Dangote Cement Plc in its 9M 2019 result posted a revenue decline of 1% from N685.29bn in 9M 2018 to N679.79bn in 9M 2019. Operating profit decreased YoY by 13% on the back of higher production cost, selling and distribution expenses. Profit before tax (PBT) declined by 20% to N197.68bn in 9M 2019 as well as profit after tax, which declined marginally by 3% to settle at N154.35bn for the period.
Q3 promotion lift sales volume, but gains eroded by price discounting
The group grew sales volume YoY by 1% from 17.77Mt to 17.96Mt on the back of a muted growth in the Nigerian and the Pan-African markets by 60pbs and 170bps, respectively. In the Nigerian market, on a year-on-year basis, volume increased from 10.76Mt to 10.82Mt owing mainly to promotional activities in Q3 2019, which helped tame the impact of the new competitor’s capacity. However, revenue declined by 70bps to N467.88bn from N471.33bn in 9M 2018 due to continued price discounting by competitors. The group had to lower prices in a bid to preserve its market share (currently c.64% of the domestic market). Also, the incident of border closure impacted export volume as the group recorded zero output in August and September.
On the Pan-African front, notwithstanding the revenue decline by 5bps to N213.20bn in 9M 2019, sales volume grew YoY to 7.14Mt from 7.03Mt buoyed by the robust volume growth in Tanzania by 106% to 842Kt, and in Sierra Leone by 108% to 173Kt in 9M 2019.
Though revenue declined by 1%, cost of production increased by 1% from N287.68bn to N290.02bn in 9M 2019, driven by a 2% increase in depreciation and amortization cost as well as plant maintenance cost. As a result, gross profit decreased by 2% from N397.61bn to N389.78bn in 9M 2019.
Haulage, advertisement and promotion expenses drag bottom-line
Selling and distribution expenses grew from N97.15bn to N121.98bn in 9M 2019. The double-digit growth was informed by a 215% spike in advertisement and promotion expense from N2.54bn to N7.99bn, as the group engaged in promotional activities to stay competitive and safeguard its market. Also, haulage expenses rose from N63.99bn to N80.60bn in 9M 2019, contributing to the 26% growth in selling and distribution expenses. On the strength of this decline alongside a 58% fall in other income, operating profit nosedived by 13% from N266.86bn to N231.48bn.
Recommendation
Given the new dynamics in the cement industry and the economic landscape, we expect pressure in the topline growth to persist into Q4 2019 and by extension, the coming years. However, we expect recoveries from the Pan-Africa market to support the group’s revenue.
Overall, we have a revised EPS of N12.04 and a fair value estimate N189.30 on the stock. At the market price of N149.50, the stock is trading at a 27% discount to our fair value estimate. Thus, we revised our recommendation to a BUY.
WSTC Securities Limited (WSTC)
