Dangote puts a rich price on refining scarcity
BREAKINGVIEWS-Dangote puts a rich price on refining scarcity The author is a Reuters Breakingviews columnist. The opinions expressed are her own.
By Yawen Chen
LONDON, Sept 15 (Reuters Breakingviews) - Aliko Dangote has chosen a favourable moment to sell shares in Africa’s biggest refinery. The Nigerian billionaire, who built much of his fortune in cement, is seeking an equity valuation of up to $50 billion in an initial public offering, partly to fund a $14.3 billion expansion. Diesel and jet fuel markets are unusually tight. The IPO price effectively assumes that things will stay that way.
Dangote Petroleum Refinery & Petrochemicals’ Lagos plant has a lot going for it. The refinery can process 700,000 barrels of crude a day, and can handle 36 different crude grades. CEO David Bird says it is set to be the largest single supplier of jet fuel to Europe for a third straight month. A planned second crude-processing line would roughly double capacity by 2029. Output of polypropylene, used in packaging and textiles, is due to almost triple by 2030.
It's a lean machine, helped by scale and the fact that it can use gas produced in the refining process as its own energy source. But cheap production costs are only part of the story. The Iran war has led to a major refining crunch, pushing up fuel prices. Dangote Petroleum's realised jet fuel price rose to $1,092 a tonne in the first half from $663 a year earlier; diesel jumped to $1,225 from $688.
Even against that backdrop, the valuation still looks demanding. At the maximum 30% IPO over-allotment, the group's equity is worth about $50.2 billion. Adding debt and subtracting cash and expected proceeds gives an enterprise value of $49.5 billion. The implied multiple of 2026 EBITDA, using forecasts from broker SBG Securities, is 8.3.
That is well above U.S. rivals Valero Energy VLO.N, Marathon Petroleum MPC.N and Phillips 66 PSX.N, which trade nearer 6 times this year's EBITDA, according to Visible Alpha data. On that lower multiple, the Dangote business would be worth roughly $35 billion instead.
How to account for the $14.5 billion gap? It is best thought of as the net present value of the planned new assets. This major increase in capacity, mostly adding another 700,000 barrels of daily crude processing by 2029, will cost $14.3 billion, the company reckons. Very crudely then, the implication is that the gross value of the new assets must be about $29 billion - close to the $35 billion fair value for Dangote's existing business, using the U.S. peer multiples. Investors have to ask themselves: is it fair to assume that the new barrels will be as valuable as the current ones are at peak fuel prices?
Granted, the group could argue that its combination of growth and shinier refineries merits a premium. In emerging markets, India’s Reliance Industries RELI.NS also trades more richly than the American refiners. The Nigerian listing may help too: a national champion sold as a “people’s IPO” could command a nice price at home.
But Reliance is a large conglomerate with non-refining businesses, and Dangote's home market adds risk. Future changes to tax policy or foreign exchange controls could dent returns, while cost overruns or a slower-than-planned expansion would make the valuation harder to justify.
Dangote’s timing is fortunate, but a $50 billion price tag leaves a lot of room for disappointment.
Follow Yawen Chen on Bluesky and LinkedIn.
CONTEXT NEWS
Nigerian billionaire Aliko Dangote on September 14 launched Africa's largest share sale yet with the initial public offering of his oil refinery, tapping the general public to raise as much as $2.1 billion for its expansion.
(Editing by Liam Proud; Production by Streisand Neto)
((For previous columns by the author, Reuters customers can click on CHEN/yawen.chen@thomsonreuters.com))