Dangote Cement Plc -2 h1135

Dangote Cement Plc Financial charges and tax further drawback to profit Investment Summary;

We update our share recommendation for Dangote Cement (Dangcem)

Alex Ibhade [email protected] Price: - Current - Target Recommendation:

N180.00* N177.97 HOLD

* As at Monday, April 15, 2015

following the release of FY’14 performance numbers and hereby maintain a cautious outlook on the company’s stock. The company’s FY’14

Fig. 2: Stock data

numbers came in below our estimates as low realizations ed by

FYE Price Mov’t: YtD / 52wk

December -10%/-23.40%

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

52-week range

₦141.90- ₦250

the company has challenges in implementing pricing strategies, driven by higher supplies and inventory build-up. As such, an improvement in

Average daily vol./val.

1,292,592/N219.74m

Shares Outstanding (N’mn)

17,040

Market Cap. (N’mn)

3,067,291 ($18,258mn)

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

EPS, N- 12months trailing

9.36

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

DPS, N- FY2013

6.00

FCF, N- FY2013

0.00

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

Source: Bloomberg, NSE, DLM Research

Fig. 3: Key ratios

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

FY’ 2014

FY’2013

Gross profit margin

63.47%

66.21%

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

Net profit margin

40.73%

52.10%

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

Equity multiplier

1.61x

1.50x

Asset turnover

0.40x

0.46x

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

Source: Company annual report, NSE, DLM Research

Fig. 4: Valuations P/Sales P/E PEG EV/Sales P/B ROE ROA Div. Yield

FY2014

FY2015E

FY2016F

FY2017F

7.83x 19.28x 0.00 8.34x 5.01x 26.05% 16.20% 3.33%

7.60x 18.43x 0.00 7.88x 4.41x 23.94% 16.27% 3.89%

7.38x 18.07x 0.00 7.63x 4.42x 24.46% 16.49% 3.89%

7.17x 18.16x 0.00 7.43x 4.38x 24.11% 16.27% 3.89%

Source: Company annual report, DLM Research

peers. The company is trading on a 2015E EV/tonne of $418.59/tonne on the expanded capacity which is at ~64% to average replacement cost of

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

$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

April 15, 2015

Source: NSE, DLM

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

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DLM RESEARCH

Equity Research | Dangote Cement Plc sales revenue Still the most expensive cement company amongst its peers. Cement 120 stocks appear to be off investors’ preference in the recent times, as

overcapacity in the sector coupled with slow demand is expected to keep 100

profit margins of all players under pressure. Given the company current production80capacity, EV/tonne remained high at $397.41 on current capacity – which implies high replacement cost. Although large cement companies are 60 expected to have high EV/tonne given their size, and integrated nature of 40

business. The EV/tonne is used to calculate how much of a is placed on the 20 company relative to building an identical new one, (replacement cost). On the basis of EV/tonne, the company is the most expensive cement 0

1Q'13 its peers at $397.41/tonne 4Q'13 1Q'14 for FY2014. This 4Q'14 brings to the company amongst

fore questions bothering on whether the company could trade at a by virtue of advantages such as the capacity it holds, its expansion or

“On the basis of

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

,,

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 Tonnes

EV(₦'b) EV/Tonnes

Mkt CAP/Tonnes Tonnes Market Cap (₦'b) MKT CAP/Tonnes

EBITDA/Tonnes Tonnes EBITDA (₦'b) EBITDA/Tonnes

2013-₦

$

2014-₦

$

2015E

$

20.30

20.30

34.05

34.05

34.05

34.05

1,566,871

7,953.66

2,665,783

13,531.89

2,829,109

14,360.96

77,186

391.81

78,290

397.41

83,087

421.76

2013-₦

$

2014-₦

$

2015E

$

20.30

20.30

34.05

34.05

34.05

34.05

1,448,400

7,352.28

2,556,000

12,974.62

2,607,120

13,234.11

71,350

362.18

75,066

381.05

76,567

388.67

2015E

$

2013-₦

$

2014-₦

$

20.30

20.30

34.05

34.05

34.05

34.05

227,714

1,155.91

219,759

1,115.53

231,694

1,176.11

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.

April 15, 2015

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Equity Research | Dangote Cement Plc

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

“ 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

,,

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.

