Dangote Cement PLC

Dangote Cement Plc
Financial charges and tax further

drawback to profit
Investment Summary;
We update our share recommendation for Dangote Cement (Dangcem)
Alex Ibhade
aibhade@dunnlorenmerrifield.com
Price:
- Current
- Target
Recommendation:
N180.00*
N177.97
HOLD
* As at Monday, April 15, 2015
following the release of FY14 performance numbers and hereby maintain

a cautious outlook on the companys stock. The companys FY14
Fig. 2: Stock data
numbers came in below our estimates as low realizations supported by
FYE
Price Movt: 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 (Nmn)
17,040
Market Cap. (Nmn)
3,067,291 ($18,258mn)
EBITDA/tonne may not be forthcoming. In absolute terms, 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 companys 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
FY2013
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, FY14 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
FY15E/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% premium 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
4Q2014
3Q2014
4Q2013
Q/q
Y/y
Revenue (Nmn)
81,424
101,306
90,520
-19.63%
-10.05%
Operating profit (Nmn)
24,646
50,471
45,798
-51.17%
-46.20%
Net profit (Nmn)
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.
www.dunnlorenmerrifield.com
Bloomberg: < DLMN> GO
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 premium 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 premium

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
,,
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
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 Cements

three plants with a combined estimated production capacity of ~34.05mmt
holds c.50% of the domestic market. This is in addition to the companys
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
DLM RESEARCH
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 groups 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 groups 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 groups revenue was impacted by
weak performance noted in the last quarter (4Q14) 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 companys 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, (FY13:4.0mt) with a
capacity utilisation rate of ~65% and average gas utilisation rate of ~89%.
The companys 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 Ghanaa 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
DLM RESEARCH

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

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
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
DLM RESEARCH

However, expected increase in demand in 1H15 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 companys 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 companys 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
companys 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
April 15, 2015
DLM RESEARCH

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

companys 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% (FY13:~44.20%)
of the companys 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 companys usage of alternative fuel is expected to rise in the

year ahead. Lending credence to this is the companys $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, (FY13:255.70bn) which allowed for maintained gross
margins of 63.47%%, albeit below 66.21% recorded in 2013. Although,
FY14 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
April 15, 2015
DLM RESEARCH
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%

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
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% (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
administrative charges to 27.66billion, (FY13:25.99bn) 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, (FY13:195.88bn), 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
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,
(FY13:25.99bn)
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
,,
DLM RESEARCH

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
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 companys loans are dollar denominated, we
anticipate a further pressure on the firms 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, (FY13: 1.72bn), a contraction of 3.2% y/y was noted in
pre-tax profit to 184,69billion, (FY13: 190.76bn) with a corresponding
decrease in pre-tax profit margin to 47.16%, (FY13: 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, (FY13: 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%, (FY13:52.10%).
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
April 15, 2015
DLM RESEARCH

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
Growth in assets and shareholders fund accompanied by increasing

financial leverage. For the FY14, the companys total assets increased by
16.78%/y to 984.72billion, (FY13: 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, (FY13: 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, (FY13:
70.50 billion), a decline of 70.80%. We believe this was as a direct result of
the companys increase in credit sales, relaxed credit policy and slow pace of
cash collection as indicated by the 52.35%% increased in trade debtor.
The companys total

assets increased by
16.78%/y to
984.72billion,
(FY13:
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%, (FY13:30%). The
companys 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, (FY13: 0.86x) and 1.01x, (FY13: 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
FY13. The weak cash position indicates the companys 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 FY13.
April 15, 2015
DLM RESEARCH

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
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
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.
April 15, 2015
10
DLM RESEARCH

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 FY15E
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 FY15.

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 FY15 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 companys 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 FY15E EV/EBITDA and $418.59 EV/tonne on combined capacity
of 34.05MT.
April 15, 2015
11
DLM RESEARCH

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
Fig.20: Valuation metrics

Capital structure (Equity)
Capital structure (Debt)
Forecast period
Beta (2 years )
Long term growth rate
Risk free rate
Risk premium
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
12
DLM RESEARCH

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
Germany
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
13
DLM RESEARCH

Fig. 27: Statement of Profit or Loss, Nmn
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: Companys annual reports, DLM Research
4.32%
2.01%
-0.47%
Fig. 32: Liquidity ratios
Change %
Change %
Days collection outstanding
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 (Nmn)
Fig.28: Statement of Financial Position (N,m)

FY2014
14
257
0.00
Days payable outstanding

Operating cycle (days)
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
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
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%
April 15, 2015
14
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 gaugea customized scale we
use to judge how well a firm under coverage has performedis determined using major value parameters as well as relevant
ratios and multiples computed with figures from the companys 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 companys 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 companys performance is exactly average; outlook is neither positive nor negative.
Grades C and D indicate that dwindling performance is the companys 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 companys 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 stocks 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 stocks
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
15
DLM RESEARCH

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 affiliate 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
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Elephant House
214 Broad Street,
Lagos, Nigeria
Tel: 234 1 462 2683-4
April 15, 2015
16

Dangote Cement PLC - 2

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Financial charges and tax further

We update our share recommendation for Dangote Cement (Dangcem)

* As at Monday, April 15, 2015

following the release of FY14 performance numbers and hereby maintain

Fig. 2: Stock data

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

Average daily vol./val.

Shares Outstanding (Nmn)

Market Cap. (Nmn)

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

EPS, N- 12months trailing

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 companys financials appears to bear the risk of higher

Source: Bloomberg, NSE, DLM Research

Fig. 3: Key ratios

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

Gross profit margin

Net profit margin

However, FY14 sales volumes contracted by 0.20% to 13.97mmt despite

the pricing strategy initiated to drive volumes. Given its capacity

Source: Company annual report, NSE, DLM Research

Source: Company annual report, DLM Research

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

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

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

Operating profit (Nmn)

Net profit (Nmn)

Source: Company annual report, Bloomberg, DLM Research

April 15, 2015

Source: NSE, DLM

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

Equity Research | Dangote Cement Plc

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

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

1Q'13 its peers at $397.41/tonne

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

Still the largest cement producer in Africa. In Nigeria, Dangote Cements

April 15, 2015

Equity Research | Dangote Cement Plc

market sales volumes

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

April 15, 2015

Equity Research | Dangote Cement Plc

Fig. 6: Revenue contribution by business (%)

South & East Africa

Source: Company annual report NSE, DLM Research

Source: Company annual report, NSE, DLM Research

Source: Company annual report, NSE, DLM Research

April 15, 2015

Equity Research | Dangote Cement Plc

The companys on-

going greenfield project

Source: Company annual report, NSE, DLM Research

April 15, 2015

Equity Research | Dangote Cement Plc

Source: Company annual report, NSE, DLM Research

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

backdrop, the companys usage of alternative fuel is expected to rise in the