Nigeria: Dangote Cement raised to “buy” by Chapel Hill Denham on earnings growth prospects

By David Whitehouse
Posted on Friday, 25 March 2022 12:13

Labourers stand on top of a trailer transporting cement along Ajah-Lagos expressway in Lagos
A trailer transports cement along the Ajah-Lagos expressway. REUTERS/Akintunde Akinleye

Dangote Cement shares have been upgraded to “buy” from “hold” by Chapel Hill Denham on prospects for continued earnings growth and hopes for a bigger share buyback.

Full-year 2022 earnings per share are forecast to increase by 5.9% to 22.44 naira, according to a research note from Chapel Hill Denham on March 25. The firm raises its share-price target to 308.68 naira, versus the current market price of 273.50.

Private-sector cement consumption in Nigeria has prospects for long-term growth, with Chapel Hill Denham forecasting that the government, directly and indirectly, still accounts for about 60% of demand. The company is still a long way from making full use of its installed Nigerian capacity, with the utilisation rate remaining below 60%.

Management says the strategy is to constantly maintain overcapacity, so that it can take opportunities as they arise. It plans capital expenditure of $500m over the next three to five years.

  • That will eat into profitability: Chapel Hill Denham predicts that that capex intensity ratio, the  amount of capital spent in relation to revenue, will average 14% through 2024.

Such a bold strategy contrasts with that adopted by Lafarge, which has prioritised “debottlenecking” existing capacity rather than investing in new plants. Chapel Hill Denham has previously argued that Lafarge would struggle to fund a new cement plant without recourse to capital markets.

Dangote Cement, by contrast, still has scope to increase debt, with a net debt to EBITDA (earnings before interest, taxes, depreciation and amortisation) ratio of 0.35 times. That means it can borrow to expand capacity in Nigeria and Senegal, the research says.

Downside Risks

According to Khalil Woli, an analyst at Cardinal Stone in Lagos, the Nigerian cement sector is likely to see volume growth of 6% this year, helped by real-estate spending and government tax credits for companies which contribute to road building. Woli rates Dangote Cement as a hold, and cites the risk of further naira weakness and the conflict in its Ethiopian market as downside risks.

Chapel Hill Denham argues that the risks are justified for investors at the current valuation. The stock is trading on a forecast 2022 P/E ratio of 12.2 times and a ratio of enterprise value to EBITDA of 7.6 times. Those compare with respective forecast ratios of 21.4 and 7.6 respectively for African peers.

Another tranche of the company’s share buyback could act as a catalyst for the stock.

  • The first two tranches of the buyback programme have seen about 1% of the shares repurchased, compared with the initial plan to buy back up to 10%.
  • “We think management may need to consider hitting the market for a tranche III buyback,” Chapel Hill Denham says.

The company’s African diversification also supports the investment case.

  • The rest of Africa will deliver volume growth of 2.1% this year, with most of the support coming from increased production in Senegal, Ethiopia and Zambia, Chapel Hill Denham says.

Bottom Line

Dangote is betting that loading up on capacity is the key to dominating the Nigerian market even if short-term growth disappoints.

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