Dangote Cement Plc made two important announcements this week. First was the plans to expand its capacity to manufacture cement to about 38.25mmtpa from 29.25mmtpa. This got analysts licking their lips sending the share price up by about by about 9.7% by Monday. Later on Wednesday the company announced that it has scheduled a board meeting for Monday February 29, 2016. High on the agenda for the board meeting will be approving the company’s audited accounts for the year.
These two announcements I believe has two major implications for the share price of the stock. We have seen the effect of the first announcement on the share price of the stock. For the second, we will have to look back at what happened same period last year and what is currently happening to the fundamentals of the stock.
By this time last year, the Nigerian stock market was coming out of a disastrous January 2015. Stocks had dropped by about 12%. Dangote Cement was trading at a two year low of about N137 per share. Just about 8 weeks earlier the stock was trading at an all time high of about N232 per share. In the equities market the feeling of Dejavu has a way of reappearing.
Valuing Dangote Cement or indeed any stock may sound like a futile attempt considering that fundamentals have been thrown out of the window. Nevertheless, it has to be done even if it means using basic valuation metrics. Using dividend valuation model, the company paid a dividend of N6 per share last year and is expected to at least retain that amount. Last year (2014 FY) earnings per share was N9.42 and down 20% from the previous year. We project an earnings per share of N12 having hit N9 already by the third quarter. As such it is unlikely that dividend will be lower than what it was last year.
At N6 and using and implied dividend yield of 5% Dangote Cement could be worth about N120 per share about 11.6% lower than the current share price making the current share price seem expensive. But history often repeats itself in the Nigerian stock market and as it did last year Dangote Cement could rise to as high as N170 before April. Typically, the company’s dividend yield drops to about 2% before its share price gets marked down.
Price earnings ratio
Using the price earnings ratio approach, Dangote Cement has a price earnings ratio of 12.4x implying that the share price of N136 is 12 times more than its 2014 earnings per share of N9.4. At a projected earnings per share of N12 for 2015 and maintaining a price multiple of 12, that will keep the share price at N144. Bear in mind that we are in a bearish market and Dangote Cement will typically attract a 15x multiple at the least. At 15x the share price is probably be valued at about N180 per share.
The above metrics suggest Dangote Cement may just be in the undervalued territory and in the buy territory. The company’s debt profile has risen by about 30% from December 2014 and could increase as the company executes its expansion plans. In addition, the scarcity of dollar and expensive inputs for its production could tell on future profits growth or stability. Based on this, investors in the company should follow closely the forex market and what the CBN and indeed the company is saying about the dollar. The company CEO recently said that dollar scarcity was biting hard but it had mitigated it with dollar inflows from its oversea activities.