Dangote Cement Plc: Frail macro conditions to pressure earnings in 2020

Dangote Cement reported a decline in Revenue (-1.1% y/y to N891.7 billion) in FY 2019, coming below our FY 2019 forecast of N922.3 billion.

The decline in Group Revenue was largely due to weak Revenue from its Nigerian operations (-1.3% y/y to N610.2 billion), as the growth in sales volumes generated by sales promotions could not cushion the impact of price discounts offered to customers.

The weak topline performance, coupled with an increase in Operating Expenses (+17% y/y to N184.6 billion) and Finance Cost (+16% y/y to N57.7 billion), led to a decline in Pre-tax Profit (down 16.7% y/y to N250.5 billion) in FY 2019.

We expect the deterioration in the macroeconomic conditions, caused by the outbreak of COVID-19 which triggered a sharp decline in oil prices to constrain activities in the construction industry as fiscal spending on capital projects weakens.

We also expect the pass-through impact of soft macro conditions to dampen private sector investment in gross fixed capital formation as businesses cut down on their CAPEX plans, in view of weaker aggregate demand. Accordingly, we believe activities in the construction and real estate sector will be lacklustre, leading to lower demand for cement.

We have revised our estimates and the overall impact is a reduction in our target price to N182.4/s from N224.4/s previously. We, however, maintain our Buy recommendation largely due to attractive valuations.

Trading at FY 2020e EV/EBITDA of 7.0x compared to its EM peer average of 9.2x and its 5-year average of 7.7x, we believe the company’s valuation remains attractive. We arrived at our target price using a blend of DCF valuation and relative valuation in the ratio 60:40.

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