Dangote Cement Plc’s financial scorecard in Q3:2019 showed clearly that the company has put the COVID-19 setback behind and, based on our estimates, is set to hit a record turnover by a full year. On a standalone basis, group sales volume in Q3:2020 was higher by 23.92%YoY, thereby putting the total volumes sold in the quarter at 7.1MT (vs 5.7MT in Q3:2019).
This is due to improvements in sales volumes in both Nigerian and Pan-African operations. In Nigeria, a combination of strong local demand for cement, land border exports waiver, the commencement of clinker exports via the Apapa Export Terminal and product promotion ensured the 39.86% YoY increase in sales volume in Q3:2020.
Taking into cognizance the commencement of operations at the Onne Export Terminal in November, we have estimated clinker exports from Nigeria to contribute c.0.35MT to total volumes by full-year (vs. 0.17MT as at 9M:2020). There were stellar performances across its pan-African business segment, save for Tanzania and Zambia, where volumes declined year-on-year.
Senegal, however, stands out as it nears full capacity utilization (c.92%). Overall, pan African volumes in Q3:2020 increased by 9.23%YoY. Consequently, group revenue in Q3:2020 was up by 34.20%YoY from NGN212.06bn in Q3:2019 to NGN284.59bn, thereby also pushing year-to-date (9M:2020) revenue higher by 12.01%, from NGN679.79bn in 9M:2019 to NGN761.44bn.
By full year, we expect the company to post a total turnover of NGN1.00trn – the highest in the company’s history and a growth of 12.18% when compared to NGN891.67bn recorded in 2019FY. On a trailing twelve months basis, group revenue stood at NGN973.32bn in 9M:2020. Hence, our optimism stems from expectations of a positive outing in Q4:2020. We expect cement demand in Nigeria to remain strong while clinker and cement exports should further support sales volumes.
Improved Earnings and Modest CAPEX Boost Free Cash Flows
Although the positive topline performance strongly supported the company’s profitability, we highlight some cost pressure points. In 9M:2020, we note the sharp rise in energy costs by 13.01% and the rise in materials cost (+10.14%) triggered by the naira devaluation. Nonetheless, strong topline gains ensured the cost to sales ratio in 9M:2020 was lower at 41.70% (vs 42.66% in 9M:2019).
Further, despite advertisement and promotional costs increasing by 25.99%YoY, EBITDA margin was higher at 46.62% (vs 44.61% in 9M:2019). Ultimately, earnings per share improved markedly by 35.20% to NGN12.25 (vs NGN9.06 in 9M:2019) implying a return on equity of 25.50% (vs 18.02% in 9M:2019).
The company continues to reap gains of the cash and cost optimization initiatives launched in Q2:2020. In 9M:2020, free cash flow improved by 63.43% to NGN283.23bn (vs NGN173.30bn in 9M:2019) following modest CAPEX and improved cash earnings. Also, the robust cash position puts the company in a better liquidity position when compared to H1:2020 with current and cash ratios of 0.65x and 0.23x ( vs 0.55x and 0.13x in H1:2020) respectively.
Considering our new topline expectations for 2020FY, we revise our EBITDA estimate upwards from NGN503.42bn to NGN522.25bn. We also employ a forward EV/EBITDA of 7.03x (vs 7.70x current EV/EBITDA). Hence, having adjusted for net debt of NGN262.41bn, we arrive at our revised target price of NGN200.06. This represents an upside potential of 0.03% when compared to its current price of NGN200. Hence, we rate the counter as HOLD.