April 15, 2015

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Equity Research | Dangote Cement Plc Revenue/Tonnes Tonnes Revenue (₦'b) Revenue/Tonnes

$

2013-₦

$

2014-₦

2015E

$

20.30

20.30

34.05

34.05

34.05

34.05

386,177

1,960.29

391,639

1,988.02

399,472

2,027.78

19,023

96.57

11,502

58.39

11,732

59.55

Fig. 6: Revenue contribution by business (%) 3.55% 1.58%

Nigeria West & central Africa

94.87%

South & East Africa

Source: Company annual report NSE, DLM Research Fig. 7: Quarterly sales revenue (₦’billion) 120 100 80 60 40 20 0

1Q'13

4Q'13

1Q'14

4Q'14

Source: Company annual report, NSE, DLM Research Fig. 8: Annual sales revenue (₦’billion)- 2011- 2015E

450 400 350 300 250 200 150 100 50 FY'11

FY'12

FY'13

FY'14

FY'15E

Source: Company annual report, NSE, DLM Research

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.

April 15, 2015

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Equity Research | Dangote Cement Plc 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 overcapacity. Hence, the company planned to exports to Mali and Gambia where

“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.

demand for cement are both high through the rail. Given the over-capacity of the market and the marketing strength of the domestic palyers, breakeven for the Senegal plant might take a little longer. However, the company’s operational advantage lies on its ability to build modern, energyefficient factories that will provide strong competition for many of Africa's ageing cement plants. Fig. 9: production capacity & annual cement sales (million)- 2010- 2014

Total capacity

40

Cement sale

35 30

43.63%

25 20 15 10 5 0 FY'10

FY'11

FY'12

FY'13

FY'14

Source: Company annual report, NSE, DLM Research

April 15, 2015

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Equity Research | Dangote Cement Plc Fig. 10: Capital expenditures (₦’billion)- 2010- 2014 250 200

17.56%

150 100 50 0 FY'10

FY'11

FY'12

FY'13

FY'14

Source: Company annual report, NSE, DLM Research

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 ed 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

“ A mitigating factor to power costs is notable Coal facilities operational at Ibese one and two and Obajana three.

,,

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. Fig. 11: Cost of sale (₦’billion)-2011-2014 160.0 140.0 120.0 100.0 80.0 60.0 40.0 20.0 FY'11

FY'12

FY'13

FY'14

FY'15E

Source: Company annual report, NSE, DLM Research

April 15, 2015

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Equity Research | Dangote Cement Plc

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

COS/revenue

Gross margin

100% 80%

59.00%

60.36%

66.21%

63.47%

65.00%

41.00%

39.64%

33.79%

36.53%

35.00%

FY'11

FY'12

FY'13

FY'14

FY'15E

60% 40% 20% 0%

Source: Company annual report, NSE, DLM Research Fig. 13: Revenue, COS and gross profits growth trend analysis (%) -2011-2014 Revenue

100.00

COS

Gross profit

90.00 80.00 70.00 60.00 50.00 40.00 FY'11

FY'12

FY'13

FY'14

FY'15E

Source: Company annual report, NSE, DLM Research

Rising operating expenses causes a drag on operating profit. For FY2014, the company recorded a 5.8% y/y increase in operating expenses (istrative, 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% (20112014) 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 istrative 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.

April 15, 2015

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“ The growth in

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

,,

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Equity Research | Dangote Cement Plc Fig. 14: Operating margins, operating exp/revenue and total cost/revenue ratios (%) Revenue

Operating margin

Operating exp/revenue

Total cost/revenue

450 400 350 300 250 200 150 100 50 -

60% 50%

40% 30% 20% 10% 0% FY'11

FY'12

FY'13

FY'14

FY'15E

Source: Company annual report, NSE, DLM Research

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 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

“ 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.

,,

to 40.73%, (FY’13:52.10%). Fig. 15: Pre-tax profit (₦’billion) and margins (%)-2011-2014 PBT

PBT margins

230 210 190 170 150 130 110 90 70 50

51% 50%

49% 48% 47% 46% 45% 44% 43% FY'11

FY'12

FY'13

FY'14

FY'15E

Source: Company annual report, NSE, DLM Research

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Equity Research | Dangote Cement Plc Fig. 16: Profit after tax (₦’billion) and margins (%)-2011-2014 PAT

250

PAT margins

60% 50%

200

40%

150

30% 100

20%

50

10%

-

0% FY'11

FY'12

FY'13

FY'14

FY'15E

Source: Company annual report, NSE, DLM Research

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.

