Dangote Cement Plc (DANGCEM: TP N201.29) reported a 48.4% YoY decline in profit after tax to N200.5billion in its FY’19 audited report released after the close of market yesterday. The performance was weighed by pressures on finance expense, higher selling & distribution cost, and a surprise effective tax rate of 19.9% (vs. tax credit in the previous year).
Some positives:
- DANGCEM grew Pan-African volumes by 1.9% YoY despite aggressive competition. Traction on this front was supported by the Tanzanian (+94.0% YoY) and Sierra Leonian (+116.0% YoY) operations which offset weaknesses in some other Pan-African markets. In our view, the commissioning of the 1.5MTPA Ivory Coast plant (slated for Q4’20) is likely to provide support to non-Nigerian volume growth in coming quarters.
- Even though cash & bank balances contracted by 29.5% YoY, the cement giant declared a N16 dividend per share that translated to a dividend yield of 9.5% (vs. one-year T-Bill yield of 5.2%) on yesterday’s prices.
- In addition, the company revealed that it is seeking regulatory approval for its planned share buyback programme. Management also disclosed that it is open to part in financing the share buyback programme with a debt raise although other options are still on the table. To our minds, expected improvement in future cash flows and the tax-deductibility of interest could provide some support for the debt option even though other risks abound.
- Considering that the firm is aiming to buy back up to 10% of its total issued shares, the proposed 12-month buyback exercise could require N289.7 billion (using last market closing price) in funding. If the program is approved, the company is likely to deploy the balance of cash (post provision for dividend) and funds from other sources (i.e. debt) to the transaction. We believe the buyback programme highlights management’s confidence about the prospects of the business.
Some concerns:
- Nigerian volumes (14.1MT) remained flat at the end of FY’19, despite heavy investments in the bag of goodies promotion in 2019. Nigerian volumes have been negatively impacted by rising competition in the domestic market and the knock-on effect of border closure on exports (-41.0% YoY). That said, management has revealed plans to commission the Apapa and Onne export terminals by end of Q2’20. This will enable the business export cement via waterways and reduce the impact of land border restriction on volumes.
- Operating margin printed at 32.3% in Q4’19 (vs 33.3% in Q4’18%). The surge in advertising, promotional, and haulage expenses were the key pressure points in the review quarter.
- Net finance expense rose by 16.6% YoY In Q4’19, following increased commercial paper (CP) issuance. Despite the moderation in interest rate, the possibility of more CP issuances could drive volume-induced pressure on finance expense.
- Income tax came in at N49.9 billion in FY’19 (vs the N89.5 billion tax credit in FY’18), despite the N58.4 billion tax credit associated with pioneer tax status on some lines. Management linked pressures on taxation to the N20.6 billion charged on lines with expired pioneer tax status.
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