Dangote Cement Plc – Against the Whirlwinds

Dangote Cement Plc - Still on Course to Deliver Value

Recently, Dangote Cement Plc published its unaudited H1- 2020 financial result. According to the report, Revenue saw an increase of 2.0%y/y to N466.9bn, amid the disruption in economic activities by COVID-19.

However, volume declined by 1.5% y/y. Overall, the company profit before and after-tax increase by 4.7% and 5.8% to settle at N162.9bn and N126.1bn, respectively. Hence, we maintained our BUY rating on DANGCEM but revised our TP to reflect recent volatilities in the equity market.

Better Averages prices enhance topline performance

Dangote Cement Plc (DANGCEM) defied the whirlwind of COVID-19 pandemic by printing a y/y improvement in Revenue in Q2-2020, despite restrictions on movement its markets across Africa.

Notably, the Group Revenue increased by 4bps y/y in Q2-2020 and 2.0% y/y in H1-2020 to settle at N227.7bn and N476.9bn, respectively. The surprising increase in revenue was buoyed by the better average net prices realised in Nigeria and the Pan Africa market as well as the increase in volumes sold across the Pan Africa market.

Specifically, Net revenue per tonne in Nigeria increased by 3.8% to N44,855.0 in H1
-2020. Taking a deeper look into the Group’s Revenue, we observed that there was a decline in volume sold for the period under review as the overall volume declined by 1.5% y/y dragged solely by the 2.8% decline from the Nigerian market that accounted for over 60.0% of the Group’s Sales.

The management attributed the decline in volume from the Nigerian market to the restriction in movement implemented by the Nigerian government from the end of March-2020 and highlighted that the relaxation of lockdown in May and June-2020 had since paved way for the management to push volumes.

As expected in our previous report titled “Is DANGCEM’S “holiday” over?”, the company launched its maiden shipment of clinker with about 27.8tonnes exported from Nigeria to Senegal through the now commissioned Apapa Export Terminal.

Manufacturing Cost Analysis: Pressuring gross margin

Cost of Sales (+4.8%y/y to N202.4bn) rose faster than revenue growth (+2.0%) in H1 2020, mainly driven by the increase in the Nigerian manufacturing costs from N93.6bn in H1-2019 to N101.1bn in H1-2020.

Pan Africa manufacturing costs increased by 1.8% due to the increase in Pan Africa sales as well as the depreciation of the naira. A cost analysis of the Nigerian operation showed that the increase was spurred by higher energy costs due to unfavourable fuel mix which resulted in the use of more gas whose price increased compared to H1-2019.

The general increase in salaries also pushed Nigeria manufacturing costs upward relative to H1-2019. Notably, material consumed increased by 6.0% y/y to settle at N60.1bn.

Cost efficiency and improved income boost bottom-line

DANGCEM’s Operating Expenses (OPEX) declined by 1.5%y/y to settle at N103.7bn in H1- 2020. This was as the Group’s Selling and Distribution (S&D) expenses declined by 3.3%y/y to N77.6bn, offsetting the 4.3%y/y increase in administrative expenses to N26.1bn.

A sub-component analysis of the S&D expenses showed that Haulage costs saw a significant reduction, down 9.2%y/y to settle at N50.7bn, and the management attributed the decline to the reduced haulage costs seen in their Tanzania and Zambia operation due to the reduced volumes when compared to H1-2019.

The company’s aggressive promotional strategy in a bid to recoup some of the lost revenue (in the early part of Q2-2020) due to COVID-19 induced lockdown, spurred the management to spend more on the advertisement and promotional expenses (+70.0% y/y to N5.3bn).

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Depreciation charge declined by 15.3% y/y to settle at N10.0bn, buoyed by reduced depreciation charges from the Pan Africa segment (mainly in Ethiopia) as some of the trucks approach the end of their useful lives.

Also, Net finance cost saw a huge decline of 29.2% to settle at N10.6bn and management guided that the significant decline was fueled by the Nigerian Naira devaluation from about ₦365/1US$ to ₦387/1US$ which resulted in net exchange gains from inter-Group assets and liabilities that do not eliminate in full on consolidation in the Nigerian operations.

Overall, the Group’s EBIT for H1-2020 saw a mild increase of 1.7% y/y to settle at N173.5bn. Notably, we observed a mild reduction of 0.8% y/y in the effective tax rate for H1-2020, which the management guided was as a result of the amendment to the commencement rules based on the new Finance Act in Nigeria.

Accordingly, the Profit Before Tax and Profit After Tax increased by 4.7% y/y and 5.8% y/y to settle at N162.9bn and N126.1bn, respectively.

Financial Position Analysis

To further give context to the surprise increase in Revenue, DANGCEM’s Trade Receivable surged by 26.0%y/y to N17.6bn which clearly speaks to management’s aggressiveness in driving sales.

Also, we saw a 31.2% y/y spike in borrowing (recall that the cement issued an N100bn Bond during the period), which speaks to the increase of 6.3% y/y seen in finance cost.

Also, the Cash and cash equivalents witnessed a significant decline of 16.6% y/y to N103.3bn driven mainly by a whopping 63.1% y/y decline in a short term deposit to settle at N14.7bn. Overall, total assets increased by 3.7% to settle at N1.8trn for H1-2020.

Outlook: BUY rating maintained with downgraded TP

Going into H2-2020, we maintain our expectation for Revenue to grow by 2.4% to N912.8bn by year-end as stated in our earlier report titled Is DANGCEM’S “holiday” over? as we believe that the company is on course, having achieved 52.2% (N476.9bn) of our full-year revenue target in H1-2020 despite the COVID-19 pandemic that obstructed economic activities.

Our optimism is buoyed by the commencement of Apapa and Onne export terminals which we believe will continue to enable the business export cement via waterways rather than land which is likely to remain closed for a better part of H2-2020.

Also, we expect to see further the benefit of promotional campaigns embarked on in Q2-2020 on FY-2020 performance, especially as majority of Federal Government capital project are scheduled to take place in H2-2020.

Overall, we estimate a 26.1%y/y jump in the company’s PAT to N252.3bn in FY-2020E, buoyed by moderation in OPEX and finance charges growth as seen in H1-2020, exchange rate translation gains coupled with a reduction in the effective tax rate for the Nigeria operation which accounts for over 60% of the Group’s earnings.

Overall, we maintain our BUY rating on the ticker. However, factoring the current volatilities in the Nigerian equity market, we revise our Target Price (TP) to N175/share which gives an upside potential of 23.4% at the current price of N141.8 Again, we insist that the planned 10.0% share Buy-Back will remain positive for market valuation.

Dangote Cement Plc - Against the Whirlwinds - Brand Spur

Dangote Cement Plc - Against the Whirlwinds - Brand Spur

United Capital Research