Dangote Cement: Export Potentials Underscore Positive Topline Outlook

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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.

Dangote Cement Brandspurng Export Potentials Underscore Positive Topline Outlook
Photographer: Tom Saater/Bloomberg

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.

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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.

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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.

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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.

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Dangote Cement: Export Potentials Underscore Positive Topline Outlook - Brand SpurDangote Cement: Export Potentials Underscore Positive Topline Outlook - Brand Spur

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