“The company’s total assets increased by 16.78%/y to ₦984.72billion, (FY’13: ₦843.20bn), predominantly driven by investment in noncurrent assets on the back of ₦217billion investment across the Africa continent

,,

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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Equity Research | Dangote Cement Plc Industry Debt (short and long term debt ₦'billion) Company Debt CCNN 1.28 LAFARGE 14.65 DANGOTE 222.14 Total Industry debt 238.07 Industry assets (₦'billion) Company CCNN LAFARGE DANGOTE Total Industry debt

% of industry 0.54% 6.15% 93.31% 100.00%

Assets 15.78 305.88 984.72 1,306.38

% of industry 1.21% 23.41% 75.38% 100.00%

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

1,200

Fixed assets

1,000 800 600 400 200 FY'11

FY'12

FY'13

FY'14

Source: Company annual report, NSE, DLM Research

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

Proprietary raio

D/E

Debt/EBIT

Debt/EBITDA

1.40 1.20 1.00 0.80 0.60 0.40 0.20 0.00 FY'11

FY'12

FY'13

FY'14

Source: Company annual report, NSE, DLM Research

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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Equity Research | Dangote Cement Plc 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

“ 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..

,,

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% 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.

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Equity Research | Dangote Cement Plc Fig. 19: Dangcem vs. industry peers, 52 –wk price movement (rebased)

110.0

CCNN

DANGCEM

WAPCO

ASHAKACEM

100.0 90.0 80.0 70.0 60.0 50.0 40.0 30.0 20.0 10-Apr-14

10-Jun-14

10-Aug-14

10-Oct-14

10-Dec-14

10-Feb-15

10-Apr-15

Source: Company annual report, NSE, DLM Research

Fig.20: Valuation metrics Capital structure (Equity) Capital structure (Debt) Forecast period Beta (2 years ) Long term growth rate Risk free rate Risk Tax rate WACC Outstanding shares (Million)

73.38% 26.62% 5year 1.21 4.00% 15.80% 2.20% 13% 15.40% 17,040

Fig.21: Sensitivity analysis of enterprise value to changes in EV/EBITDA multiple and WACC (₦’billion)

EV/EBITDA multiples 11x

12x

13x

14x

15x

Discount Discount Discount

13.50% 14.50% 15.00%

2,548,781 2,457,464 2,413,442

2,677,797 2,580,943 2,534,261

2,806,813 2,704,423 2,655,080

2,935,830 2,827,903 2,775,899

3,064,846 2,951,383 2,896,717

Discount WACC

16.50% 15.40%

2,287,558 2,378,967

2,400,796 2,497,705

2,514,035 2,616,444

2,627,273 2,735,182

2,740,512 2,853,920

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

Terminal perpetual growth rates Discount Discount Discount Discount WACC

13.50% 14.50% 15.00% 16.50% 15.40%

Fig.23: DCF Valuation method EBIT(₦’mn) Operating FCF Present Value of Op FCF EV Equity Value Price/Share

April 15, 2015

2.0% 3,157,517 2,884,806 2,764,378 2,453,592 2,674,553

FY2015E 197,660 164,370 153,009 3,620,082 3,397,946

2.5% 3,260,087 2,968,325 2,840,140 2,511,175 2,744,790

FY2016F 207,745 345,239 278,490

3.0% 3,372,427 3,059,106 2,922,215 2,573,024 2,820,691

FY2017F 213,977 369,605 258,358

3.5% 3,496,000 3,158,140 3,011,428 2,639,630 2,902,970

FY2018F 226,987 390,595 236,594

4.0% 3,632,580 3,266,605 3,108,751 2,711,565 2,992,466

FY2019F 243,010 430,652 226,046

₦199.41

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Equity Research | Dangote Cement Plc Fig.24: Sensitivity analysis of target price to changes in EV/EBITDA multiple and WACC

Discount Discount Discount Discount WACC

13.50% 14.50% 15.00% 16.50% 15.40%

EV/EBITDA multiples 11x 12x 136.54 144.11 131.18 138.43 128.60 135.69 121.21 127.86 126.57 133.54

13x 151.68 145.67 142.78 134.50 140.51

14x 159.25 152.92 149.87 141.15 147.48

15x 166.83 160.17 156.96 147.79 154.45

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

Discount Discount Discount Discount WACC

Terminal perpetual growth rates 2.0% 2.5% 13.50% 172.26 178.28 14.50% 156.26 161.16 15.00% 149.19 153.64 16.50% 130.95 134.33 15.40% 143.92 148.04

3.0% 184.88 166.49 158.46 137.96 152.50

3.5% 192.13 172.30 163.69 141.87 157.33

4.0% 200.14 178.67 169.40 146.09 162.58

P/B (x)

P/S (x)

P/E (x)

USA Indian China NIGERIA Switzerland Italy

4.78 3.75 2.01 1.46 1.4 1.08 0.82

3.83 3.8 2.2 1.36 1.29 1.13 0.44

EV/ EBITDA (x) 18.06 17.7 7.37 5.06 9.88 7.61 8.66

Nigeria

5.01

7.83

14.87

19.23

Fig26; Comparable valuation method Company Country ULTRATECH AMBUJA CEMENTS ANHUI CONCH LAFARGE AFRICA HOLCIM HEIDELBERGCEMENT ITALCEMENTI Average multiples Dangcem Prices

