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Dangote Cement grosses growth in EPS due to drop in NFC, effective tax rate

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The latest Q2 2019 updated results of Dangote Cement has shown a 44.5% y/y growth in EPS due to declines in net finance cost (-71.5% y/y) and the company’s effective tax rate (-23.9 ppts y/y).

However, a new assessment report by Cordros Capital made available to Business Hilights on Tuesday, indicated that the Group’s core operations weakened further in the period following poor outturn in revenue (-5.3% y/y) and EBITDA (-11.6% y/y).

According to the report, “Revenue dipped by 6.9% y/y in Nigeria to offset a 1.4 y/y expansion across Pan-Africa operations within the period under review.

“In Nigeria, the decline in revenue was on account of volume (-6.0% y/y) and price (-0.9% y/y) weaknesses. Meanwhile, volume growth (+1.2% y/y) achieved across Pan-Africa was enough to neuter the competition-induced price decline.

The report averred that despite the disappointing volume growth (-0.5% y/y) recorded over H1-19, we have left our 2019E volume estimate unchanged. Although the intensely competitive environment in Nigeria ensured that Nigeria remained a drag to the Group’s achieved volume thus far, the current run rate (H1-19: -2.7% y/y) is still in line with our full-year expectation of 14.93MT.

Also, despite the prolonged rainfall, management hinted that volumes sold in July are already ahead of last year. For the rest of Africa, management said that the lack of infrastructure investment continues to weigh on cement demand in South Africa and Cameroon, however, we still expect 2019FY volume to grow by 9.6% y/y to 10.26MT, driven by strong performances in Sierra Leone, Zambia, and Tanzania.

Under Valuations and Risk, Cordors Capital argued that “Based on our utilization of absolute valuation methodology, we arrived at a TP of NGN241.18/s, which implies a 41.9% potential upside, and a total return of 49.2% after incorporating 2018E dividend yield of 7.3%. Consequently, we retain our ‘BUY’ recommendation on the stock.

“On our estimates, the stock is trading on forward (2019E) P/E and EV/EBITDA multiples of 11.6x and 5.9x, compared to 16.5x and 12.9x for the Middle East and Africa peers, respectively. That said, we identify (1) deeper than expected price discounting in Nigeria, and (2) prolonged energy bottlenecks in Ethiopia as major risks to our estimates.

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