Leveraging on Offshore operation to boost top line: DANGCEM not-toothe. Gained volume spike in Ex-Nigeria Sales: FY 2014 turnover growth was

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1 We give a BUY rating on DANGCEM on account of expected improved margin from its ex-nigeria operations and expected increased sales volume from its recent price slash. The counter shares have witnessed volatility in the course of the year posting -15% YTD return (vs. NSE: % ) on the back of declined sales turnover in the domestic market in FY14 occasioned by election-related headwind in better part of 2014 and Q1 15 which resulted in infrastructural projects being put on hold in the course of the year. At current price per share of N170 (15 th Sept), DANGCEM share presents 15.9% upside potential to our fair value estimate of NGN Currently, we have a more upbeat outlook for DANGCEM s H2 15 performance as plants in other African countries particularly the recently commissioned plant in Zambia commences operation. Leveraging on Offshore operation to boost top line: DANGCEM not-toothe back of stiff impressive scorecard in the domestic market in FY 2014 on competition and macroeconomic headwind which weighed on turnover was offset by increasing market share gain in ex-nigeria operation. FY 2014 turnover was flat while PBT and PAT also declined by 6% and 23% respectively. However, a spike in turnover from its ex-nigeria sales rescued the cement titan from dent in aura. In similar vein, EBITDA and EBIT were down by 2% and 4.5% each, Dividend yield was however up 63.75% as the cement titan rewarded its shareholder with N6 dividend per share. Gained volume spike in Ex-Nigeria Sales: FY 2014 turnover growth was muted on the back of decline in sales volume in its core Nigeria operation. Arthur Steven Asset Management Limited 86, Raymond Njoku Street, SW, Ikoyi, Lagos Tel:

2 Margin Improvement underway as ex-nigeria plants come on stream: We foresee improvement in DANGCEM s operating margin as two of its offshore plants Zambia and Cameroon commence operation. We are also upbeat that this will give the needed boost to its turnover and hence it s operating margin. In FY2014, DANGCEM s declining sales in its core Nigeria operation was offset by volume spike from both Senegal and South Africa as the cement titan gains more market shares in this region. FIGURE 1:52-WEEK PRICE PERFORMANCE HIGHLIGHTS OF H1 PERFORMANCE Revenue trended upward as non-nigerian factories ramp up: DANGCEM recorded 15.9% growth in revenue driven by volume spike from its non-nigeria operation. This is against the 242.2bn made in the previous period. Sales volumes were up 13.7% to 8.1 million tons in Q2 15 driven largely by a pick-up in increase in market share in its ex-nigeria operation. This was underscored by strong market share gain in two of its offshore operations-senegal and South Africa. Historical Performance: Profitability: DANGCEM has had a good operating run in the last five years given its historical performance. Except for 2014 when the company s turnover was flat while PBT and PAT declined, the company has posted impressive performance in four out the five years under review. We note that it has consistently grown its gross earning at a compounded annual growth rate of 28% in the past five years. Between 2010 and 2014, DANGCEM s turnover grew from NGN202.56Billion to NGN Billion; a CAGR of 18.10%. FIGURE 2: TURONVER GROWTH 450, ,000 Turnover 391, , , , , , , , , , ,000 50,000 0 H1'15 Q1'15 FY'14 9M'14 H1'14

3 This is a massive growth rate when compare to sectoral growth rate and that of the Nigeria economy. On the other hand, operating expense grew by 13%. INVESTMENT THESIS: ASAM places a BUY recommendation on DANGCEM Plc stock based on the analysis of the company s intrinsic valuation, projected sales growth for cement, priceto boost revenue both from its cutting strategies, talented management and DANGCEM s ability domestic and offshore operation. Additionally, DANGCEM s financial muscle to foray into new markets and expands operation in existing markets as well its wide geographical spread helps in hedging its revenue against downturn in a particular market. At the moment, DANGCEM is planning to spend circa $2billion to expand its operation and increase its annual cement production to 50million metric tonnes. VALUATION: We derived our valuation for DANGCEM Plc by using the Discounted Cash Flow (DCF) methodology. Our fair value estimate for DANGCEM is N213.29, which is a 12.2% upside on the current price of its share as at September 15, The discount rate (weighted average cost of capital (WACC)) of 13.55% is derived using a 15.68% risk free rate (the rate for 5-year FGN bonds auctioned in May 2015), a beta of 1.07, an after-tax cost of debt of 12.9%, and a market risk premium of 6%. The long term cash flow growth rate to perpetuity calculated is 5.6%. By taking into account DANGCEM s recent foray into other markets in West and South African sub-region, its recent price slash as well as ncreasing market share in its offshore operations such as Senegal and South Africa, we forecast a five-year revenue growth CAGR of 17.9%. In addition, the company s earnings are projected to have a five-year CAGR of 10.7% as a result of its cost-control strategies, which have curtailed sales and distribution costs.

