Dangote Cement reported a 3.8% y/y growth in Revenue to N249.2bn in Q1 2020. The growth in group revenue was solely driven by an improvement in revenue from its Nigerian operations (up 5.6% y/y to N179.3bn) amidst a flattish performance from Pan African operations (down 0.6% y/y to N69.8bn). We expect the impact of COVID-19 to have a more profound impact on Nigeria Sales in Q2-2020, given that Lagos, Ogun, and the FCT went on full lockdown from 30 March. Although the lockdown measures were relaxed on 4 May, economic activities are yet to return to pre-COVID-19 levels.

Similarly, we expect weaker Revenue from Pan African Operations driven by weakness in South Africa (poor macro conditions, lockdown in the last week of March amidst weak infrastructure spending by the government), Tanzania (production challenges and unfavorable weather conditions) and Zambia (the economy slipped into recession in Q1, leading to a decline in the cement market) to have a material impact on overall Pan African sales volumes. As such, we have made marginal adjustments to our forecasts.

We retain our target price of N182.4/s and maintain our Buy recommendation largely due to attractive valuations. Trading at FY 2020 EV/EBITDA of 7.0x compared to its EM peer average of 9.2x and its 5-year average of 7.7x, we believe the company’s valuation remains attractive. We arrived at our target price using a blend of DCF valuation and relative valuation in the ratio 60:40. We also note that the company’s planned share buyback has been approved by SEC and management will review the opportunity to deploy the programme in due time. We believe this remains a catalyst for an upward re-pricing of its shares.

READ ALSO: Dangote Cement’s Q1 Result: Weak topline and higher OPEX drive weak earnings

Review of Q1 2020 performance

Q1 2020 Revenue grew 3.8% y/y to N249.2bn. The growth in group revenue was solely driven by an improvement in revenue from its Nigerian operations (up 5.6% y/y to N179.3bn) amidst a flattish performance from Pan African operations (down 0.6% y/y to N69.8bn). On a q/q basis, we note that group revenue grew stronger, up 17.6% q/q, again on the back of a sturdy growth from Nigerian operations (up 26% q/q). We believe the growth in revenue from Nigerian operations reflects stronger demand for cement particularly in the months of January and February which more than compensated for the slowdown in March due to headwinds triggered by the outbreak of the global pandemic. Notably, cement sales volumes grew by 0.7% y/y to 4.0MT, the highest Q1 volume in the last four years. However, we note that the momentum in sales volumes has slowed down, following the lockdown implemented in states such as Lagos, Ogun, and the Federal Capital Territory (FCT).

EBITDA grew 2.2% y/y to N114.2bn. The low single-digit growth in EBITDA was due to a higher increase in cost of sales adjusted for depreciation (up 6.3% y/y) compared to the growth in revenue (up 3.8% /y). The increase in cost of sales adjusted for depreciation was largely driven by growth in salaries and related staff costs (up 13% y/y) and other production expenses (N4.0bn in Q1 2020 vs N1.5bn in Q1 2019). However, the company reported a sub-inflationary growth in OPEX (up 4% y/y to N47.7bn). We highlight that expenditure on advertisement and promotion was up 96% y/y to N3.7bn- we believe this was due to the continued implementation of sales promotional activities to drive sales volume. Overall, EBITDA margin weakened marginally by 0.7ppts to 45.8% in Q1 2020.

READ MORE: Continental Reinsurance reports Q1 2020 results, affirms support towards COVID-19 pandemic

Net Finance Cost dipped significantly, down 60.5% y/y t0 N3.7bn in Q1 2020, due to a decline in Finance Cost (down 23% y/y to N9.0bn) alongside foreign exchange gains of N3.7bn recorded in Q1 2020. However, Finance Income was down 32.6% y/y to N1.5bn, reflective of the decline in Cash and Bank Balances (down 41% y/y to N101.8bn) and a lower yield environment. We note that the decline in Finance Cost was due to the absence of Foreign exchange loss in Q1 2020 compared to N3.1bn recorded in Q1 2019.

