Dangote Cement Plc – Resilient Q1 2020 results amid early impacts of COVID-19

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Dangote Cement Plc - Still on Course to Deliver Value

Dangote Cement Plc grew revenue YoY by 4% in its Q1 2020 result. Gross profit rose YoY by 3% on account of faster growth in production cost. Operating profit increased YoY by 4% due to marginal savings in administrative expenses. However, profit before tax (PBT) grew double-digit by 12% owing to a YoY reduction in finance cost and gains from foreign exchange adjustment. But due to the surge in income tax, profit after tax (PAT) grew mildly by 1%. EPS for the period stood at N3.60k (Q1 2019: N3.54k).

Volume growth and higher pricing in Nigeria anchor group revenue growth

The group’s revenue grew YoY from N240.16bn to N249.18bn in Q1 2020 anchored by Nigeria’s performance. Income from Nigeria increased YoY by 6% from N169.89bn to N179.34bn, driven by both volume and price increase. Volume grew mildly by 1%, while the average realized prices rose by 5% from N42,567 per metric ton (MT) to N44,633/MT in Q1 2020. Overall, revenue from Nigeria accounted for 72% of the group’s revenue in Q1 2020.

On Pan Africa front, aggregate revenue declined YoY by 1% from N70.27bn to N69.85bn in Q1 2020 on account of lower volumes. Volume decreased YoY by 3% from 2.35MT to 2.28MT in Q1 2020. The volume decline was due to technical issues in Tanzania, as well as lockdown in South Africa at the end of March. Though the average realised prices for the period increased by 2% from N29,941/MT to N30,634/MT in Q1 2020, it was not enough to offset the decline in output.

Consequently, the group’s volume declined by 60bps from 6.34MT to 6.30MT in Q1 2020 but owing to the higher realised prices in Nigeria, the group’s revenue advanced by 4%.

Higher production cost compresses gross profit margin

Cost of sales rose YoY by 5% from N99.48bn to N104.33bn in Q1 2020 driven by personnel cost and other production expenses. Salaries and related staff costs increased by 13% from N7.89bn to N8.94bn in Q1 2020. Also, other production costs grew from N1.45bn to N4.04bn in Q1 2020. As a result, gross profit increased by 3% from N140.68bn to N144.86bn in Q1 2020 and gross profit margin weakened by 50bps to 58% from 59% in Q1 2019.

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Operating expense grew, but other income supports operating income

The group’s operating expense increased YoY by 3% from N52.83bn to N54.20bn in Q1 2020, driven by selling and distribution expenses. Selling and distribution expenses grew YoY from N40.70bn to N41.36bn due to a 96% spike in advertisement and promotion cost. Though administrative cost decreased by 3% for the period, the 4% growth in selling and
distribution expenses bloated operating costs. Notwithstanding, operating income increased by 4% from N88.38bn to N91.78bn in Q1 2020 due to a 109% surge in other revenue.

FX gains amid lower finance cost lift PBT, but gains eroded by a higher effective tax rate

PBT grew double-digit by 12% from N78.96bn to N88.06bn in Q1 2020 on the back of foreign exchange adjustment by the CBN and lower finance cost for the period. The group recorded an FX gains of N3.75bn in Q1 2020. Also, finance cost decreased by 23% to N9.01bn in Q1 2020 due to the lower yield environment and reduction in the group’s borrowings. Nevertheless, PAT grew mildly by 1% to N60.59bn in Q1 2020 (Q1 2019: N60.25bn) due to a higher effective tax of 31% (Q1 2019: 24%).

Recommendation

We note the group’s resilience in growing revenue in Q1 2020 despite the early impact of the coronavirus (COVID-19) pandemic. Lockdown in South Africa, Ghana, Congo and in Nigeria began late March. Thus, sales in Q1 2020 were least impacted. Even at that, sales volume declined, but for higher pricing in Nigeria, revenue grew. Looking forward, however, we expect to see the full impact of the pandemic from Q2 2020 result.

Historically, though, Q2 and Q3 sales are usually the weakest due to raining season. We expect a profound decline in these periods given the pandemic. That said, we expect the group to leverage its market leadership status, advertisement, and promotional activities to cushion the impact.

We have a revised EPS of N12.16k informed by lower sales and a higher effective tax rate. Given the current market price of N137.30k, the stock is trading at 1% discount to our fair value estimate of N138.71k. Thus, we recommend a HOLD.