Dangote Cement: WSTC Remains Cautious Despite Good Earnings Show
Analysts at WSTC Securities Limited, a dealing member of the Nigerian Stock Exchange (NSE) have explained that despite the fact Dangote Cement first half 2020 resilient performance spooks optimism, it maintains cautious stance for the second half of 2020.
As a result, the firm has advised its clients to neither buy nor sell Dangote Cement stock for now.
According to its equity note, the investment firm aligned cautious stance to the uncertainties around COVID-19 on the economy.
MarketForces analysts explained that the hold rating would mean that the estimated change in price is between -10% and 15% of current market price.
Dangote Cement Plc in its recently released first half (H1 2020) result reported a year on year revenue growth of 2% driven by an increase in average realised price per tonne.
WSTC Securities Limited noted that the cement company’s gross profit was relatively flat with a marginal decline of 5bps.
Despite the fact that COVID-19 disrupt productive activities, Dangote Cement operating profit grew by 2%, largely because of the decrease in selling and distribution expenses.
Then, its pre-tax profit before increased by 5%, bloated by FX revaluation gains while profit after tax increased by 6% due to lower tax charge in Q2 2020.
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In the first half of 2020, the numbers show that the cement company earned more on every shares deployed for operation.
EPS for the period stood at ₦7.45k compare to ₦7.01k in the comparable period in 2019.
WSTC Securities analysts stated that the group volume declined, but revenue grew because of higher realised prices per tonne
The group’s revenue increased year on year by 2% from ₦467.73 billion to ₦476.85 billion in H1 2020, driven by higher sales in Nigeria and the Pan Africa market.
Analysts said sales in Nigeria increased from ₦328.29 billion to ₦332.38billion in H1 2020 due to higher realised prices per tonne for the period.
Specifically, average price per tonne in Nigeria grew year on year by 4% from ₦43,224 to ₦44,855 in H1 2020.
But owing to the 2% volume decline from 7.60MT to 7.41MT in H1 2020, revenue from Nigeria grew mildly by 1% in H1 2020.
Similarly, the group recorded higher sales in the Pan Africa region.
Revenue from the area grew from ₦140.09 billion to ₦145.03 billion, driven by volume growth and price increase.
Volume grew by 70 basis points (bps) from 4.70MT to 4.73MT in H1 2020.
Analysts stated that average realised price per tonne also increased year on year by 3% from ₦29,889 to ₦30,648 in H1 2020.
Looking at the result, it is observed that the combined volume and price increase informed the 3.5% revenue growth from the region in H1 2020.
In the period cost were up, then it resulted to higher production cost which dampened gross profit margin.
The group’s cost of sales grew faster than revenue.
Cost of sales increased by 5% from ₦193.17billion to ₦202.42billion in H1 2020 driven by higher material and energy cost.
WSTC stated that material cost, which accounted for about 32% of the cost of sales, grew year on year by 6% from ₦60.41billion to ₦64.06billion in H1 2020.
Also, analysts stated that energy cost increased by 4% due to higher gas prices induced by FX adjustment by the Central Bank of Nigeria.
As a result, gross profit was relatively flat at ₦274.43 billion in H1 2020 from ₦274.56 billion in H1 2019, while gross profit margin contracted by 115bps to 58% in H1 2020.
“The group’s H1 2020 result was a positive surprise for us”, WSTC Securities stated.
The firm said it anticipated a revenue decline for the period due to the pandemic, but that did not occur.
The group realised higher prices per tonne to mitigate the impact of lower volumes.
“While the resilient performance has spooked optimism, we maintain a cautious H2 2020 outlook given the COVID-19 related uncertainties”, WSTC stated.
Though WSTC maintains cautious stance, analysts revised the group’s financial year 2020 revenue growth to 1% (₦903.16 billion) from the previous flat position of ₦891.35 billion.
“While we expect the group to continue to leverage its leadership position in Nigeria to drive value, we expect the commissioned Apapa export terminal will boost export sales in H2 2020.
“We also expect increased output given the gradual easing of the lockdown across markets”, analysts stated.
Analysts stated that WSTC has a revised earnings per share of ₦12.31k with a fair value estimate of ₦143.59k on the stock.
“At the current market price of ₦141.80k, the stock is trading at 1% discount to our reasonable estimate. Thus, we recommend a HOLD”, WSTC stated.
Dangote Cement: WSTC Remains Cautious Despite Good Earnings Show
