New Grinding Unit In Cote d'Ivoire And Sustainability Efforts Will Improve Operational Efficiency By 2025

Key Takeaways

• Strategic expansion in Africa, notably in Cote d'Ivoire and Ethiopia, aims to boost revenue and long-term growth.
  
• Emphasis on local sourcing, alternative fuels, and exports seeks to mitigate FX risks and improve cost efficiency.
  
• Currency volatility, climate disruptions, and increasing competition in African markets threaten Dangote Cement's revenue growth and profit margins despite cost-saving investments.

Catalysts

Dangote Cement Plc, together with its subsidiaries, prepares, manufactures, distributes, and sells cement and related products in Nigeria.

• Dangote Cement's upcoming 3 Mtpa grinding unit in Cote d'Ivoire, set for 2025, strengthens its footprint and capitalizes on African market growth, potentially boosting revenue.
  
• Efforts to enhance local input sourcing and alternative fuel use, alongside expanding the CNG fleet, are expected to mitigate FX exposure and cut operational costs, improving net margins.
  
• Increasing exports, particularly to Ghana and Cameroon, aims to balance currency fluctuations, diversify revenue streams, and potentially enhance earnings.
  
• Expansion in Ethiopia with significant capacity increases demonstrates long-term growth strategy, likely contributing to increased volume and revenue.
  
• Sustainability initiatives, including the transition to CNG-powered trucks, are expected to reduce costs and improve efficiencies, potentially enhancing net margins.

Dangote Cement Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Dangote Cement's revenue will grow by 18.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 13.9% today to 15.9% in 3 years time.
• Analysts expect earnings to reach NGN 934.4 billion (and earnings per share of NGN 55.27) by about April 2028, up from NGN 498.2 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting NGN1071.5 billion in earnings, and the most bearish expecting NGN808.6 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 20.5x on those 2028 earnings, up from 16.0x today. This future PE is greater than the current PE for the NG Basic Materials industry at 16.0x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 29.45%, as per the Simply Wall St company report.

Dangote Cement Future Earnings Per Share Growth

Risks

• Currency volatility and devaluation, particularly in Nigeria and Ethiopia, may continue to impact Dangote Cement's revenue and profit margins due to increased costs associated with imports and the potential for decreased purchasing power in local currencies.
  
• Adverse weather conditions and climate change, such as heavy rainfall in regions like Tanzania, have disrupted operations and sales volumes, negatively affecting earnings and potentially impacting future operational margins.
  
• The presence of Chinese cement makers expanding into African markets introduces increased competition, which might hinder Dangote Cement's market share and revenue growth, pressure pricing strategies, and influence profitability.
  
• High levels of sovereign debt and macroeconomic instability in Sub-Saharan Africa, including inflation and election uncertainties in countries like Senegal and South Africa, pose risks to infrastructure spending and long-term demand for cement, impacting future revenue streams.
  
• Operating and net margins may be pressured by continuous rising energy and transportation costs, despite investment in cost-saving initiatives such as compressed natural gas trucks and alternative fuels; these initiatives, while beneficial, might not be sufficient to counterbalance broader economic pressures.

Valuation

• The analysts have a consensus price target of NGN533.266 for Dangote Cement based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of NGN667.16, and the most bearish reporting a price target of just NGN457.55.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be NGN5879.8 billion, earnings will come to NGN934.4 billion, and it would be trading on a PE ratio of 20.5x, assuming you use a discount rate of 29.5%.
• Given the current share price of NGN480.0, the analyst price target of NGN533.27 is 10.0% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.