Dangote Cement Plc -2

April 15, 2015 www.dunnlorenmerrifield.com Bloomberg: < DLMN> GO

Investment Summary;

We update our share recommendation for Dangote Cement (Dangcem)

following the release of FY’14 performance numbers and hereby maintain

a cautious outlook on the company’s stock. The company’s FY’14

numbers came in below our estimates as low realizations supported by

weak pricing strategy drove the underperformance. In our view, it appears

the company has challenges in implementing pricing strategies, driven by

higher supplies and inventory build-up. As such, an improvement in

EBITDA/tonne may not be forthcoming. In absolute terms, the company

reported an EBITDA of ₦219.76billion (down 3.5% y/y) and

EBITDA/tonne of ₦6,454/tonne ($32.76) based on current capacity of

34.05mmt. The company’s financials appears to bear the risk of higher

financial charges through increase in interest rates and the impact of the

naira devaluation. On the other hand, its on-going expansion appears to be

enhancing its long term profitability and dominant presence in the market.

However, FY’14 sales volumes contracted by 0.20% to 13.97mmt despite

the pricing strategy initiated to drive volumes. Given its capacity

advantages, Dangote Cement is more favoured to benefit from the

opportunities in the industry, especially when the conditions within

domestic economy improve and industry volumes begin to accelerate.

Furthermore, visibility of investments in upgrading clinker capacity

remains strong in relation to its domestic peers.

While we retain our DCF valuation approach, valuations at 13.82x/13.20x

FY’15E/16E EV/EBITDA and P/B of 5.01x remain high in comparison with

peers. The company is trading on a 2015E EV/tonne of $418.59/tonne on the

expanded capacity which is at ~64% premium to average replacement cost of

$150/tonne. We therefore remain cautious on Dangote Cement stock and maintain a

HOLD stance with a target price of ₦177.97/share (previous target price: ₦226.63).

Since our last valuation report (Nov 2014), Dangote Cement share price has declined

13.83%.

Fig. 1: Quarterly results highlights

4Q’2014 3Q’2014 4Q’2013 Q/q Δ Y/y Δ

Revenue (N’mn) 81,424 101,306 90,520 -19.63% -10.05%

Operating profit (N’mn) 24,646 50,471 45,798 -51.17% -46.20%

Net profit (N’mn) 19,025 45,036 48,447 -57.76% -60.73%

Source: Company annual report, Bloomberg, DLM Research

Financial charges and tax further

drawback to profit Alex Ibhade

[email protected]

Please read the Important Disclosures at the end of this report.

Dangote Cement Plc

Fig. 5: Dangote Cement vs. NSE, 52-wk movement (rebased)

Fig. 2: Stock data

FYE December Price Mov’t: YtD / 52wk -10%/-23.40%

52-week range ₦141.90- ₦250

Average daily vol./val. 1,292,592/N219.74m

Shares Outstanding (N’mn) 17,040

Market Cap. (N’mn) 3,067,291 ($18,258mn) EPS, N- 12months trailing 9.36

DPS, N- FY2013 6.00

FCF, N- FY2013 0.00

Source: Bloomberg, NSE, DLM Research

Fig. 3: Key ratios

FY’ 2014 FY’2013

Gross profit margin 63.47% 66.21%

Net profit margin 40.73% 52.10%

Equity multiplier 1.61x 1.50x

Asset turnover 0.40x 0.46x

Source: Company annual report, NSE, DLM Research

Fig. 4: Valuations

FY2014 FY2015E FY2016F FY2017F

P/Sales 7.83x 7.60x 7.38x 7.17x

P/E 19.28x 18.43x 18.07x 18.16x

PEG 0.00 0.00 0.00 0.00

EV/Sales 8.34x 7.88x 7.63x 7.43x

P/B 5.01x 4.41x 4.42x 4.38x

ROE 26.05% 23.94% 24.46% 24.11%

ROA 16.20% 16.27% 16.49% 16.27%

Div. Yield 3.33% 3.89% 3.89% 3.89%

Source: Company annual report, DLM Research

Source: NSE, DLM

Price:

- Current N180.00*

- Target N177.97

Recommendation: HOLD * As at Monday, April 15, 2015

Equity Research | Dangote Cement Plc DLM RESEARCH

April 15, 2015 2 www.dunnlorenmerrifield.com

Bloomberg: < DLMN> GO

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sales revenue Still the most expensive cement company amongst its peers. Cement

stocks appear to be off investors’ preference in the recent times, as

overcapacity in the sector coupled with slow demand is expected to keep

profit margins of all players under pressure. Given the company current

production capacity, EV/tonne remained high at $397.41 on current capacity

– which implies high replacement cost. Although large cement companies are

expected to have high EV/tonne given their size, and integrated nature of

business. The EV/tonne is used to calculate how much of a premium is

placed on the company relative to building an identical new one, (replacement

cost). On the basis of EV/tonne, the company is the most expensive cement

company amongst its peers at $397.41/tonne for FY2014. This brings to the

fore questions bothering on whether the company could trade at a premium

by virtue of advantages such as the capacity it holds, its expansion or

upcoming capacity. Adding to this is the observed key man risk. The

company pricing power has been aided by factors such as higher breakeven

points on the back of higher capacity, production discipline, which appears

likely to be sustained despite its low capacity utilization.

