DANGCEM posted an impressive growth in EPS by 91% YoY to N22.9 (missing our estimate of N13.52) over 2018. The deviation from our estimate stemmed largely from the long-awaited tax credit (N89.52 billion) which included reversal of tax provisions (N134 billion) made on the Obajana 4 and Ibese 3 & 4 lines for 2015 – 2017, as well as a tax charge of N44 billion based on a 15% effective tax rate for 2018 (inclusive of an extension of the additional two-year pioneer tax credit which is pending approval). However, we reckon that core earnings dragged over 2018 with PBT increasing modestly by 4% YoY to N300.81 billion, which was in line with our estimate of N303.21 billion.
Going into 2019, we maintain our optimism on DANGCEM and expect the company to sustain earnings growth, albeit at a still slower pace. Specifically, we expect PBT to expand modestly by 6% YoY and a steep decline in EPS by 32% YoY to N15.6 (reflecting the high base of 2018 due to the reversal of prior year tax benefits); excluding the impact of the tax reversals in 2018, forecasted 2019 EPS will grow 3% YoY. The slower growth in our forecast PBT stemmed from i) downward revision of our 2019 and 2020 volume growth to 10% and 6% to 25.96mt and 27.55mt respectively; ii) downward adjustment to revenue per ton, with average price for the group estimated at N35,790 per ton (lower by 3.1% YoY) largely driven by price erosion in Nigeria and the rest of Africa as competition intensifies; and (iii) reduction in our gross margin estimates to 57.8% from 58.3%. The impact of our adjustments culminated in a cut of our FVE on DANGCEM to N248.14 (Previous: N253.03). DANGCEM trades at 2019 EV/EBITDA of 9.8x which is at a discount to MEA peers of 12.74x. Accordingly, we maintain our STRONG BUY recommendation on the stock.
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