Pre-tax Profit grew 11.5% y/y to N88.1bn in Q1 2020. A higher effective tax rate of 31% in Q1 2020 compared to 24% in Q1 2019 led to a flattish growth in Profit after tax, up 0.6% y/y to N60.6bn in Q1 2020. Earnings per share rose to N3.60/s in Q1 2020 from N3.54/s in Q1 2019.

Looking ahead, we expect the deterioration in the macroeconomic narrative of Nigeria, caused by the outbreak of COVID-19 and significantly lower oil prices to constrain activities in the construction industry as fiscal spending on capital projects weakens, on the back of lower oil revenue. In a similar fashion, we expect private sector investment in gross fixed capital formation to slow down as businesses cut down on their CAPEX plans given fragile macro conditions, which will weaken aggregate demand.

READ ALSO: FAAC disburses N1.945 trillion in Q1 2020, highest Q1 allocation since 2014

Similarly, we expect weaker Revenue from Pan African Operations driven by weakness in South Africa (poor macro conditions, lockdown in the last week of March amidst weak infrastructure spending by the government), Tanzania (production challenges and unfavorable weather conditions) and Zambia (the economy slipped into recession in Q1, leading to a decline in the cement market) to have a material impact on overall Pan African sales volumes. Considering the 1.4% decline in Pan African Sales Volumes in Q1 2020, we have revised downwards our forecast on Pan-African volumes to 9.25MT (previously; 9.82MT) in 2020.

Valuation; BUY rating maintained

We retain our target price of N182.4/s and maintain our Buy recommendation largely due to attractive valuations. Trading at FY 2020e EV/EBITDA of 7.0x compared to its EM peer average of 9.2x and its 5-year average of 7.7x, we believe the company’s valuation remains attractive. Furthermore, we highlight that the proposed share buyback is a positive catalyst for upward re-pricing of the shares. We arrived at our target price using a blend of DCF valuation and Relative valuation in the ratio 60:40.

CSL Stockbrokers Limited, Lagos (CSLS) is a wholly-owned subsidiary of FCMB Group Plc and is regulated by the Securities and Exchange Commission, Nigeria. CSLS is a member of the Nigerian Stock Exchange.

Transactions on the Nigerian Stock Exchange (NSE) reopened positive, occasioned by gains in blue-chip stocks. At the close of trading, the All-Share Index recorded a 0.40% gain to settle at 25,267.82 points. Similarly, market capitalization gained N53 billion to close the last trading day of the month at N13.168 trillion.

Performance Overview

A total of 325.61 million shares valued at N4.47 billion was traded in 5,647 deals on Friday. FBNH was the most traded stock by volume of 75.1 million units, while GUARANTY topped by value at N904.25 million.

Market sentiment, as measured by market breadth, was negative with 20 losers against 14 gainers. DANSUGAR (-7.86%) recorded the highest price decline to close at N12.90 per share, while CADBURY (+8.65%) topped the gainer’s chart at N8.65k per share.

The sectoral performance was positive following gains in the Industrial, Insurance, and Oil & Gas Indices, having appreciated by 4.92 %, 3.12%, and 0.63% respectively.

(READ MORE: Dangote, Nestle, MTN, Zenith, Access Bank, party with N375 billion on NSE)

The Banking Index (-1.93) led the laggards, as price decline in ZENITH BANK, GUARANTY and ETI pressured the index. Similarly, the Consumer Goods index trailed distantly to shed -0.65% on the back of -7.86% depreciation in DANGSUGAR.

Top gainers

CADBURY went up by 8.13% to close at N8.65; DANGSUGAR went up by 7.86% to close at N12.9; BUACEMENT went up by 7.69% to close at N42; FLOURMILL increased by 5.00% to close at N21, and DANGCEM went up 0.36% to close at N139.

Top Losers 

CAVERTON went down by 7.50% to close at N2.58; VITA FOAM went down by 7.50% to close at N5.55; ETI went down by 6.42%  to close at N5.1; ZENITH BANK went down by 3.15% to close at N16.9, and GUARANTY went down by 1.64% to close at N24.

READ ALSO: NSE loses N2 trillion in value in Q1 2020, as oil plunges 65% QoQ

Outlook 

Nigeria’s Stockmarket finished on a positive note as industrial stocks finished bullish. Profit-taking continued at most banking tickers. We envisage  profit-taking dominating Nigeria’s stock market in the short term.

