Dangote Cement Plc (“DANGCEM”, “The Company”) reported FY- 2020 results on 23rd March. Despite the pandemic-induced disruption to its activities, Group Revenue increased 16.0% y/y to N1.03trn, driven by strong growth in sales volume (+8.6% to 25.7Mt), particularly in Nigeria.
The company also weathered the storm of cost pressures, aided by price increments, with Cost of Sales increasing 15.3%, slower than revenue growth. Overall, increased sales, efficient cost management and significant moderation in finance costs resulted in a strong bottom-line performance, with Profit Before Tax (PBT) and Profit After Tax (PAT) increasing by 49.0% and 37.7%, respectively. We update our forecasts and valuation in response to the new data and changing market dynamics.
Resilient Local Demand Boosts Top-line
DANGCEM defied the COVID-19 pandemic by printing impressive topline growth in FY-2020, despite economic restrictions in Nigeria and its markets across Africa. The company reported a 16.0% uptick in Revenue to N1,034.2bn from N891.7bn in FY-2019. This increase was driven by a robust expansion in Nigerian sales volumes (up 12.9% y/y to 15.9Mt) and surprising resilience in its Pan African operations (up 4.4% y/y to 10.0Mt). The company’s fortunes were boosted by a V- shaped recovery in cement demand through H2-2020, a result of pent-up demand from Q2-2020 when construction activity was restricted due to pandemic-induced total lockdowns. Furthermore, in Nigeria, volume growth (+14.3%) more than compensated for a drop in export volumes (-27.3%), which was subdued by pandemic-related pan- African trade restrictions and the land border closure in Nigeria.
On further analysis, the company saw increased price realization (average selling price per tonne) due to inflationary pressures, which persisted through the fiscal year, and the impact of exchange rate devaluation on costs. For context, Revenue per tonne in Nigeria increased by 4.5% to N45,165.0 in FY-2020.
The company also kicked off clinker exports with about 197kt exported from Nigeria through the year. As seen in Nigeria, the Pan African business saw improved sales volume growth, particularly following the lockdowns, with FY-2020 sales rising 12.7% y/y to N318.7bn, supported by strong performance in Cameroon, Congo, Ethiopia, and Senegal.
Operational Efficiency Drives Margin Expansion
At the cost level, the Cost of Sales rose significantly (+15.3% y/y to N468.4bn), albeit outpaced by Revenue growth (+16.0% y/y). Consequently, Gross Margin expanded by 27bps to 57.7% from 57.4%. The increase in Cost of Sales was mainly driven by an increase in energy costs from N122.8bn in FY-2019 to N146.3bn in FY-2020, an expected manifestation of the Naira’s devaluation. Notably, the cost of material consumed increased by 15.1% y/ y to settle at N134.9bn amid inflationary and FX pressures.
Operating expenses declined marginally by 0.2% y/y to N214.2bn in FY-2020 from N214.8bn in FY-2019, reflecting successful cost curtailment in the face of pandemic-related constraints. Specifically, lower haulage expenses (-7.7% y/y) led to a moderation in Selling and Distribution expenses (down 4.2% y/y) and counteracted the surge in Administrative expenses (11.5%). As a result, the group’s EBITDA increased by 20.9% to N478.1bn on the back of a 16.7% y/y increase in Nigerian business EBITDA to N421.4bn (58.5% EBITDA margin) and a 49.0% y/y surge in Pan Africa EBITDA to N71.3bn (22.4% EBITDA margin).
Notably, the surge in Pan Africa EBITDA is traceable to increased volumes in Cameroon, Congo, and Ethiopia, as well as higher pricing in Zambia and increased use of local coal and alternative fuels in Ethiopia. As such, group EBITDA margin expanded to 46.2% y/y from 44.3% in 2019.
