9 November 2022

Dangote Cement

Upgrade to Buy

Company Update
Construction Materials.Nigeria
Rat ing: $RECO$Tar get Pr ic e$ISO$$TP$

Higher-than-anticipated pricing outlook, primarily in Nigeria, drives our Buy rating

We cut our 2022-24e EPS for Dangote by 10.6% on average given macro challenges in Nigeria and weak 3Q22 results (EPS
NGN2.30, -54.1% Y-o-Y). We subsequently lower our 2022-24e group volume forecast by 6.6% on average. We also cut our 2022-
24e EBITDA and EBIT forecasts by 7.0% and 9.6% on average, given an escalating cost base (mainly inflationary and FX driven) and
lower our EBITDA and EBIT margins by 490bps and 520bps. We raise our 2022-24e revenue forecasts by 4.0% on higher prices in
Nigeria as it passes through inflation (20.77% in Sept-22). Overall, we are positive on its strong cash generation capacity and decent
2022e DY of 7.7%. The Board approved a new share buyback programme, pending shareholder approval, for early 2023e. The
stock (-6.61% YTD) is trading at 6.2x 2022e EV/EBITDA vs its 2016-21 EV/EBITDA of 9.1x. We upgrade Dangote from Neutral to Buy
on softer trading multiples with a revised TP of NGN292, down marginally from NGN298, implying 26.9% upside.

Prices already at historical levels in Nigeria, is there scope for further increases?
We compute historical high industry prices in Nigeria of NGN63,486/tonne (+18.1% Y-o-Y) in 3Q22, driven by input cost pass
through. Dangote’s prices were NGN64,671/tonne (+17.4% Y-o-Y) in 3Q22. Industry volumes fell 3.3% Y-o-Y to 6.69mt in 3Q22
with Dangote accounting for 61.8% (+10bps Y-o-Y) of market share by demand, on our estimates. We cut our Nigerian volume
forecast by 4.0% on average (2022-24e) to reflect the escalating cost environment amidst uncertainty on the resolution of gas
supply. We keep our industry demand outlook of 30.49mt for 2022e and CAGR of 2.1% (2021-26e), but question how much more
price increases can the market absorb. To this end, management are uncertain, but guide for further increases as inflation persists.

Pan Africa challenges persist, but Tanzania and Ethiopia are resolute
Extended maintenance in Senegal and Congo and supply challenges across Cameroon, Ghana, and Sierra Leone led to lower
volumes of 2.5mt (-7.0% Y-o-Y) in 3Q22. Higher 3Q22 prices (NGN41,233/tonne, +12.0% Y-o-Y) supported revenues. We expect
5% price escalation p.a. over 2022-24e will support its top-line. We forecast a gradual volume recovery driven by the Ethiopian and
Tanzanian markets. Positively, the projects in Ghana and Cote d’Ivoire (c1.85mtpa) are guided to be finished in FY23e.

Moses Njuguna, CFA

+254 203743038 | mnjuguna@efg-hermes.com

Disclosure Appendix at the back of this report contains important disclosures, analyst certifications Page 1 of 9
and the status of non-US analysts
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Data Miner
Investment Thesis Valuation and Risks
Dangote Cement is the largest cement player across Sub Our target price is derived using a 10-year discounted cash flow
Saharan Africa with 51.6mtpa in production capacity across 10 (2022-26e are forecast and 2027-31e is the normalised period),
countries. Nigeria is home to c68% of its total capacity with a risk free rate of 12%, a market risk premium of 7%, a
(35.25mtpa) and its most profitable market (59% average medium-term revenue growth rate of 2%, EBIT margin of
EBITDA margin and accounted for 87% of the group’s EBITDA 30.0% (from 34.0%) over our normalised period, and a terminal
over 2017-21). Dangote is the market leader in Nigeria (63% growth rate of 8%. Key downside risks are increased
market share by demand in 2021). Our Buy rating is mainly competition across its markets, higher cost inflation, risks to
explained by our forecasts of higher average selling prices in demand growth outlook, and macro headwinds in the markets it
Nigeria of cUSD146 over 2022-26e vs USD126/tonne in 2021, operates.
despite the flat volume growth outlook in Nigeria (51%
utilisation rate by 2026e from 53% in 2021). We expect the Pan
African operations will deliver mixed results. We remain cautious
on the company’s exports strategy, as competitors have
successfully implemented clinker exports to grinders since 2012.
In addition, we have concerns over the sector’s expansion drive
in Nigeria amidst low industry utilisation rates (55.0% in 2021).