Stock trading is in a large part, a game of signals. Depending on what strategy you are using, either algorithms, black boxes, fundamental analysis or technical analysis of charting, most traders trade based on signals generated by whatever trading or stock-picking system they use. While signals can be picked from different sources and used from a combination of systems or strategies, one area that can signal a buy or sell is directors’ share dealings.

Information Asymmetry

Asymmetric information arises when one party to an economic transaction has more material knowledge in a transaction than another. This is one of the agency problems in corporate governance. It happens in companies because the directors know and have more knowledge about the financial health of a company than the shareholders.

Because of that privileged “advanced” knowledge that company directors have about the health and well being of the companies they oversee, investors should take notice of and interest in the buying and selling of company shares by the directors, as such activities can be loaded with profitable entry or exit signals

How to Uncover Directors’ Share Dealings

Insider dealing is a stock trading crime and as such, insiders such like directors send notifications to the regulatory authorities about their intension to buy and sell shares of their companies or the actual transactions. More often than not, the authorities, like the Nigeria Stock Exchange, publish such notifications to keep the public in the loop. The Nigerian Stock Exchange, in particular, publishes “notification of share dealing by insider”. By typing that into the search window on their website, you arrive at a list of such events. There have been about 74 insider share dealing notifications on the Exchange’s website since January 1, 2020.

(READ MORE: AIICO Insurance grows profit by 88% in 2019(Opens in a new browser tab)

Investment Strategy

It is through those publications that one can gain knowledge of and the thinking of insiders about the direction of a company. For example, in one of the latest of such publications, on May 21, 2020, to be precise, the managing director and CEO of AIICO Insurance, Babatunde Fajemirokun, notified the exchange that he bought 3,769,586 shares of AIICO insurance on May 20^th, 2020, at a price of N0.96.  The question that readily comes to mind is why would an MD buy the shares of his company? The common-sense answer, among others, is because he wants to make money from such purchases, and the only way, he can make money is if the share increases in price after the purchases. Therefore, the fact that the managing director, an insider, bought the shares, is an indication that he thinks, based on all the facts that he has or knows about the company, that the shares of the company are bound for an increase in the near future. True to that thinking, the shares of AIICO closed the week at a price of N1.01, giving the MD an unrealized gain of N0.05 per share or N188,479.3 on that transaction, alone. The signaling impact, in this case, is even more glaring when one takes note of the fact that a few days earlier, on May 18^th, 2020, the same managing director of AIICO Insurance bought 1,198,330 shares of AIICO at N0.90 per share. In fact, from May 15^th through May 20^th, the MD bought over 6 million shares of AIICO Insurance. The above case study underscores how following or paying attention to insider share dealings can be used as a trading strategy or one of the ways to discover a stock trading signal.

READ ALSO: IMF considering an “emergency” bailout for Nigeria

What Research says

It is not only in Nigeria that things of this sort happen, it happens all over the world and it has been happening over a long time, so much such that it had elicited and continues to elicit research interest among academics and analysts. A research conducted by Jaffe (1974) and Finnerty (1976) indicated that using director dealings as a trading signal produced abnormal returns in the months following. This finding has been agreed to by other researchers like Givoly and Palman (1985), and Jeng, Metric, and Zeckhauser (2002), although Grivoly and Palman attributed part of the added return to price increases due to investors mimicking directors.  There are other researches, though, that found out that using directors’ dealings as signals may not yield the required results due to trading costs.

READ ALSO: COVID-19: The ‘New Normal’ for Nigerian aviation industry

Time is Money

In a not too efficient market, like that of Nigeria, insider or directors share dealings can provide a profitable trading signal, but such signals may not last forever. Therefore, time is of the essence for those who want to explore such trading strategies. The earlier you discover such signals and act on them, the better you will be positioned to derive the benefits that may accrue from them.

There’s a caveat

Note that this presentation is not and should not be construed as investment advice. Anyone who uses the strategy does so at his/her own risk with no liability of any sort from the author and publisher.