37.36 22.61 12.2 8.12 19.05 21.5 28.07

High Low Mean Median Harmonic mean Illiquidity discount Adopted P/E Dangcem Dangcem -P/E, on current Price Forward - P/E on current price Projected 2015 EPS Implied Price Per Share

April 15, 2015

37.36 8.12 21.27 21.50 16.43 0.00 18.30 19.23 18.43 9.76 178.72

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Equity Research | Dangote Cement Plc Fig. 27: Statement of Profit or Loss, N’mn FY2014 Turnover 391,639 Change %

3.00%

3.00%

(145,421) 3.00% 270,068 3.00%

(149,784) 3.00% 278,170 3.00%

(68,576)

(66,478)

(68,473)

5.36%

-3.06%

3.00%

219,759

229,931 4.63%

240,984 4.81%

252,493 4.78%

183,493

193,626 5.52%

203,590 5.15%

209,698 3.00%

Change % Gross Profit Change %

248,581

SG&A

(65,088)

Change % Change %

Other Operating Income EBIT

FY2017F 427,955

3.00%

(143,058)

Core operating Profit Change %

FY2016F 415,490

(141,186) -1.31% 262,202 5.48%

Cost of Sales

EBITDA

Fig. 30: DuPont Analysis

FY2015E 403,388

Total assets turnover

FY2014 0.40x

FY2015E 0.39x

FY2016F 0.40x

FY2017F 0.41x

Net income margin

52.10%

46.53%

48.42%

49.45%

Equity multiplier ROCE

1.61x 33.55%

1.47x 26.68%

1.48x 28.66%

1.48x 30.01%

FY2015E 0.54x

FY2016F 0.55x

FY2017F 0.57x

Fig. 31: Efficiency ratios Fixed assets turnover

FY2014 0.52x

Current assets turnover Total assets turnover

2.86x 0.40x

2.42x 0.39x

2.46x 0.40x

2.44x 0.41x

Inventory turnover Receivables turnover

2.03x 25.04x

2.06x 26.07x

5.45x 30.42x

5.45x 30.42x

Payables turnover Days inventory outstanding

1.42x 108.91

1.40x 67

1.40x 67

1.40x 67

3,609

4,034

4,155

4,280

187,102

197,660 5.64%

207,745 5.10%

213,977 3.00%

Profit Before Taxation Change %

184,689

191,249 3.55%

195,092 2.01%

194,168 -0.47%

Income tax expenses Profit After Taxation

(25,187) 159,502

(24,862) 166,387

(25,362) 169,730

(25,242) 168,927

Source: Company’s annual reports, DLM Research

4.32%

2.01%

-0.47%

Fig. 32: Liquidity ratios

Change %

Change %

Days collection outstanding

Source: Company’s annual reports, DLM Research

Non-current assets: Fixed Assets

FY2015E

FY2016F

FY2017F

747,793 99,823

751,465 104,881

751,965 108,027

752,165 111,268

Total noncurrent assets Current assets:

847,616

856,346

859,992

863,433

Inventories Trade Debtors

42,688 15,640

25,916 15,472

26,694 13,660

27,495 14,070

Prepayment Bank and Cash Balances

58,183

60,508

62,323

64,193

Other current assets

20,593 -

60,508 4,034

62,323 4,155

64,193 5,135

Total current assets Total Assets

137,104 984,720

166,439 1,022,785

169,156 1,029,148

175,086 1,038,519

Other non-current assets

Current Liabilities: Overdraft

14

12

12

260 0.00

260 0.00

260 0.00

FY2014 (96.70)

FY2015E (20.43)

FY2016F (21.48)

FY2017F (19.43)

Current ratio Quick ratio

0.59 0.40

0.89 0.75

0.89 0.75

0.90 0.76

Cash ratio

0.09

0.32

0.33

0.33

Fig. 33: Long-term solvency & stability ratios FY2014 FY2015E

Working capital (N’mn)

Fig.28: Statement of Financial Position (N,m) FY2014

14 257 0.00

Days payable outstanding Operating cycle (days)

