Dangote Cement: Feeling the heat of a slowing Nigerian market

Dangote Cement 9M 2019 Revenue declined 0.7% y/y to N467.7 billion (annualised; N906.4 billion), coming below our FY 2019 forecast of N933.1 billion. The decline in Revenue was largely due to subdued performance from its Nigerian operations. The weak topline performance coupled with an increase in Operating Expenses (+22% y/y) and FX loss led to a decline in Pre-tax Profit (down 20.1% y/y to N197.7bn).

Since the start of the year, Dangote cement has struggled to deliver strong top line performance owing largely to weak demand in a low growth, yet competitive Nigerian market. This, alongside unfavourable weather conditions forced the company to embark on sales promotional activities to boost sales volumes.

There was a pickup in sales volumes in Q3 (up 9.4% y/y), making us forecast an improvement in sales volumes for the rest of the year driven by the ongoing sales promotions, expectations of favourable weather conditions and improved CAPEX spending from the fiscal authority.

Nonetheless, we have made slight changes to our estimates and the overall impact is a reduction in our target price to N224.4/s from N248.7/s previously. We, however, maintain our Buy recommendation.

At current levels, we believe Dangote Cement is steeply discounted, trading at FY 2019e EV/EBITDA of 6.40x compared to its EM peers average of 10.12x and its 5-year average of 8.05x. We arrived at our target price using a blend of DCF valuation and Relative valuation in the ratio 60:40.

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