Dec Year End Dec Year End

In NGNbn, unless otherwise stated 2021a 2022e 2023e 2024e In NGNbn, unless otherwise stated 2021a 2022e 2023e 2024e
Income Statement Per Share Financial Summary

Revenue 1,384 1,632 1,615 1,598 EPS (NGN) 21.2 22.1 21.3 20.1

EBITDA 683 696 675 662 DPS (NGN) 20.0 17.7 17.0 16.1

Net operating profit (EBIT) 582 584 554 531 BVPS (NGN) 56.8 63.5 65.0 67.7

Taxes or zakat (174) (180) (173) (163) Valuation Metrics

Minority interest (3) (4) (3) (3) Price to earnings 10.8x 10.4x 10.8x 11.5x

Net income 361 373 359 339 Price to book value 4.1x 3.6x 3.5x 3.4x
Balance Sheet Price to cash flow 6.6x 6.4x 7.6x 7.7x

Cash and cash equivalents 340 536 447 400 FCF yield 10.5% 9.3% 6.8% 6.8%

Total assets 2,392 2,720 2,748 2,807 Dividend yield 8.7% 7.7% 7.4% 7.0%

Total liabilities 1,408 1,634 1,640 1,656 EV / EBITDA 6.3x 6.2x 6.3x 6.5x

Total equity 984 1,087 1,108 1,151 EV / Invested capital 3.5x 3.4x 3.1x 2.9x

Total net debt (cash) 238 180 273 333 ROAIC 25.5% 22.1% 20.6% 19.2%

Cash Flow Statement ROAE 39.2% 36.6% 33.1% 30.3%

Cash operating profit after taxes 650 516 502 498 KPIs

Change in working capital (61) 89 6 7 Revenue growth (Y-o-Y) 33.8% 18.0% -1.1% -1.0%

CAPEX (186) (245) (242) (240) EBITDA growth (Y-o-Y) 43.5% 1.8% -3.0% -1.9%

Investments 59 29 46 38 Gross profit margin 65.8% 61.6% 61.1% 60.4%

Free cash flow 470 389 312 303 EBITDA margin 49.4% 42.6% 41.8% 41.4%

Net financing (332) (193) (401) (350) Net operating profit (EBIT) margin 42.1% 35.8% 34.3% 33.3%

Change in cash 138 197 (89) (47) Effective tax rate 32.3% 32.3% 32.3% 32.3%

Source: Dangote Cement, EFG Hermes estimates Net Debt (Cash) / Equity 0.2x 0.2x 0.2x 0.3x

Net Debt (Cash) / EBITDA 0.4x 0.3x 0.4x 0.5x

Source: Dangote Cement, EFG Hermes estimates

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Valuation

We use a 10-year DCF valuation with 2022-26e as our forecast period and 2027-31e as our normalised
period using a medium-term growth rate of 2.0%, EBIT margin of 30.0% (from 34.0%), and terminal
growth rate of 8%. We use a discount rate of 14.1% over the 10-year horizon.

