Earnings surge despite lockdown
Dangote Cement wrapped up the first half of the year in impressive fashion, reporting a 6% y/y jump in Group bottom line to ₦126.1 billion, 22% ahead of our ₦103.2 billion estimates. The earnings expansion was achieved amidst a pandemic-induced slowdown in economic activity in April.
On a quarterly basis, operating earnings came under pressure, with the Nigerian business reporting a 6% y/y drop in EBITDA to ₦91.1 billion, dragged by higher energy costs, wages, haulage costs and selling and distribution costs. EBITDA margin moderated 190bps y/y to 59.5%. On the other hand, the Pan African business reported a 40% y/y jump in EBITDA to ₦16.9 billion, a record quarterly operating profit from the region.
This was largely due to increased volumes, higher pricing in Zambia, reduced haulage and depreciation costs in Tanzania, Zambia and Ethiopia. That said, dragged by the weaker Nigerian figures, Group EBITDA fell 2% y/y to ₦103.8 billion in Q2, at a reduced margin of 45.6% (Q2’19: 46.7%).
Overall, supported by the stronger operating the environment in Q1, Group H1’20 EBITDA came in flat versus the previous year at ₦218.1 billion (Vetiva: ₦210.4 billion), with an EBITDA margin of 45.7%. Furthermore, PBT fell 2% y/y to ₦74.8 billion in Q2, as a 16% y/y increase in debt balance drove a 24% y/y increase in net finance costs.
However, in spite of the drop in PBT, Dangote Cement reported an 11% y/y jump in Q2 PAT to ₦65.6 billion, supported by a 12.4% (Q2’19: 22.9%) effective tax rate.
Exports, promotions to drive volume growth
At the end of March 2020, Lagos State announced a partial lockdown in the movement of citizens in a bid to curb the spread of the ongoing COVID-19 pandemic. The rest of the country soon followed, with the resulting lockdown limiting economic activity across the country.
Lockdowns were also enacted across the Pan African countries. We had anticipated a sharp drop in public and private sector infrastructure spend as a result, with government and corporate treasuries directly or indirectly impacted in the short term. Thus, it came as no surprise to see a 28% y/y drop in cement sales in Nigeria in April, the month of the lockdown.
Revenue was also impacted by the Pan African business due to similar shutdowns. However, by the start of May, lockdown restrictions had eased across Africa, leading to a resurgence of economic and more importantly, construction activities.
By the end of Q2’20, volumes had recovered to 3.4 million MT in Nigeria (Vetiva: 3.1 million MT), a mild 6% y/y drop in sales, even as the borders were closed. Combined with strong Q1 volumes, the Nigerian business reported 7.4 million MT of sales in the first half of the year, 2.4% down y/y.
With the relaunch of the popular bag of goodies promo in July and amidst the resumption of sea-based exports in Q2, we forecast FY’20 Nigerian volumes at 14.0 million MT, up from 13.4 million MT. While cement sales fell 6% y/y in Q2, a 3% y/y rise in average revenue/tonne to ₦45,118 in Nigeria meant that Revenue moderated only3% y/y to ₦153.1 billion.
Combined with stronger Q1 results, however, H1’20 revenue came in 1% higher y/y at ₦332.4 billion. While we maintain our expectation of stronger competition in the space amidst reduced demand, we adjust our pricing expectations to reflect higher costs and anticipate a 3% growth in average revenue/tonne over FY’20. Thus, we forecast an FY’20
Revenue of ₦625.4 billion for the Nigerian business.
Similar to Nigeria, the Pan African business saw a recovery in demand post-lockdown, with Q2 sales rising 3% y/y to 2.4 million MT, supported by stronger sales in countries such as Cameroon, Congo, Ethiopia, Senegal and Sierra Leone. Combined with Q1, the region recorded a 1% y/y jump in cement sales to 4.7 million MT.
With average revenue/tonne also rising 4% y/y to ₦31,117 in Q2’20, Pan African revenue surged 8% y/y to ₦75.2 billion in the second quarter, taking H1’20 topline 4% higher y/y to ₦145.0 billion.
We forecast continued sales growth in the region and raise our Pan Africa volume and Revenue forecasts to 9.4 million MT (Previous: 9.2 million MT) and ₦293.9 billion. Overall, we forecast a 1% y/y moderation in FY’20 Group volumes to 23.5 million MT, with Revenue growing 3% y/y to ₦919 billion, thanks to higher pricing.
The new export strategy: A medium-term boost
Following the commissioning of the export jetty in Apapa, Dangote Cement resumed exports of clinkers to West African markets in Q2, with a first clinker shipment of 27.8 thousand MT to Senegal in June.
The company is looking to build on this and expand its shipping routes to cover several West and Central African countries including Cote d’Ivoire, Cameroon and Ghana. The expansion will focus on shipping clinkers to countries without commercial quantities of limestone, which currently import clinkers from Asia and Europe.
In all, management has identified a possible 15 target countries with a combined population of over 350 million people. While we expect total clinker sales for 2020 to be negligible, we see this as an effective medium-long term growth strategy, possibly delivering additional volume growth for the Nigerian business.
A decent performance expected despite economic challenges
After taking into account the stronger-than-expected performance in the first half of the year, we have adjusted our Group EBITDA expectation to ₦423.5 billion (margin: 46%), supported by improved Pan-African EBITDA. Finally, we adjust our FY’20 PAT expectation to ₦209.8 billion.
After updating our model, we revise our target price to ₦198.15, reflecting stronger medium-long term prospects on account of the export strategy, an expected reduction in WACC due to the debt strategy and an overall low-interest environment.