Dangote Cement Plc recorded double-digit growth across its earnings as published in its HOLD FY 2020 report. Group revenue increased by 16% YoY induced by volume growth and higher realized prices in the period.
On the back of the sales growth, Dangote Cement’s gross profit rose by 17% YoY. Operating profit surged by 29% YoY, supported by a slight reduction in operating expenses and an increase in other income. Profit before tax (PBT) grew by 49% YoY, and profit after tax (PAT) increased by 38% YoY. EPS for the period stood at N16.14k (FY 2019: N11.76k). The management proposed a dividend of N16.00k for FY 2020 (FY 2019: N16.00k).
Increased Real Estate Demand Amid Promotional Activities Drove Sales Increase
The group’s revenue increased by 16% YoY from N891.67bn to N1.03tn in FY 2020, driven by volume and higher realized prices in the Nigerian and Pan African markets. The group’s volume sales rose by 9% from 23.68MT to 25.72MT in FY 2020, driven primarily by volume growth in the Nigerian market.
Dangote Cement’s sales volume in Nigeria increased by 13% YoY from 14.12MT in FY 2019 to 15.94MT in FY 2020 due to the group’s promotional activities during the year, export sales, increased real estate demand due to the low interest-rate environment and lower rain in 2020.
Sales volume in the Pan African market grew by 4% YoY from N9.56MT to 9.98MT in FY 2020. The group’s realised price per tonne in the Nigerian market increased by 5% to N45,177 in FY 2020 and increased by 8% in the Pan African market to N31,926 in FY 2020, due to lower discounts and rebates contributing to the overall revenue growth in FY 2020.
Increased Cost Of Sales Due To Higher Production Amid Rising Inflation And FX Devaluations
Production cost rose by 15% YoY from N379.99bn to N437.97bn in FY 2020. The cost increase was on the back of higher production levels in Nigeria and the Pan African market to meet the increased volume demand. The manufacturing costs in Nigeria grew by 25% YoY from N181.00bn to N225.70bn in FY 2020.
Besides the impact from volume growth, the elevated general price level (inflation) in Nigeria in 2020 and FX devaluation impact on foreign denominated expenses also contributed to the cost increase.
Elsewhere, Pan Africa manufacturing cost increased by 7% YoY from N199.00bn to N212.20bn in FY 2020. The cost increase was primarily due to the significant volume increase in Ethiopia, Congo and Cameroon. Nonetheless, owing to the increased production output, the group maintained a relatively flat cash cost in FY 2020.
As a result, gross profit increased by 17% from N511.68bn to N596.23bn in FY 2020, and gross profit margin strengthened slightly by 30bps to 58% in FY 2020.
A Flat Operating Expense Due To The Group’s Cost Curtailment Measures
Dangote Cement’s operating cost decreased slightly from N214.77bn in FY 2019 to N214.06bn in FY 2020, driven by the decline in selling and distribution cost despite the volume growth in the period. Selling and distribution expenses declined by 4% YoY from N160.65bn in FY 2019 to N153.72bn in FY 2020.
The decline was driven by a lower depreciation (down 23% YoY) as some of the group’s trucks approached the end of their useful lives. Due to the improvement in efficiency and turnaround time and the reduction in the use of third-party trucks, the group’s haulage cost also decreased by 8% YoY. On the back of the group’s cost control measures, operating profit increased by 29% YoY from N299.89bn to N386.73bn in FY 2020.
2020 was a challenging year for most companies due to the impact of the COVID-19 pandemic on businesses and economies. In the wake of the pandemic, we anticipated a rough year for the group due to the industry’s sensitivity to business cycles.
However, it turned out differently as a record year for the group on many fronts. In FY 2020, the group surpassed N1 trillion in revenue and increased production capacity by 3MT in Nigeria. The group commissioned two export terminals (Apapa and Onne terminal) in Nigeria and a gas power plant in Tanzania.
Besides, we note the impressive volume and price growth despite the pandemic’s impact on government and household income. We also noted the group’s cost control measures, with healthy margins. As economies recover in FY 2021, we believe that the group is well-positioned to capture more value.
Thus, we have a forward EPS of N17.50k per share and a fair value estimate of N201.03k on the stock. At the current market price of N215.00k, the stock trades at a justified PE of 11.5x and offers a one-year total return of 2%.
Thus, revise our recommendation to a HOLD.