In its recently released financial performance for Q1 2021, Dangote Cement Plc (Dangote Cement) recorded a 33% YoY revenue growth from N249.18bn in Q1 2020 to N332.65bn in Q1 2021.
The Group’s revenue growth was driven by a combination of price and volume increases during the quarter. Operating profit grew by 61% YoY from N91.78bn in Q1 2020 to N147.83bn in Q1 2021.
Finance cost spiked by 181% YoY from N9.01bn in Q1 2020 to N25.29bn in Q1 2021. Nonetheless, profit before tax grew by 48% YoY from N88.06bn in Q1 2020 to N130.10bn in Q1 2021. Profit after tax grew by 48% YoY from N60.59bn in Q1 2020 to N89.71bn in Q1 2021.
Increased Revenue Reflects Capacity Expansion Amid Strong Demand
Dangote Cement’s solid revenue growth in Q1 2021 was driven by increased demand for products, as a result of increased activities in the real estate sector. In our view, the implementation of an accommodative monetary policy stance by the monetary policy authorities resulted in a hunt for higher yields and returns by local investors, of which alternative asset classes (such as real estate) were explored.
We also posit that the low-yield environment drove increased demand for a mortgage. According to data by the National Bureau of Statistics, the real estate sector (nominal GDP) grew by 9% YoY from N2.55trn in Q4 2019 to N2.79trn in Q4 2020.
On a quarterly basis, the real estate sector grew by 27% from N2.19trn in Q3 2020. Therefore, the complementary demand for real estate implied a higher demand for cement, which extended to Q1 2021.
To meet the increased demand for products, the Group ramped up production capacity and sold higher volumes during the period. Volume sales in the Nigerian market grew by 22% YoY from 4.02mn tonnes in Q1 2020 to 4.91mn tonnes in Q1 2021.
The Group also realised a higher average price per tonne from N45.87k per tonne in Q1 2020 to N48.84k per tonne in Q1 2021, representing a 9% price increase.
Hence, the combination of price and volume growth translated to a 34% YoY revenue growth in the Nigerian market.
We note that the Group’s revenue growth was the highest during the quarter among other major market cement players (Lafarge Q1 2021 revenue growth: +12% YoY; BUA Cement Q1 2021 revenue growth: +27% YoY). Effectively, it suggests that the Group’s market share increased during the period.
In its Pan African markets, the Group recorded a 13% YoY volume growth from 2.32mn tonnes in Q1 2020 to 2.61mn tonnes in Q1 2021, attributed to strong operating performances across major markets including Tanzania (+29% volume growth), Senegal (+6% volume growth), and Cameroon (+16% volume growth).
The volume growth recorded across the Group’s Pan African markets was on the back of increased consumption owing to construction projects and government housing projects. The average price per tonne realised across the Pan African markets stood at N35.58k in Q1 2021, representing an 18% YoY increase from N30.16k per tonne in Q1 2020.
Thus, the revenue generated by the Group across its Pan African markets grew by 33% YoY from N69.85bn in Q1 2020 to N92.97bn in Q1 2021.
Overall, the Group’s total revenue grew by 33% YoY from N249.18bn in Q1 2020 to N332.65bn in Q1 2021. The Group’s total revenue growth was majorly supported by the volume growth recorded in its Nigerian market.
Improved Technology and Operating Efficiency Spur Margin Expansion
Cost margin lowered by 300 basis points from 42% in Q1 2020 to 39% in Q1 2021, attributed to the Group’s modern and efficient plant. We also attribute the lower cost margin to the impact of economies of scale associated with higher volumes. On the back of the lower cost margin, gross profit rose by 41% YoY from N144.86bn in Q1 2020 to N204.66bn in Q1 2021.
Operating expense margin also lowered by 500 basis points from 22% in Q1 2020 to 17% in Q1 2021, as the Group’s cost optimisation efforts materialised during the period. The impact of the cost optimisation resulted in a 61% YoY growth in operating profit.
However, the growth in profit before tax lowered to 43% YoY due to higher finance costs in Q1 2021. Notably, the Group’s average total borrowings grew by 36% YoY from N342.17bn in Q1 2020 to N465.01bn in Q1 2021.
The increased borrowings reflected the N100bn debt capital raised by the Group in Q2 2020. Given the higher debt level, on a year-on-year basis, the impact reflected in finance cost (+63% YoY from N9.01bn in Q1 2020 to N14.68bn in Q1 2021). The Group also recorded a N10.62bn foreign exchange loss during the period.
In the Nigerian market, we expect to see sustained volume growth in the near term. However, in the medium term, we posit that the production ramp-up of other market players could induce competition that would limit the volume growth in the Nigerian market.
Also, on the back of an upward trend in interest rates in the economy, we expect to see some pull-back effect on the level of demand from the private sector. In addition, the gradual economic recovery from the recession and the increased economic activities that follow is expected to positively impact the Group’s topline.
In the Pan African market, we expect to see sustained market penetration and increased demand in the near term and medium term. We also believe that the Group is positioned to capture the opportunities presented by the African Continental Free Trade Area agreement (AfCFTA).
We revised our projections and reflected our improved outlook of earnings and cash flow, amid the increase in demand and pricing power of the Group across its two geographical segments. We also note the significant growth in the construction sector and the Group’s increased market share. Based on these considerations, we upgrade our FY 2021 EPS forecast to N18.10 (previous: N17.50).
Using a blend of Discounted Cash Flow, Discounted Dividend, Residual Income, and Enterprise Value valuation methodologies, we arrived at a N249.75 fair value for the Company. Based on our fair value, the stock’s justified P/E stands at 13.80x (previous: 11.50x).
The increase in justified P/E reflects our improved outlook for earnings and cash flow growth. The higher P/E also factored in potential capacity expansions and increased market share, amid strong industry fundamentals. At the current market price, the stock offers a 26% total return (price return: 18%; dividend yield: 8%).