4 Relative valuation; At a 17.30x P/E, DANGCEM is trading above some of its peer group. This suggests that DANGCEM offers value relative to its peers as longer-term growth prospects appear no worse than its peers. On a price to book (P/BV) basis, DANGCEM currently trades at P/BV ratio of 4.7% indicating that the stock might be considered undervalued. PROFILE Dangote Cement is an integrated quarry-to-depot cement producer of cement with production capacity of circa 20mmpta as at It is currently the largest cement producer with three plants in Nigeria. The Company has operations in West and Central Africa, and South and East Africa and is also engaged in exploration and limestone mining operations. The Company owns other plants in Senegal, Zambia, Tanzania, South Africa, Congo, Ethiopia and Cameroun, and terminals in Ghana, Sierra Leone, Ivory Coast and Liberia. The Company's subsidiaries include Sephaku Cement (Pty) Limited, Dangote Industries (Ethiopia) Plc, Dangote Industries (Zambia) Limited, Dangote Cement Senegal S.A, Dangote Cement Cameroon S.A, Dangote Industries Gabon S.A and Dangote Quarries Kenya Limited, among others. Dangote Cement has a commanding position in the Nigerian market accounting for 60% of the domestic market share. In addition to its domestic market dominance, DANGCEM Plc has entered the league of cement majors in Africa with tentacles in the greater part of West African sub region and beyond. It recently announced its plan to roll out cement production in Zimbabwe as part of cross continent growth aspiration. Current production capacity stands at circa 30million metric tons in its Nigeria operation alone. MANAGEMENT DANGCEM management is led by Mr. Onne van der Weijde. Mr. Onne assumed leadership of Dangcem in February He brings to DANGCEM wealth of experience in the cement industry at senior management level having served at Holcim at various capacities in the past. The company s executive management comprises professionals with vast experience in cement industry at the global level. The board is led by Alh. Aliko Dangote as the chairman who is the founder of the company. He has been the Chairman of Dangote Cement since its formation and is also the Chairman of other listed companies in Dangote Industries. Mr. Dangote is well known for his entrepreneur zeal and for making breakthrough in most of the ventures he veered into.

5 Risk The major risks that DANGCEM Plc faces are fierce competition from its rival in the industry, security challenges in the country and the fiscal strain on government resource to embark on capital project. Competitive risks include increasing market penetration by its closest rivals such as Lafarge and other fringe players The mounting security challenges in the country, especially in the north-east, are a greater concern as the challenges have led to putting several capital projects that have been embarked upon on hold in this part of the country leading to low sales turnover for cement manufacturers including DANGCEM. The security issues could potentially constrict the extent of the company s revenue growth. Added to the security challenge is fiscal challenge faced by government in embarking on capital projects on account of limited financial resources owing to falling crude oil prices. This has meant low patronage for products of DANGCEM and other players in the cement industry.

6 FINANCIAL HIGHLIGHT

7 Analyst Certification, Important Disclosure and Disclaimer Analyst Certification The research analysts who prepared this report certify as follows: 1. That all of the views expressed in this report articulate the research analyst(s) independent views/opinions regarding the companies, securities, industries or markets discussed in this report. 2. That the research analyst(s) compensation or remuneration is in no way connected (either directly or indirectly) to the specificc recommendations, estimates or opinions expressed in this report. Investment Rating Criteria and Disclosure Arthur Steven Asset Management adopts a 3-tier recommendation system for assets under our coverage: Buy, Hold and Sell. Thesee generic ratings are defined below; Buy: Based on our valuation and subjective view (if any), the total return upside on the stock s current price is greater than our estimated cost of equity. Hold: Based on our valuation and subjective view (if any), the total return upside on the stock s current price is less than the cost of equity, however, the expected total return on the stock is greater than or equal to the Standing Deposit Facility rate of the Central Bank of Nigeria (which is currently MPR 200bps; i.e 10%). We consider this as the minimum return that may deserve our holding of a risk asset, like equity. Sell: Based on our valuation and subjective view (if any), the total return upside on the stock s current price is less than the Standing Deposit Facility rate of the Central Bank of Nigeria (which is currently MPR 200bps; i.e. 10%). We consider this as the minimum return that may deserve our holding of a risk asset, like equity, especially as we consider the average 4.5% total transaction cost for an average retail investor.

8 Arthur Stevens Asset Management Ltd. (MEMBER OF THE NIGERIAN STOCK EXCHANGE) Succeeding Together Address: 86 Raymond Njoku Street, SW Ikoyi, Lagos, Nigeria. Telephone: Disclaimer Arthur Steven Asset Management (ASAM) notes are prepared with due care and diligence based on publicly available informationn as well as analysts knowledge and opinion on the markets and companies covered; albeit ASAM neither guarantees its accuracy nor completeness as the sole investment guidance for the readership. Therefore, neither ASAM nor any of its associate or subsidiary companies and employees thereof can be held responsible for any loss suffered from the reliance on this report as it is not an offer to buy or sell securities herein discussed.