigeria remained strong due to Government capital expenditure and increased activities of homebuilders and real estate developers, the company also resumed cement exports via its terminals in the second half of 2021, with a shipment of 57 Kilotons.

In total, analysts said the cement giant sold 9,869 Kilotons of cement from its Nigerian operations in the first half of 2021 – an increase of 33.18%. Similarly, its Pan-African volume was up by 15.49% year on year to 5,465 Kilotons, with exceptional volume growth in Congo which saw 70.00% year on year growth, Ghana jumped 44.40%, Sierra Leone expanded 46.40%, and Tanzania edged higher by 50.00%.

Although sales volume growth in Q2:2021 was flattered by a low 2020 base -due to COVID-19 restrictions- volume was nonetheless better than the corresponding period in 2019 by 29.00%, analysts added.

“We also recognize the positive impact of reduced discounts and rebates on net revenue as revenue per tonne increased by 15.71% year on year”.

Overall, Nigeria’s largest cement company garnered a total of N690.55 billion from sales in the first half of the financial year 2021, exceeding its comparative period in 2020 performance by 44.81%.

“For the rest of the year, we have a positive outlook for revenue mainly due to better export volumes (clinker especially) and higher ex-factory prices. Thus, we revise our revenue forecast for 2021 to N1.43 trillion from N1.22 trillion – an increase of 38.46%”, Meristem hinted.

Equity analysts are paying attention to the absence of sharp increases and decreases in price since it could help you determine whether or not the business is financially stable. Moodys recently downgrade the ticker for what the investors’ service firm considered high leverage as the group continues its borrowing spree amidst capacity expansion.

“The review for downgrade was prompted by the increase in dollar debt in Dangote Cement Plc.’s capital structure which was not initially contemplated in the B1 rating previously assigned. As of 30 June 2021, the amount of dollar debt has increased to around 193 billion naira equivalent (35% of total debt) from N71 billion equivalent in 2019.

“This exposes Dangote Cement to increased currency risks because the majority of its cash flows are generated in naira and other African currencies and the fact that all the dollar debt is short term with maturities of less than a year”, Moodys said.

COMPANY PROFILE

Headquartered in Lagos, Nigeria, Dangote Cement Plc is Africa’s largest cement producer. The group operates nine fully integrated cement plants, a grinding plant and two import terminals across Africa, with a combined capacity of 48.6 Mtpa and approx. 61% share of the market in Nigeria, Africa’s largest economy and population.

DANGCEM Sees Higher Valuation as Analysts Show Confidence in Earnings Strength