Prospects for Export Volumes Underpins Positive Topline Outlook
At the end of H1:2020, Dangote Cement Plc’s. (DANGCEM) topline performance surpassed the corresponding period in 2019, shrugging setbacks by the COVID-19 pandemic in Q2:2020.
Although city lockdowns (April -May) in some of its operating regions and loss of export volumes in Nigeria (a result of the sustained border closure) left its mark on group volumes in H1:2020, which dropped by 1.46%, revenue, however, grew by 1.95%, lifted by higher realized prices in most regions.
Although the land border closure in Nigeria affected cement exports, the company has commenced its clinker exports from its newly completed terminal at the Apapa Port– adding c.28 Kilotonnes to Nigerian volumes.
Despite the looming headwinds of a drop in public demand (owing to the reduction in Government CAPEX) and price discounts from promotional activity (the major drag to 2019 performance), we expect a positive full-year performance.
Although the company’s annualized half-year performance (NGN900.79bn) trails our forecast revenue (NGN942.58) by 4.43%, our optimism derives from the commencement of operations at the export terminals in Apapa and Onne ( In full operation, export volumes from the terminals are expected to more than offset the c.60KT monthly exports volume lost due to the border closure), the pickup in economic activities and higher volumes resulting from its ongoing retail deepening strategy.
Hence, we maintain our expectation that topline should grow by only 5.71% in 2020FY.
Naira Devaluation Triggers Cost Pressures
The company’s costs grew, in line with our expectation in our last update. As expected, direct costs rose by 4.79%, impacted by the CBN’s FX devaluation as energy and raw material costs increased by 3.65% and 6.04% respectively in H1:2020.
Hence, the cost to sales ratio was higher at 42.45% (vs. 41.30% in H1:2019). Although OPEX dropped by 1.52% (a result of lower haulage expenses), EBITDA margin was flat at 39.11% (vs 39.64% in H1:2019). Net margin also widened to 26.45% (vs. 22.56% in H1:2019) as topline gains offset the 6.29% increase in finance costs.
For the rest of the year, we still expect higher prices of import requirements (a result of the Naira devaluation) to keep direct costs elevated. We also expect the “bag of goodies” promotion to drive OPEX higher.
Also, given the company’s dollar-denominated debt and additional debt issuances during the past quarter, we still expect finance costs to rise by c.20.75% by a full year.
Funding Mix: Debt Issuance in Q2 lifts Gearing
The company’s debt to asset ratio increased to 0.26x in H1:2020 (vs 0.21x in 2019FY), while its gearing ratio also moved higher to 0.64x (vs 0.41x in 2019FY). This shows the effect of the company’s new debt issuances (an NGN100bn commercial paper and NGN100bn drawdown from the NGN300bn bond issuance) in Q2:2020 to fund expansion projects and working capital.
Thus, total debt stock stood at NGN475.41bn as at H1:2020. However, interest coverage remains healthy at 8.32x (vs. 8.69x in H1:2019).
Outlook and Recommendation
We project an EV/EBITDA of 6.30x and an EBITDA of NGN503.42bn to arrive at our 2020 target price of NGN171.80 (+21.16% upside). Thus, we maintain our BUY rating on the counter.