Figure 1: DCF valuation

In NGNmn except for per share data

2022e 2023e 2024e 2025e 2026e 2027e 2028e 2029e 2030e 2021e

Taxed EBIT 404,776 380,493 368,236 350,779 338,552 325,800 332,316 338,962 345,741 352,656
Depreciation 111,022 121,111 130,240 138,495 139,991 143,735 146,610 149,542 152,533 155,584
WC 89,413 6,331 6,557 6,870 (709) (11,978) (12,217) (12,462) (12,711) (12,965)
Capex (244,873) (242,214) (239,758) (158,341) (156,574) (159,706) (162,900) (166,158) (169,481) (172,871)
FCF 360,339 265,722 265,275 337,803 321,260 297,851 303,808 309,884 316,082 322,404
PV of FCF 315,966 204,001 178,445 199,102 165,909 134,777 120,453 107,652 96,211 85,986
Terminal
5,680,824
Value (TV)
PV of TV 1,515,092
Total PV of
3,123,357
FCF
Mid-year
1.12
adj.
Enterprise
5,183,813
value
Net
(238,112)
debt/(cash)
Minorities (18,299)
Equity Value 4,927,402
Implied
292
price
Source: Company data, EFG Hermes estimates

Scenario Analysis

As investors may have different perspective of our assumptions, we provide the scenario analysis below:

Figure 2: Terminal growth rate vs EBIT margin Figure 3: Risk free rate vs market risk premium

EBIT margin Market risk premium

20.0% 25.0% 30.0% 35.0% 40.0% 6.0% 6.5% 7.0% 7.5% 8.0%
5.0% 164 195 226 257 288 8.0% 625 563 512 469 433
growth rate

6.5% 10.0%
free Rate

181 217 253 289 325 433 401 374 350 328
Terminal

Risk

8.0% 206 249 292 335 378 12.0% 328 309 292 277 263
9.5% 247 302 357 412 467 14.0% 263 250 239 228 218
11.0% 328 406 484 563 641 16.0% 218 209 201 193 186
Source: Company data, EFG Hermes estimates Source: Company data, EFG Hermes estimates

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Figure 4: Old vs New financials, 2022-24e

In NGNmn expect for per share and price data

2022e 2023e 2024e

Old New % change Old New % change Old New % change
Volumes (mt)
Group 30.1 28.4 -5.6% 31.2 29.2 -6.5% 32.4 29.9 -7.6%
Nigeria 18.7 18.3 -2.2% 19.3 18.5 -4.0% 19.9 18.7 -5.9%
Pan Africa 11.4 10.1 -11.3% 11.9 10.7 -10.5% 12.5 11.2 -10.3%
Revenue 1,512,810 1,632,487 7.9% 1,554,332 1,614,758 3.9% 1,596,562 1,598,385 0.1%
Nigeria 1,087,524 1,234,159 13.5% 1,108,292 1,196,388 7.9% 1,129,476 1,159,775 2.7%
Pan Africa 425,286 398,328 -6.3% 446,040 418,371 -6.2% 467,086 438,609 -6.1%
Implied price
50,205 57,387 14.3% 49,814 55,338 11.1% 49,289 53,404 8.3%
(NGN)
Nigeria 58,055 67,330 16.0% 57,417 64,584 12.5% 56,781 61,949 9.1%
Pan Africa 37,306 39,371 5.5% 37,482 39,263 4.7% 37,367 39,131 4.7%
Implied price
106 140 31.9% 104 135 28.8% 103 130 25.9%
(USD)
Nigeria 139 159 14.3% 138 152 10.7% 136 146 7.3%
Pan Africa 87 93 6.4% 87 93 5.9% 88 92 4.7%
Group EBITDA 733,682 689,742 -6.0% 722,759 668,825 -7.5% 709,959 656,687 -7.5%
margin 48.5% 42.3% -6.2% 46.5% 41.4% -5.1% 44.5% 41.1% -3.4%
Group EBIT 635,796 584,492 -8.1% 616,310 553,598 -10.2% 594,140 531,464 -10.5%
margin 42.0% 35.8% -6.2% 39.7% 34.3% -5.4% 37.2% 33.3% -4.0%
EPS (NGN) 24.32 22.11 -9.1% 23.82 21.29 -10.6% 22.82 20.08 -12.0%
YoY growth 14.5% 31.5% 17.0% -2.1% -3.7% -1.6% -4.2% -5.7% -1.5%
Gross debt 616,068 716,068 16.2% 619,591 719,591 16.1% 633,308 733,308 15.8%
Net debt 173,996 179,593 3.2% 204,227 272,608 33.5% 237,368 332,911 40.3%
Net debt/EBITDA 0.2x 0.3x 0.3x 0.4x 0.3x 0.5x
Total assets 2,614,148 2,720,402 4.1% 2,704,708 2,747,920 -1.6% 2,800,994 2,807,217 0.2%
Current assets 971,907 1,067,574 9.8% 941,650 973,989 3.4% 919,287 923,769 0.5%
Current liabilities 1,077,966 1,122,018 4.1% 1,122,342 1,146,444 2.1% 1,169,178 1,173,083 0.3%
BVPS (NGN) 65.78 63.52 -3.4% 69.85 65.02 -6.9% 73.59 67.73 -8.0%
Source: Company data, EFG Hermes estimates