Source: Company’s annual reports, DLM Research

FY2016F

FY2017F

0.00%

0.00%

0.00%

0.00%

Equity multiplier Total debt-to-equity

1.61x 0.36x

1.47x 0.25x

1.48x 0.26x

1.48x 0.26x

Total debt-to-assets

Gearing

22%

17%

17%

17%

Proprietary Interest coverage

62% 0.00x

67.95% 0.00x

67.41% 0.00x

67.46% 0.00x

Cash coverage

0.00x

0.00x

0.00x

0.00x

Source: Company’s annual reports, DLM Research

Trade payable

856 100,930

856 100,571

856 103,588

856 106,696

Short term loan Other current liabilities

110,640 21,371

60,434 25,010

60,434 25,760

60,434 26,533

233,797

186,871

190,638

194,519

Long term loans Other noncurrent Liabilities

110,640

110,640

115,640

115,640

27,944 138,584

30,254 140,894

29,084 144,724

27,817 143,457

Total Liabilities

372,381

327,765

335,363

337,976

Shareholders’ equity

612,339

695,020

693,785

700,544

Fig. 34: Shareholders’ investment ratios FY2014

Non-current Liabilities

FY2015E

FY2016F

FY2017F

EPS, N

9.36

9.76

9.96

9.91

DPS, N Pay-out

6.00 64.10%

7.00 71.69%

7.00 70.28%

7.00 70.61%

0.00

0.00

0.00

0.00

FCFPS, N Source: Company’s annual reports, DLM Research

Source: Company’s annual reports, DLM Research

Fig. 29: Profitability & return FY2014

FY2015E

FY2016F

FY2017F

Gross profit margin Operating profit margin

63.47% 47.77%

65% 49%

65% 50%

65% 50%

Net profit margin

40.73%

41.25%

40.85%

39.47%

ROCE ROE

24.92% 26.05%

23.65% 23.94%

24.78% 24.46%

25.35% 24.11%

ROA

16.20%

16.27%

16.49%

16.27%

Source: Company’s annual reports, DLM Research

April 15, 2015

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Equity Research | Dangote Cement Plc

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% 10% to <30% -10% to < 10% <-10%

STRONG BUY BUY HOLD 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.

April 15, 2015

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Equity Research | Dangote Cement Plc IMPORTANT DISCLOSURES.

This research report has been prepared by the analyst(s), whose name(s) appear on the front page of this document, to provide 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 companies (―DL Merrifield‖). The analyst(s) views herein are expressed in good faith and every effort has been made to use reliable comprehensive information but no representation is made as to its accuracy or completeness. The opinions and information contained in this report are subject to change and neither the analysts nor DL Merrifield is under any obligation to notify you or make public any announcement with respect to such change.

This report is produced independently of DL Merrifield and the recommendations (if any), forecasts, opinions, estimates, expectations and views contained herein are entirely those of the analysts. While all reasonable care has been taken to ensure that the fa cts stated herein are accurate and that the recommendations, forecasts, opinions, estimates, expectations and views contained herein are fair and reasonable, none of the analysts, DL Merrifield nor any of its directors, officers or employees has verified the contents hereof and accordingly, none of the analysts, DL Merrifield nor any of its respective directors, officers or employees, shall be in any way responsible for the contents hereof. With the exception of information regarding DL Merrifield, reports prepared by DL Merrifield analysts are based on public information. Facts and views presented in this report have not been reviewed and may not reflect information known to professionals on other DL Merrifield business areas including investment banking. This report does not provide individually tailored investment advice. Reports are prepared without regard to individual financial circumstances and objectives of persons who receive it. The securities discussed in this report may not be suitable for all investors. It is recommended that investors independently evaluate particular investments and strategies. The appropriateness of a particular investment or strategy will depend on an investor’s individual circumstances or objectives. Neither the analyst(s), DL Merrifield, any of its respective directors, officers nor employees accepts any liability whatsoever for any loss howsoever arising from any use of this report or its contents or otherwise arising in connection therewith. Each analyst and/or any person connected with any analyst may have acted upon or used the information herein contained, or the research or analysis on which it is based prior to its publication date. This document may not be relied upon by any of its recipients or any other person in making investment decisions. Each research analyst certifies that no part of his or her compensation was, or will be directly or indirectly related to the specific recommendations (if any), opinions, forecasts, estimates or views in this report. Analysts’’ compensation is based upon activities and services intended to benefit clients of DL Merrifield. As with other employees of DL Merrifield, analysts’ compensation is impacted by the overall profitability of DL Merrifield, which includes revenues from all business areas of DL Merrifield.

DL Merrifield does and seeks to do business with companies/governments covered in its research reports including market making, trading, risk arbitrage and investment banking. As result, investors should be aware that DL Merrifield may have a conflict of interest that could affect the objectivity of this report.

Elephant House 214 Broad Street, Lagos, Nigeria Tel: 234 1 462 2683-4 www.dunnlorenmerrifield.com April 15, 2015

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