EV/Tonnes 2013-₦ $ 2014-₦ $ 2015E $

Tonnes 20.30 20.30 34.05 34.05 34.05 34.05

EV(₦'b) 1,566,871 7,953.66 2,665,783 13,531.89 2,829,109 14,360.96

EV/Tonnes 77,186 391.81 78,290 397.41 83,087 421.76

Mkt CAP/Tonnes 2013-₦ $ 2014-₦ $ 2015E $

Tonnes 20.30 20.30 34.05 34.05 34.05 34.05

Market Cap (₦'b) 1,448,400 7,352.28 2,556,000 12,974.62 2,607,120 13,234.11

MKT CAP/Tonnes 71,350 362.18 75,066 381.05 76,567 388.67

EBITDA/Tonnes 2013-₦ $ 2014-₦ $ 2015E $

Tonnes 20.30 20.30 34.05 34.05 34.05 34.05

EBITDA (₦'b) 227,714 1,155.91 219,759 1,115.53 231,694 1,176.11

EBITDA/Tonnes 11,217 56.94 6,454 32.76 6,805 34.54

Still the largest cement producer in Africa. In Nigeria, Dangote Cement’s

three plants with a combined estimated production capacity of ~34.05mmt

holds c.50% of the domestic market. This is in addition to the company’s

operations on the continent in Senegal and South Africa. Also, the company

will soon commence operations in Cameroon, Zambia and Ethiopia.

Dangote Cement has an average operation of ~67% capacity utilisation in the

last four years with operating margins above industry average. Given its

strong ROCE (24.92%, although below the previous year), and above our

calculated WACC of 15.40%, further expansion or setting up new capacities

are still profitable, especially given the expected growth in cement demand

emanating from regional markets and stable prices in the years ahead.

“On the basis of

EV/tonne, Dangcem is the most expensive cement company amongst its peers at $397.41/tonne for FY2014 ,,




Revenue growth of 1.41% not reflective of pricing strategy. For the full

year audited results to December 2014, the company recorded revenue of

₦391.64billion, a growth of 1.41% y/y compared with ₦386.20billion in the

previous year. This comprises of ₦391.3billion from the sales of cement and

₦369million from the sales of other products. The slow growth in revenue

was largely as a result of decline in sales volume underpinned by muted

cement demand in the last half of 2014 on the back of prolong raining

season. Noticeably, as a result of build-up in inventory, management

introduced a lifting bonus and 14% price cut to stimulate the market.

Regardless, while domestic market sales volumes declined by 0.8% to

21metric tonnes, its Nigerian sales volume declined by 3.2% to 12.87metric

tonnes, and the group’s overall volume declined by 0.2% to 13.97metric

tonnes. In all the company delivered revenue/tonne of ₦11.50 on current

capacity. In our opinion, the result is not reflective of its price reduction

necessitated to induce customers and boost overall sales volumes. The

results came below our consensus forecast of ₦428.66billion. By our

assessment, the overall performance in the group’s revenue was impacted by

weak performance noted in the last quarter (4Q’14) –when it recorded

revenue of ₦81.42billion, 15.8% below its 8-quarters average of

₦96.70billion. This implies that its price reduction strategy did not translate

to higher sales volumes. Adding burden to lower sales numbers is the

worsening situation of power supply, occasioned by the continuous drop in

gas supply to its power generating stations. As a result of low gas supply, the

company imported Low Pour Fuel Oil (LPFO) for the most part of the year.

On plant performances, the company’s Obajana plant in Kogi State was

disrupted by gas and LPFO supplies. Consequently, Obajana sales

decelerated by 6.5% to 7.4million tonnes in the review year– with a capacity

utilisation rate of ~72% and averaged 76% gas utilisation ratio. Furthermore,

sales volume at Ibese plant, was c.3.9million tonnes, (FY’13:4.0mt) with a

capacity utilisation rate of ~65% and average gas utilisation rate of ~89%.

The company’s Gboko plant in Benue State increased sales volume by

15.7% to 1.6 million and contributed 13% of all the cement sold in Nigeria.

Operations in West & Central Africa contributed revenues of ₦6.2billion,

most of which was generated from sales of 0.3 million tonnes of imported

cement in Ghana–a decrease of 56.0% on revenues of ₦14.1billion in 2013.

