Dangote Cement Plc (DANGCEM), and the Unexplained Decline in Stock Price

Background:

Dangote Cement is one of the biggest cement manufacturer and importer in Africa. The company has projects and operations in Nigeria, Benin, Senegal, Zambia and Ghana. The listing of Dangote Cement on the NSE on October 26, 2010 made it Nigeria's biggest listed firm accounting for approximately one third (1/3) of the exchange capitalization.  The listed company is a result of the merger of Benue Cement Company PLC (BCC) and Dangote Cement Group of companies. BCC which was previously listed on the Nigerian Stock Exchange (NSE) was delisted after the merger. The shareholders of BCC received one share for every two Benue shares held as part of the merger with Dangote Cement.

There was so much fan fare with the introduction of Dangote Cement at the NSE.  At the listing ceremony, the NSE Interim Administrator, Mr. Emmanuel Ikazoboh stated that the listing will add N2.1 trillion, or 25 percent to market capitalization of the Exchange, adding that the event was historic because it is the biggest issue by a single company to be listed on the NSE. Mr. Ikazoboh “disclosed that the development will boost investors’ confidence on NSE, urging Nigerian entrepreneurs to come and take advantage of the market by listing their companies on the Exchange”. Several analysts represented that listing of Dangote Cement will shift the market reliance on the banking subsector as the major drivers of the market. Most analysts believed that the low free float, should serve as a catalyst for the stock in the short term. Additionally, analysts at "Stanbic IBTC” set a 12-month target price of 170.50 naira and a "buy" recommendation.

Technical Analysis:

The company listed 15,494,019,668 billion ordinary shares of 50 kobo each at N135.00 per share by way of introduction on the floor of the Nigerian Stock Exchange (NSE). On the first day of the listing, 196 million shares were traded. However, since the listing of the stock, the price movement has been disappointing. When Dangote Cement was listed on the NSE on October 26, 2010, it was touted as the offering that will rescue the NSE from its "Abyss". However, since the stock was listed on the NSE, it has done nothing but trend downwards.  At the closing price of N121.15 on November 19, 2010, the stock is below its 5 day and 10 day cumulative simple moving averages of 5 day and 10 day. Also, the daily trading volume has been lackluster as shown in the graph below:

Support and Resistance:

Technically, the stock appears to be heading lower as it has violated all short-term pertinent moving averages. As the stock continues to head downwards, traders should watch for the following four (4) support levels. Violations of these supports will mean further downtrend.

However, if the short-term downtrend reverses, the following four (4) resistant levels should be pertinent benchmarks for traders to watch.

Downtrend Impact on Benue Cement Shareholder Portfolio

As previously noted, the shareholders of Benue Cement received one share of Dangote Cement for every two Benue shares held as part of the merger with Dangote Cement. Therefore, it means that shareholders with one hundred thousand (100,000) shares pre-merger received fifty thousand shares (50,000) post the merger.  As of close of trading on November 19, 2010, BCC shareholders whose shares were converted to Dangote Cement shares have lost approximately 10% of their portfolio value as highlighted in the schedule below:

Conclusion:

Although it is too early to write a postmortem on the shares of Dangote Cement, but the current downtrend should be very troubling to management and shareholders of the company, because the stock price has declined by N13.5 or 10% since the merger and the listing of Dangote Cement shares on the NSE. Normally the stock price of newly listed companies experience up trends before any pull back, but it is baffling that the stock price of Dangote Cement has exhibited an aberration from the norm.