FY 2019: Is Dangote Cement’s “Holiday” Over?

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Recently, Dangote Cement Plc (DANGCEM) released its audited financial report for the year that ended 31st December 2019. Therein, Revenue declined 1.1% to N891.7bn while Profit After Tax dipped sharply by 48.6% y/y to N200.5bn. In all, the management proposed a final dividend of N16.0/share (same as 2018) translating to a dividend yield of 9.4%. Below we give our take on the past year’s result and our expectations for 2020.

Topline Analysis: Deep discounts fail to spur Revenue growth

DANGCEM’s Revenue declined marginally by 1.1% y/y to N891.7bn in FY-2019, dragged by lower average net prices which failed to spur a commensurate growth in Group’s sales volume. Accordingly, Revenue in Nigeria and Pan-Africa declined by 1.3% y/y and 0.2% y/y to N610.2bn and N282.7bn respectively. The management attributed the deeper decline in Nigeria’s Revenue to the sharp drop in export sales (-41.0% y/y to 0.45Mt) which outweighed the growth in domestic sales (+2.0% to 13.7Mt). Notably, the drop in export sales was attributed to the closure of land borders, majorly in Q4-2019 while domestic volume growth was supported by the “Bag of Goodies” promotion, launched in July-2019, as the company added a new 4.5Mt capacity during the year.

Elsewhere, a 0.8% y/y growth in Pan-African cement sales volume (inclusive of clinker sales – 1.9% y/y) failed to buoy Net Revenue (-0.2% y/y) as the estimated average Pan-African ex factory cement price declined 0.7% y/y to $80/tonne. Notably, the volume growth was supported by the Sierra Leonean (+116.0% y/y) and Tanzanian (+94.0% y/y) operations which almost offset weaknesses in some other Pan-African markets, such as Ghana (-34.0% y/y), South Africa (-9.4% y/y), Cameroon (-6.5% y/y) and Zambia (-5.6% y/y). We note that the FY- 2019 result is the first revenue decline in 7years. Over the years, growth has been supported by the sustained uptrend in Nigeria and pan-African expansion. Clearly, increased competition in the home market and slower pan African growth may suggest the need to recalibrate the strategy for growth across the continent.

Manufacturing Cost Analysis: Marginal reduction is not enough

The rate of decline in Revenue (-1.1% y/y) was faster than the reduction in Cost of Sales, which inched lower by 0.9% y/y to N380.0bn. Accordingly, Gross Profit dipped 1.2% to N511.7bn and Gross Margin shed 0.1% to 57.4%. Analysis of the regional manufacturing cost showed that the performance was dragged by the higher production cost in Nigeria (+11.5% y/y to N181.0bn), which the managements attribute to the double-digit inflation in material prices. Meanwhile, lower manufacturing cost as a result of lower sales volume in Ghana, South Africa and Cameroon supported the performance.

Bottom-line Analysis: PAT down 48.6% y/y, in absence of tax credit

DANGCEM’s Operating Expenses (OPEX) rose by 13.4% y/y to N214.8bn. This was spurred by higher Administrative (+3.1% y/y) as well as Selling and Distributions (+17.3% y/y) expenses. Sub-component analysis showed that Haulage expenses spiked, up 21.7% to N107.2bn, as a result of higher sales distribution costs in Nigeria (+24.7% to N70.7bn) and Pan Africa (+16.4% to N36.5n). Also, the company’s aggressive promotional strategy in a bid to promote brand equity and retain market share left an imprint on the Advertisement and Promotional expenses as the cost jumped by 115.5% y/y to settle at N8.6bn (previously: N4.0bn). Accordingly, Operating Profit declined by 11.5% y/y to N299.9bn and Operating margin shed 4.0% to 33.6%. Net Finance cost climbed higher by 30.2% y/y to N50.1bn as Finance Income declined by 32.8% y/y to N7.6bn (mainly due to lower interest-earning on cash balances in Nigeria) while Finance cost jumped 15.9% y/y to N57.7bn (mainly as a result of exchange losses on CFA franc, Sierra Leonean Leone and the Ghanaian Cedi). Accordingly, Profit Before Tax fell by 16.7% y/y to N250.5bn. However, Profit After Tax declined faster by 48.6% y/y to N200.5bn worsened by the base effect of the one-off tax credit of N133.7bn enjoyed in 2018, on Ibese production lines 3 & 4 and Obajana production line 4. Again, this may be a pointer that DANGCEM’s days of huge tax break are gradually coming to an end. In all, EPS declined from N14.98/share (excluding the impact of the one-off tax credit in 2018) to N11.79/share in 2019. Despite the pressures on bottom-line performance, the board of directors have proposed a dividend of N16.0/share (same as 2018), resulting in a dividend yield of 9.4% (vs. 1-year NTB yield of 5.6%). Overall, the Leverage ratio climbed to 41.0% thus ROE and ROA halved to 21.3% and 11.7% respectively.

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Balance Sheet Analysis

To further give context to pressure on earnings, DANGCEM reported a 25.8% and 32.5% reduction in Cash & Cash Equivalence to N123.9bn and Trade Receivables to N30bn respectively coupled with a reduction in receivable turnover to settle at 23.9x which is way below the 5years receivable turnover average of 29.1x Also, Borrowings (N367.9bn) and Total Liability (N843.4bn) jumped 6.4% and 19.2% respectively, this clearly speaks to the surge seen in net finance cost as highlighted above. Overall, Shareholders the fund fell 9.0% to settle at N897.9bn for the year.

Outlook: BUY recommendation maintained at a TP of N199

Looking ahead, despite the challenging operating and regulatory environment, we remain positive on DANGCEM. This is predicated on our expectation for export sales to recover in 2020 as Nigeria and Congo commence clinker export to neighbouring countries. Specifically, the plan to commission Apapa and Onne export terminals by the end of Q2-2020, which will enable th business export cement via waterways and reduce the impact of land border closure further supports our optimistic position. Also, the management’s resolve to intensify promotional campaigns as well as the government’s drive to increase infrastructure spending in Nigeria should further spur domestic sales. Finally, we expect the completion of the 1.5MTPA plant in Ivory Coast (slated for Q4-2020) to provide further support to overall volume growth, towards the end of the year. In all, we expect revenue to expand by 2.4% in 2020, EBIT and PBT are anticipated to rebound by 11.8% y/y and 20.1% y/y respectively, supported by slower growth in OPEX and finance charges. Accordingly, we expect Profit After Taxes to settle at N242.3bn, jumping 20.1% for the period. Overall, we maintain our buy rating on the ticker, holding at our target price of N199/share which puts upside potential at 17.1%. Notably, we insist that the planned 10.0% share Buy-Back will remain positive for market valuation.

United Capital Research