Revenues from South & East Africa was ₦13.9billion (2013: ₦0.6bn)

representing 3.5% of total group revenues, with operating profits just above

breakeven.

“ While domestic

market sales volumes declined by 0.8% to 21metric tonnes, its Nigerian sales volume declined by 3.2% to 12.87metric tonnes, and the group’s overall volume declined by 0.2% to 13.97metric tonnes ,,




The first half of 2015 is expected to remain slow due to observed lower

demand necessitated by lower construction activities on the back of muted

government expenditure on capital projects.

94.87%

1.58%

3.55%

Nigeria

West & central Africa

South & East Africa

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FY'11 FY'12 FY'13 FY'14 FY'15E

Revenue/Tonnes 2013-₦ $ 2014-₦ $ 2015E $

Tonnes 20.30 20.30 34.05 34.05 34.05 34.05

Revenue (₦'b) 386,177 1,960.29 391,639 1,988.02 399,472 2,027.78

Revenue/Tonnes 19,023 96.57 11,502 58.39 11,732 59.55

Fig. 7: Quarterly sales revenue (₦’billion)



Fig. 6: Revenue contribution by business (%)

Source: Company annual report NSE, DLM Research

Fig. 8: Annual sales revenue (₦’billion)- 2011- 2015E




However, expected increase in demand in 1H’15 stands to provide the

company with better footing to counter declining sales volume. Overall, we

expect the company to report healthy revenue CAGR of ~3.75% over the

next five years led by capacity expansion, price stability and healthy demand

in regional operation coupled with operating efficiency leading to higher

volume growth and greater profitability.

Expansion to fuel growth in future. Dangote Cement has committed over

$5billion for expannsion across 13 African countries. The company recorded

a significant investment in 2014 as capital expenditure surged significantly

by 55.14% on the back of its pan Africa investment.The company’s ongoing

greenfield project across major Africa countries is expected to come on

stream by 2015/2017 leading to total capacity of 44mtpa from current

capacity of 34.05mtpa.This, in our view will boost the overall profitability of

the company. With the current capacity, we highlight that the company has

grown its production capacity by a CAGR of 43.63% over the past five

years, which is commendable in our view. The company announced recently

that it has commenced operation in Senegal with nominal plant capacity set

at 4000MT per day and 1.2 mtpa. The plant has a total production capacity

of 1.5million tonnes annually. Senegal with a population of 14 million people

has cement market of 3mtpa which implies that the market has over-

capacity. Hence, the company planned to exports to Mali and Gambia where

demand for cement are both high through the rail. Given the over-capacity

of the market and the marketing strength of the domestic palyers, break-

even for the Senegal plant might take a little longer. However, the

company’s operational advantage lies on its ability to build modern, energy-

efficient factories that will provide strong competition for many of Africa's

ageing cement plants.

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Total capacity Cement sale

Fig. 9: production capacity & annual cement sales (million)- 2010- 2014


43.63%

“The company’s on-

going greenfield project across major Africa countries is expected to come on stream by 2015/2017 leading to total capacity of 44mtpa from current capacity of 34.05mtpa.




Growth in cost of sales depressed gross profit. For FY2014, the

company’s cost of sales (COS) of ₦143.06billion was up by 9.6% compared

to ₦130.47billion recorded in the preceding year. The moderate growth in

COS is commendable in our view given the surge noted in 2012/2013 and

increase energy cost in the first half of 2014. In our reckoning, the

moderation in COS was a direct result of improved operating efficiency of

management on the back of improved energy mix. Based on our assessment,

energy and plant maintenance cost accounted for 51.60% (FY’13:~44.20%)

of the company’s COS. A mitigating factor to power costs is notable Coal

facilities operational at Ibese one and two and Obajana three. We are

however inclined to highlight that the management has adopted various

measures to control its operating cost and remain cost efficient. Against this

backdrop, the company’s usage of alternative fuel is expected to rise in the

year ahead. Lending credence to this is the company’s $250m investment in

coal-fired power plants in its Obajana, Ibeshe and Gboko plants. We

believed these cost saving measures would help to minimize power

disruption to the plants and ultimately expand its margins going forward.

The growth in cost of sales translated to slight increase in COS/revenue

ratio as COS/revenue ratio increased to 36.53% y/y from 33.79% in 2013.

As a result, gross profit declined by ₦7,12billion or 2.8% y/y to

₦248.58billion, (FY’13:₦255.70bn) which allowed for maintained gross

margins of 63.47%%, albeit below 66.21% recorded in 2013. Although,

FY’14 COS numbers are more reflective of future performance.

