Tuesday, November 09,2021 / 10:37 AM / by FBNQuest Research / Header Image Credit: The Will

Q3 priceincreases offset softer cement output; new PT of NGN299.4 up marginally

DangCem'sQ3 results were in line with expectations. Sales of NGN331.6trn grew 17% whileearnings of NGN99.8bn advanced by around 30%. However, there were somenoticeable variances between our estimates and the results, with cementproduction missing our forecast, while prices were comfortably ahead. Looking ahead,we have adjusted our FY'21 cement production forecast downwards by around -2.5%to 29.1 million metric tonnes (mmt) and raised our average price estimate by3.4% to c.USD114/tonne.

The netimpact on our EPS estimate for this fiscal year is negligible. Nigerian volumeswere down -6% y/y to 4.3mmt in Q3, mainly due to heavier rains compared with Q3 '20. Nonetheless, we expect demand to remain resilient, driven by housing,retail and infrastructure projects. In particular, the presidential executiveorder for Road Infrastructure Development and Refurbishment Investment TaxCredit (ITC) scheme, in our view, provides a sustainable pipeline for cementdemand. Recently, the FG approved road projects under the ITC scheme for theNigerian National Petroleum Corporation. The roads will cover a total distanceof 1,804.6km at a financial consideration of NGN621.2bn. From a costperspective, we see two main headwinds. Firstly, rising gas prices and freightcosts, which continue to pose downside risks to profits, and, secondly, globalcement industry's net-zero CO₂ emissions commitment by 2050.

For thelatter, substitution of clinker (the main constituent in portland cement) andthe reduction of fossil fuel use in kiln operation are key pillars. Our newprice target of NGN299.4, is up marginally and represents a potential upside of6.9% from current levels. Although the stock has rallied 12% since our mostrecent note (25 Aug '21), we retain our Outperform rating because oflikely upward support from a potential share buyback. DangCem is trading on a '21f EV/EBITDA of 7.6x vs global peers (8.8x). Year-to-date, the shares havegained 14.3% vs. the NGX ASI's 7.4%.

9M '21 sales crossed the NGN1trn mark for the firsttime

DangCemQ3 '21 earnings of NGN99.8bn grew 30% y/y, in line with our estimate. Bottomline growth was helped by double-digit sales growth (+17% y/y to NGN331.6bn)and a +207bp y/y gross margin expansion to 61.6%. Both improvements more thanoffset rising operating expenses, up +21% y/y to NGN67.4bn, and net financecosts which grew by +160% y/y to NGN13.9bn. 9M sales, up +34% y/y, crossed theNGN1trn mark for the first time. 9M EBITDA margin for Nigeria of 50.4% expandedby around +380bps y/y to boost profits.

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