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Financial Statements

Income Statement (Dec Year End) Cash Flow (Dec Year End)
In NGNbn 2021a 2022e 2023e 2024e In NGNbn 2021a 2022e 2023e 2024e
Revenue 1,384 1,632 1,615 1,598 Cash operating profit after taxes 650 516 502 498
COGS (473) (627) (629) (633) Change in working capital (61) 89 6 7
Gross profit 910 1,006 986 966 Cash flow after change in WC 597 605 508 505
SG&A (226) (308) (309) (301) CAPEX (186) (245) (242) (240)
Other operating inc (expense) (1) (3) (2) (3) Investments 59 29 46 38
EBITDA 683 696 675 662 Free cash flow 470 389 312 303
Depreciation and amortisation (101) (111) (121) (130) Non-operating cash flow 0 0 0 0
Net operating profit (EBIT) 582 584 554 531 Cash flow before financing 470 389 312 303
Share of results from associates 1 1 1 1 Net financing (332) (193) (401) (350)
Net investment income (loss) 0 0 0 0 Change in cash 138 197 (89) (47)
Net interest income (expense) (45) (29) (19) (27) Source: Dangote Cement, EFG Hermes estimates
Other non-operating inc (exp.) 0 0 0 0
FX gains (loss) 0 0 0 0 Rating and Target Price chart
Net provisions 0 0 0 0
Income before taxes or zakat 538 556 536 505
Taxes or zakat (174) (180) (173) (163)
Net inc before minority interest 364 377 363 342
Minority interest (3) (4) (3) (3)
Reported net income 361 373 359 339
Adjusted net income 361 373 359 339
Source: Dangote Cement, EFG Hermes estimates
Balance Sheet (Dec Year End)
In NGNbn 2021a 2022e 2023e 2024e
Cash and cash equivalents 340 536 447 400
Accounts receivable (current) 13 17 19 21
Inventory 167 159 151 143
Other debit balances (current) 353 355 357 359
Total current assets 873 1,068 974 924
PP&E (net) 1,473 1,607 1,728 1,837
Goodwill & intangibles 0 0 0 0
Investments (non-current) 0 0 0 0
Other debit balances (non-current) 46 46 46 46
Total non-current assets 1,519 1,653 1,774 1,883
Total assets 2,392 2,720 2,748 2,807
Short term debt 401 360 382 406
Accounts payable (current) 106 141 142 144
Other credit balances (current) 570 622 623 624
Total current liabilities 1,076 1,122 1,146 1,173
Long term debt 177 356 338 328
Other credit balances (non-current) 155 155 155 155
Total non-current liabilities 332 512 493 483
Total net worth 965 1,072 1,097 1,143
Total equity 984 1,087 1,108 1,151
Total equity and liabilities 2,392 2,720 2,748 2,807

Source: Dangote Cement, EFG Hermes estimates

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Guide to Analysis
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Rating Potential Upside (Downside) %

Buy Above 15%
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