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Fig. 11: Cost of sale (₦’billion)-2011-2014


Fig. 10: Capital expenditures (₦’billion)- 2010- 2014


“ A mitigating factor

to power costs is notable Coal facilities operational at Ibese one and two and Obajana three. ,,

17.56%




Rising operating expenses causes a drag on operating profit. For

FY2014, the company recorded a 5.8% y/y increase in operating expenses

(Administrative, selling and distribution expenses) to ₦65.10billion compared

to ₦61.55billion recorded in 2013. The company has recorded a continuous

growth in operating expenses in the past four years, averaging 30% (2011-

2014) which is quite not impressive in our view. The growth in operating

expenses in the review period was largely driven by a 6.41% y/y increase in

administrative charges to ₦27.66billion, (FY’13:₦25.99bn) which emanated as

a result of increase in staff costs, salary increases and the start of operations at

Sephaku coupled with non-capitalizable expenses incurred for projects under

construction.This is in addition to a 5.3% y/y increase in selling and

distribution expenses as the company intensified effort to increase its selling

and distribution channels. As a result, the company now have c.4,700 trucks

for cement distribution across the country. Given the foregoing, we anticipate

a higher operating cost in the years ahead as other Africa plants becomes

operational.Consequently, operating profit (EBIT) declined by 4.5% y/y to

₦187.10billion, (FY’13:₦195.88bn), with a corresponding decrease in

operating margin to ~47.80% from 50.72% in 2013. Hence, operating

expenses as a proportion of revenue recorded a slight increase to 16.62% from

15.94% in the preceding year, while total cost as a proportion of revenue

increased to 53.15% from 49.72% in 2013.

41.00% 39.64% 33.79% 36.53% 35.00%

59.00% 60.36% 66.21% 63.47% 65.00%

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Fig. 12: Annual COS/Revenues ratio and gross profit margins (%)-2011-2014


Fig. 13: Revenue, COS and gross profits growth trend analysis (%) -2011-2014


“ The growth in

operating expenses in the review period was driven largely by a 6.41% y/y increase in administrative charges to

₦27.66billion,

(FY’13:₦25.99bn) which emanated as a result of staff costs increased across the group on the back of increased staff numbers, inflationary salary increases and the start of operations at Sephaku

,,




Significant increase in financial charges and introduction of a 13.64%

income tax depressed pre-tax and post-tax profits. The increase recorded

in finance charges (140.4%, ₦32.98bn) has severely affected profitability

during the period under review on the back on a 31% growth in borrowings.

We note however that lower financial charges will be beneficial to the cement

manufacturer who appears to be increasing its balance sheet leverage. While

lending rate is unlikely to be reduced in the near term by the apex bank, a

further increase in its debt obligation will take its toll on it pre-tax profits. In

addition, given that much of the company’s loans are dollar denominated, we

anticipate a further pressure on the firm’s pre-tax profit on account of naira

depreciation or exchange rate loss, causing net profit depletion. On the

contrary, the obligation of meeting debt payments is likely to mitigate the

anticipated price war as the company strive to maintain improved net profit.

Specifically, in spite of a notable 109% y/y surged in line item ―other income‖

to ₦3.61billion, (FY’13: ₦1.72bn), a contraction of 3.2% y/y was noted in

pre-tax profit to ₦184,69billion, (FY’13: ₦190.76bn) with a corresponding

decrease in pre-tax profit margin to 47.16%, (FY’13: 49.40%). Furthermore,

following the expiration of pioneer tax credit in 2013, the introduction of a

13.64% tax rate resulted in post-tax profit declining by 20.7% y/y to

₦159.50billion, (FY’13: ₦201.20bn). Consequently, net profit margin declined

to 40.73%, (FY’13:52.10%).

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Revenue Operating margin Operating exp/revenue Total cost/revenue

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PBT PBT margins

Fig. 15: Pre-tax profit (₦’billion) and margins (%)-2011-2014

Fig. 14: Operating margins, operating exp/revenue and total cost/revenue ratios (%)



“ While lending rate

is unlikely to be reduced in the near term by the apex bank, a further increase in its debt obligation will take its toll on it pre-tax profits. ,,




Growth in assets and shareholder’s fund accompanied by increasing

financial leverage. For the FY’14, the company’s total assets increased by

16.78%/y to ₦984.72billion, (FY’13: ₦843.20bn), predominantly driven by

investment in non-current assets on the back of ₦217billion investment across

the Africa continent. Although we see this increasing further as the company

continue its Pan Africa investment. In addition, shareholders’ fund recorded a

growth of 8.94% y/y to ₦612.34billion, (FY’13: ₦562.1bn). This is even as

current and long term liabilities accelerated by 40.60% and 18.27%

respectively. Cash position remains relatively weak at ₦20.60billion, (FY’13:

70.50 billion), a decline of 70.80%. We believe this was as a direct result of

the company’s increase in credit sales, relaxed credit policy and slow pace of

cash collection as indicated by the 52.35%% increased in trade debtor.