Despite an increase in financial liabilities, the company saw a 23.7% reduction in Finance Costs, on the back of the low-interest rate environment. FX gains also drove increased finance income (+291.8% y/y), against FX losses recorded in FY-2019. Notably, we observed an 863bps increase in the effective tax rate, which management explained was due to manufacturing lines exiting Pioneer status in February 2020 and thus being unable to take advantage of tax credits for the remainder of the year. Overall, Profit Before Tax (PBT) and Profit After Tax (PAT) increased by 49.0% y/y and 37.7% y/y, respectively.
Our three-step Du-Pont analysis of the firm’s Return on Equity (ROE) showed that despite a marginal moderation in Asset Turnover (0.50x in FY-20 from 0.51x in FY-19), a surge in Net Margin (from 22.5% to 36.1%) and increased leverage (2.3x in FY-20 vs 1.9x in FY-19) boosted ROE. In line with the huge bottom-line growth, the board of directors have proposed a dividend of N16.0/share, same as the preceding years’ payout.
N100bn corporate bond issue drives leverage ratio to 2.3x DANGCEM’s debt portfolio continues to grow as the company looks to expand across its markets and boost its export capabilities. Debt/Equity and Leverage ratio increased to 1.3x (vs a 5-year average of 0.9x) and 2.3x (vs. 1.9x 5-year average), respectively, majorly driven by aggressive growth in financial liabilities. The rise in leverage is primarily attributable to the N100.0bn bond issued in April 2020, the proceeds of which are being used to fund capital expenditures related to the Company’s 3Mt plants in Okpella and Obajana (completed), as well as working capital and debt refinancing needs. However, the company’s interest coverage is very robust, at 8.8x, above the 5-year average of 5.6x.
Outlook: Topline Line Growth To Moderate Owing To High Base
Our outlook on DANGCEM for FY-2021 is positive as we expect Nigeria’s economic recovery to continue to support local demand for cement and buoy continued group revenue growth. Our expectation is also predicated on recovery in exports – given 2020s relatively low export base (due to the land border closure), the new Apapa and Onne sea export terminals and the additional 3Mt Obajana capacity. However, we do not expect any significant growth in local Real Estate demand, as interest rates rise towards pre-pandemic peaks, even as public infrastructure investment recovers.
Accordingly, we expect revenue growth for the Nigerian segment to moderate to 14.4% (from 18.0%) to N801.2bn, owing to the high base of 2020 volumes. For its Pan Africa business, we see the expected SSA-wide post-pandemic recovery sustaining volume growth, forecasted at 5.0% y/y (vs. 4.4% in 2020), as more volumes are sold in Congo, Tanzania, Ethiopia and South Africa. Overall, we project a 13.0% y/y increase in Group revenue to N1,168.3bn.
We anticipate comparable cost burdens over the course of the year as inflation persists even as the FX situation improves. We also think the effectiveness of the ‘Bag of Goodies’ promo’s relaunch in July would inspire additional marketing spend.
Thus, we forecast a 12.9% y/y EBITDA growth to N537.5b, implying an EBITDA margin moderation of 22bps to 45.01%. Finally, we expect higher financing costs as a result of higher rates amid the company’s expanded debt portfolio and the company’s increased participation in the debt markets (in view of the company’s N300.0bn bond program). We foresee this, along with the absence of pioneer tax credits, having an impact on bottom-line growth. These factors bring our forecast PBT and PAT to N407.1bn (+9.1%) and N305.4bn (+10.6%).
BUY Rating Maintained With Downgraded Target Price
Following the completion of the first tranche of its share buyback program, the company’s management noted that the SEC buyback authorization had expired but reiterated the company’s intent to repurchase 10% of its total outstanding shares, with the program’s success contingent on stock market turnout and the company’s liquidity. Accordingly, while we do not rule out another buyback, we doubt the possibility of another one this year. Based on the foregoing, and adjusting our valuation assumptions for a higher risk-free rate and country risk premium, we have revised our price target on the ticker slightly lower to N253.7 from N261.5, which still translates to a BUY rating (12.8% upside) based on its current market price.