However, gross indebtedness increased by 31% y/y to ₦222.14billion,

(₦169.16bn). This led to a debt-to-equity ratio of 36%, (FY’13:30%). The

company’s D.E appears to be increasing but still at a comfortable level (i.e

below 40% threshold) given that cement industry is highly capital intensive.

Debt to asset ratio increased marginally to 22% from 20% in the preceding

year.

Hence, as a result of the increase in gross debt, equity multiplier increased to

1.61x from 1.50x in 2013. This in our view indicates gradual increase in overall

financial risk profile. .In addition, debt to EBIT and EBITDA ratios increased to

1.19x, (FY’13: 0.86x) and 1.01x, (FY’13: 0.74x) which in our view fair as the

company seems to be generating enough cash to pay its interest expenses.

However, with cash position depleting and current liabilities rising too in the

same direction, cash ratio remains relatively weak at 0.09x from 0.43x in

FY’13. The weak cash position indicates the company’s inability to repay its

current liabilities by relying on its cash position alone. In addition, quick ratio

decreased significantly to 0.40x from 0.73x in FY’13.

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PAT PAT margins

Fig. 16: Profit after tax (₦’billion) and margins (%)-2011-2014


“The company’s total

assets increased by 16.78%/y to

₦984.72billion, (FY’13:

₦843.20bn), predominantly driven by investment in non-current assets on the

back of ₦217billion investment across the Africa continent ,,




Industry Debt (short and long term debt ₦'billion)

Company Debt % of industry

CCNN 1.28 0.54%

LAFARGE 14.65 6.15% DANGOTE 222.14 93.31%

Total Industry debt 238.07 100.00%

Industry assets (₦'billion)

Company Assets % of industry

CCNN 15.78 1.21% LAFARGE 305.88 23.41% DANGOTE 984.72 75.38%

Total Industry debt 1,306.38 100.00%

Outlook and valuation. In anticipation of an absolute market price war, the

company has diversified its product offering by producing different grades of

cement, concrete blocks and ready-mix concrete. The company tried to use

discount pricing as a tool to segment the market in anticipation that the

industry is likely to face more pricing pressure on the back of excess

production capacity, but the sustainability of this strategy remains doubtful.

With excess capacity expected to remain in the Nigeria market, the company

will have to continue to absorb increasing production costs. For 2015 financial

year, demand for cement in Nigeria is likely to be affected by declining

government spending on the back of dwindling crude oil prices.

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Total assets Fixed assets

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D/A Proprietary raio D/E Debt/EBIT Debt/EBITDA

Fig. 17: Total assets and fixed assets (₦’billion)-2011-2014

Fig. 18: Solvency ratio(x) 2011-2014






With all capacity concentrated in Africa with massive infrastructural

development, we expect expansion in demand in other regions of the

continent to boost overall profit in the years ahead with improved margins

due to economies of scale. In addition, changes in energy mix along with other

cost measure are expected to keep margins at higher levels than industry peers.

With the benefit of new cement capacity of 34.05MT, we expect sales volumes

to grow to 14.5MT on the back of stronger demand in regional operations;

this is in addition to the newly commissioned Senegal plant which began

operation December 2015. We anticipate improvement in capacity utilisation

to reach 80% on the back of expected improvement in power supply due to

expected energy mix across its Nigeria plants. Further, we expect realisations

to improve progressively due to limited capacity addition coming on stream in

Nigeria. In our view, the ban of cement importation in Cameroon is

favourable to the company. Hence, we expect the company to take advantage

of this initiative to drive sales volume with aggressive market penetration and

consolidation. With improved utilisations, we expect EBITDA/tonne to

improve to $34.28/tonne from the current level. After witnessing a declined

post-tax profit, mainly due to higher interest cost on debt of expansion and

higher tax, we expect the company to report a higher profit by FY’15.

However, rise in energy cost inflation and end of tax-exemptions will pressure

margins and profitability across the board.

On the multiples front, the company currently trades at 18.3x FY’15 P/E,

which is a sizeable 74% premium to the domestic peer average of 11.02x. On

an EV/tonne basis, the stock is trading at $397.41/tonne (on capacity of

34.05MT), which is relatively high in our view with much improvement

needed. From valuation perspective, we use a blend of DCF, EV/tonne and

peer multiple comparisons to value the company’s stock. However, we

retained our DCF valuation approach but adjusted the way we compute our

terminal value in place of using absolute terminal growth. Hence, given our

valuation, we believe the stock is fully priced at current level. Hence, we

maintain our HOLD stance on the stock and revise our target price

downwards to ₦177.97 per share. (i.e. valuing Dangote Cement stock at

13.82x FY’15E EV/EBITDA and $418.59 EV/tonne on combined capacity

of 34.05MT.

“ We maintain our

HOLD rating on the stock and revise our target price downwards

to ₦177.97 per share. (i.e. valuing Dangcem at 13.82x FY’15E EV/EBITDA and $418.59 EV/tonne on combined capacity of 34.05MT.. ,,




Fig.20: Valuation metrics

Capital structure (Equity) 73.38%

Capital structure (Debt) 26.62%

Forecast period 5year

Beta (2 years ) 1.21

Long term growth rate 4.00%

Risk free rate 15.80%

Risk premium 2.20%

Tax rate 13%

WACC 15.40%

Outstanding shares (Million) 17,040

Fig.21: Sensitivity analysis of enterprise value to changes in EV/EBITDA multiple and WACC

(₦’billion)

Fig.22: Sensitivity analysis of enterprise value to changes in growth rate and WACC (₦’billion)

Terminal perpetual growth rates

2.0% 2.5% 3.0% 3.5% 4.0%

Discount 13.50% 3,157,517 3,260,087 3,372,427 3,496,000 3,632,580

Discount 14.50% 2,884,806 2,968,325 3,059,106 3,158,140 3,266,605

Discount 15.00% 2,764,378 2,840,140 2,922,215 3,011,428 3,108,751

Discount 16.50% 2,453,592 2,511,175 2,573,024 2,639,630 2,711,565

WACC 15.40% 2,674,553 2,744,790 2,820,691 2,902,970 2,992,466

Fig.23: DCF Valuation method

FY2015E

FY2016F

FY2017F

FY2018F

FY2019F

EBIT(₦’mn) 197,660 207,745 213,977 226,987 243,010

Operating FCF 164,370 345,239 369,605 390,595 430,652 Present Value of Op FCF 153,009 278,490 258,358 236,594 226,046 EV 3,620,082

Equity Value 3,397,946

Price/Share ₦199.41

20.0

30.0

40.0

50.0

60.0

70.0

80.0

90.0

100.0

110.0

10-Apr-14 10-Jun-14 10-Aug-14 10-Oct-14 10-Dec-14 10-Feb-15 10-Apr-15

CCNN DANGCEM WAPCO ASHAKACEM

EV/EBITDA multiples

11x 12x 13x 14x 15x

Discount 13.50% 2,548,781 2,677,797 2,806,813 2,935,830 3,064,846

Discount 14.50% 2,457,464 2,580,943 2,704,423 2,827,903 2,951,383

Discount 15.00% 2,413,442 2,534,261 2,655,080 2,775,899 2,896,717

Discount 16.50% 2,287,558 2,400,796 2,514,035 2,627,273 2,740,512

WACC 15.40% 2,378,967 2,497,705 2,616,444 2,735,182 2,853,920

Fig. 19: Dangcem vs. industry peers, 52 –wk price movement (rebased)





Fig.24: Sensitivity analysis of target price to changes in EV/EBITDA multiple and WACC

EV/EBITDA multiples

11x 12x 13x 14x 15x

Discount 13.50% 136.54 144.11 151.68 159.25 166.83

Discount 14.50% 131.18 138.43 145.67 152.92 160.17

Discount 15.00% 128.60 135.69 142.78 149.87 156.96

Discount 16.50% 121.21 127.86 134.50 141.15 147.79

WACC 15.40% 126.57 133.54 140.51 147.48 154.45

Fig.25: Sensitivity analysis of target price to changes in perpetual growth and WACC

Terminal perpetual growth rates

2.0% 2.5% 3.0% 3.5% 4.0%

Discount 13.50% 172.26 178.28 184.88 192.13 200.14

Discount 14.50% 156.26 161.16 166.49 172.30 178.67

Discount 15.00% 149.19 153.64 158.46 163.69 169.40

Discount 16.50% 130.95 134.33 137.96 141.87 146.09

WACC 15.40% 143.92 148.04 152.50 157.33 162.58

Fig26; Comparable valuation method Company Country P/B

(x) P/S (x)

EV/ EBITDA

(x)

P/E (x)

ULTRATECH USA 4.78 3.83 18.06 37.36

AMBUJA CEMENTS Indian 3.75 3.8 17.7 22.61

ANHUI CONCH China 2.01 2.2 7.37 12.2

LAFARGE AFRICA NIGERIA 1.46 1.36 5.06 8.12

HOLCIM Switzerland 1.4 1.29 9.88 19.05

HEIDELBERGCEMENT Germany 1.08 1.13 7.61 21.5

ITALCEMENTI Italy 0.82 0.44 8.66 28.07

Average multiples

Dangcem Nigeria 5.01 7.83 14.87 19.23

Prices

High 37.36

Low 8.12

Mean 21.27

Median 21.50

Harmonic mean 16.43

Illiquidity discount 0.00

Adopted P/E 18.30

Dangcem

Dangcem -P/E, on current Price 19.23

Forward - P/E on current price 18.43

Projected 2015 EPS 9.76

Implied Price Per Share 178.72




Fig. 27: Statement of Profit or Loss, N’mn

FY2014 FY2015E FY2016F FY2017F

Turnover 391,639 403,388 415,490 427,955

Change %

3.00% 3.00% 3.00%

Cost of Sales (143,058) (141,186) (145,421) (149,784)

Change %

-1.31% 3.00% 3.00%

Gross Profit 248,581 262,202 270,068 278,170

Change %

5.48% 3.00% 3.00%

SG&A (65,088) (68,576) (66,478) (68,473)

Change %

5.36% -3.06% 3.00%

EBITDA 219,759 229,931 240,984 252,493

Change %

4.63% 4.81% 4.78%

Core operating Profit 183,493 193,626 203,590 209,698

Change %

5.52% 5.15% 3.00%

Other Operating Income 3,609 4,034 4,155 4,280

EBIT 187,102 197,660 207,745 213,977

Change %

5.64% 5.10% 3.00%

Profit Before Taxation 184,689 191,249 195,092 194,168

Change %

3.55% 2.01% -0.47%

Income tax expenses (25,187) (24,862) (25,362) (25,242)

Profit After Taxation 159,502 166,387 169,730 168,927

Change % 4.32% 2.01% -0.47%

Source: Company’s annual reports, DLM Research

Fig. 30: DuPont Analysis

FY2014 FY2015E FY2016F FY2017F

Total assets turnover 0.40x 0.39x 0.40x 0.41x

Net income margin 52.10% 46.53% 48.42% 49.45%

Equity multiplier 1.61x 1.47x 1.48x 1.48x

ROCE 33.55% 26.68% 28.66% 30.01%

Fig. 29: Profitability & return

FY2014 FY2015E FY2016F FY2017F

Gross profit margin 63.47% 65% 65% 65%

Operating profit margin 47.77% 49% 50% 50%

Net profit margin 40.73% 41.25% 40.85% 39.47%

ROCE 24.92% 23.65% 24.78% 25.35%

ROE 26.05% 23.94% 24.46% 24.11%

ROA 16.20% 16.27% 16.49% 16.27%


Fig. 31: Efficiency ratios

FY2014 FY2015E FY2016F FY2017F

Fixed assets turnover 0.52x 0.54x 0.55x 0.57x

Current assets turnover 2.86x 2.42x 2.46x 2.44x

Total assets turnover 0.40x 0.39x 0.40x 0.41x

Inventory turnover 2.03x 2.06x 5.45x 5.45x

Receivables turnover 25.04x 26.07x 30.42x 30.42x

Payables turnover 1.42x 1.40x 1.40x 1.40x

Days inventory outstanding 108.91 67 67 67

Days collection outstanding 14 14 12 12

Days payable outstanding 257 260 260 260

Operating cycle (days) 0.00 0.00 0.00 0.00


Fig. 32: Liquidity ratios

FY2014 FY2015E FY2016F FY2017F

Working capital (N’mn) (96.70) (20.43) (21.48) (19.43)

Current ratio 0.59 0.89 0.89 0.90

Quick ratio 0.40 0.75 0.75 0.76

Cash ratio 0.09 0.32 0.33 0.33


Fig. 33: Long-term solvency & stability ratios

FY2014 FY2015E FY2016F FY2017F

Gearing 0.00% 0.00% 0.00% 0.00%

Equity multiplier 1.61x 1.47x 1.48x 1.48x

Total debt-to-equity 0.36x 0.25x 0.26x 0.26x

Total debt-to-assets 22% 17% 17% 17%

Proprietary 62% 67.95% 67.41% 67.46%

Interest coverage 0.00x 0.00x 0.00x 0.00x

Cash coverage 0.00x 0.00x 0.00x 0.00x


Fig. 34: Shareholders’ investment ratios

FY2014 FY2015E FY2016F FY2017F

EPS, N 9.36 9.76 9.96 9.91

DPS, N 6.00 7.00 7.00 7.00

Pay-out 64.10% 71.69% 70.28% 70.61%

FCFPS, N 0.00 0.00 0.00 0.00


Fig.28: Statement of Financial Position (N,m)

FY2014 FY2015E FY2016F FY2017F

Non-current assets:

Fixed Assets 747,793 751,465 751,965 752,165

Other non-current assets 99,823 104,881 108,027 111,268

Total noncurrent assets 847,616 856,346 859,992 863,433

Current assets:

Inventories 42,688 25,916 26,694 27,495

Trade Debtors 15,640 15,472 13,660 14,070

Prepayment 58,183 60,508 62,323 64,193

Bank and Cash Balances 20,593 60,508 62,323 64,193

Other current assets - 4,034 4,155 5,135

Total current assets 137,104 166,439 169,156 175,086

Total Assets 984,720 1,022,785 1,029,148 1,038,519

Current Liabilities:

Overdraft 856 856 856 856

Trade payable 100,930 100,571 103,588 106,696

Short term loan 110,640 60,434 60,434 60,434

Other current liabilities 21,371 25,010 25,760 26,533

233,797 186,871 190,638 194,519

Non-current Liabilities

Long term loans 110,640 110,640 115,640 115,640

Other noncurrent Liabilities 27,944 30,254 29,084 27,817

138,584 140,894 144,724 143,457

Total Liabilities 372,381 327,765 335,363 337,976

Shareholders’ equity 612,339 695,020 693,785 700,544 Source: Company’s annual reports, DLM Research




Equity research methodology employed in this report

Views documented in this equity research report stem from conclusions reached through the use of multiple valuation

methodologies, industry-wide knowledge, company specific information and our near to medium term expectations of industry

and company performance, as well as market outlook. Our forecasts are based on a combination of top down and bottom up

analysis, alongside historical trends in industry and company financials. Where appropriate, we factored in available forecasts and

business direction provided by company management. This equity research report qualifies as an initiation research report on the

company whose stock has been analysed, hence the level and depth of details documented herein. Further updates on this

company, or its stock, or both, will be communicated to investors via brief research notes or earnings-flash emails, as occasion

demands.

Our recommendation is slightly biased towards value investing. Therefore, our investment rank gauge—a customized scale we

use to judge how well a firm under coverage has performed—is determined using major value parameters as well as relevant

ratios and multiples computed with figures from the company’s most recent financials. The investment rank or grade given to a

company is an alphabet which falls in the set {A+, A, B, C+, C, D, E, F}, where

• Grade A+ means the company has done excellently well on all fronts that form the basis of our consideration, and has a

strongly positive performance outlook.

• Grade A means the company’s performance is of high quality, but can be made better. Outlook for the company is positive.

• Grade B means the company performed marginally above average, at least relative to its peers, but faltered on some fronts.

Outlook is weakly positive.

• Grade C+ means the company’s performance is exactly average; outlook is neither positive nor negative.

• Grades C and D indicate that dwindling performance is the company’s fate at the current time. Outlook for the company is

mildly negative.

• Grades E and F mean the company is headed for towards jeopardy, which might impair its ability to continue as a going

concern. Outlook for the company in this case is alarmingly negative.

The variables used to arrive at the company’s investment rank cover a wide range of measures which characterize liquidity,

operational efficiency, profitability, profitability margins, growth, economic profitability, gearing, relative valuation ratios, capital

structure and management performance. Our investment recommendation is underpinned by the upside or downside potential

of a stock under coverage. This potential is estimated by comparing the stock’s current market price to its price target and fair

value, on a percentage increase or decrease basis as summarized below:

Deviation from current price Recommendation

>30% STRONG BUY

10% to <30% BUY

-10% to < 10% HOLD

<-10% SELL

Source: Company Financials, DLM Research

In our analysis, we distinguish between fair value and price target. Fair value is our opinion of the actual fundamental worth of a

stock, irrespective of what the market thinks of the stock or what investors are willing to pay for it. Value investors purchase stocks

way below their fair values, while income investors might purchase stocks at their fair values at the very maximum.

Price target, on the other hand, is the estimated price we opine the stock will trade in the near to medium term. It is the price that, if

realized, could result in the best investment returns, given prevailing market conditions. It gives an idea of the price other investors

might be willing to pay for a stock regardless of its actual worth. We employ fair value, price target or both to determine a stock’s

upside or downside potential.

A BUY recommendation directly means what it says; purchase the stock according to your wallet and appetite for risk. A SELL recommendation prompts investors to exit their positions in the stock, as the analyst believes the stock is not worth investors’ time and capital commitment. A HOLD recommendation generally tells investors to do nothing; if you have not bought the stock, do not buy it and if you have bought it, do not sell it.




IMPORTANT DISCLOSURES.

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background information about the issues which are the subject matter of this report. It is given for informational purposes only.

Each analyst hereby certifies that with respect to the issues discussed herein, all the views expressed in this document are his or her

own and reflect his or her personal views about any and all of such matters. These views are not necessarily held or shared by Dunn

Loren Merrifield Limited or any of its affiliate companies (―DL Merrifield‖). The analyst(s) views herein are expressed in good faith

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Dangote Cement Plc -2

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