Dangote Cement being loaded in a truck at Okene factory. Photo credit: Yalwa

…as competition, global economic take its toll on margins

By JULIUS ALAGBE

Equity analysts are reviewing their estimates’ position on Dangote Cement Plc following its unimpressive performance in the first half of 2019. The review has taken the company downward in their rating given the future outlook for the economy both locally and globally especially in terms of the African continent where it does most of its business.

The cement company is projected to make N923.743 billion in revenue at the end of financial year 2019, according to PAC Research estimate. However, WSTC Securities went a bit lower and adjusted revenue estimate to N864.78 billion from N989 billion, though analysts maintained BUY rating for the stock.

The cement company weak performance was attributed to strong competition in the industry which analysts described as fierce, and hope for resurgence in the third quarter remains dicey given the past performance trend. DangoteCem had hitherto dominated the industry but massive investments by BUA and Lafarge seem to be under cutting its market share.

WSTC Securities stated that in the wake of the changing market dynamics, analysts have revised estimates and lowered revenue forecast for DangCem. They said they considered a possible weak third quarter earnings growth possible. This was hinged on the fact that historically, DangCem had always reported a weak third quarter due to climatic conditions, as rainfall tend to drag the pace of construction works which lowers demand for cement during the period”.

Analysts at PAC Capital expect marginal increase in cost of sales per estimates. Then, net profit margin is expected to slow to 26.34% in 2019 as against 43.31% in 2018. The firm also estimated that Dangote Cement asset value is expected to hit N1.033 trillion in 2019.

In the first half

Analysis of the cement company numbers revealed that on every bag of cement sold, Dangote Cement made 58.70% revenue. This means that it generated N58.70 on every N100 sales. However, overheads of the company claimed more than 33% of the gross amount earned, as the result shows.

At the end, the company pocketed 25.49% on every bag of cement sold. To put it straight, on every N100 sales, its unencumbered profit settled at N25.49. Pan Africa Capital (PAC) Research stated that DangoteCem underperformed estimates, but the stock remains a BUY for long term investors.

In its valuation, PAC said, “our valuation puts the target price of the stock at N214.44, representing an increase of 29.18%, from the current price of N166.00.

WSTC, however arrived at a fair value estimate of N212.49 per share, stating that the share is trading at discount compare with the current market price. The total sales volume declined marginally and this reflected on the top-line as revenue fell by 3.05% to ₦467.73 billion as against ₦482.44 billion in the first half of 2018.

Due to election delay in Nigeria in February 2019, increased competition from new capacity in Nigeria, operational and economic challenges in key territories such as Ethiopia and South Africa, total cement volumes sold fell marginally by 0.60%, WSTC revealed.

PAC Research added that of the company’s cement capacity of 45.55 million tonnes per annum across Africa, a total of 12.28 million tonnes, which is less than 28% of installed capacity, was produced. In the comparable period in 2018, 12.36 million tonnes was achieved. Due to lower cement volume in Nigeria, the company’s revenue went down by 3.05%.

WSTC Securities observed that total cement volume in Nigeria fell by 2.69% to 7.60 million tonnes in the first half of 2019 compare with 7.81 million tonnes in first half 2018 and this translated to a lower revenue of ₦328.29 billion in the first half 2019, compared with ₦344.10 billion reported in the corresponding period of the previous year.

The average realised price on Nigerian sales was about ₦43,224.00 per tonnes ($120.00) in the half year of 2019, compared with average realised price of ₦44,059.00 per tonne in the corresponding period of previous year.

However, the Pan-African cement firm’s volumes increased by 2.63% to 4.69 million tonnes, as it did 4.57 million tonnes in first half of 2018 due to increased volumes in Tanzania. The higher volumes in Tanzania were partially offset by the decreased volumes in South Africa, Ghana and Ethiopia, driven by the socio-economic and power generating challenges.

The higher volume in the Pan-African operation reflected on the revenue which increased marginally by 1.01% to ₦140.09 billion in the first half of 2019 compare with ₦138.69 billion first half of 2018.

Overall, the group manufacturing costs fell by 2.24% to ₦193.17 billion compare with ₦197.60 billion in the comparable period last year. The decline was not derived from cost efficiency but as a result of lower volume recorded in Nigeria, South Africa and Ghana.

Again, as a result of 33.46% increase in haulage expenses, total selling and distribution expenses rose significantly by 29.22% to ₦80.31 billion in the first half of 2019 as against ₦62.15 billion in the first half of 2018. Group manufacturing costs falls by 2.24% year-on-year as a result of lower cement volumes in Nigeria, South Africa and Ghana

Manufacturing costs in Nigeria decreased by 1.60% to ₦93.60 billion as against ₦95.20 billion in the first half of 2018 while Pan-African manufacturing costs fell by 2.80% to ₦99.50 billion in the first half 2019 compare with ₦102.40 billion in the comparable period in 2018.

In general, administrative expenses was relatively flat at ₦24.98 billion as against ₦24.71 billion in first half of 2018 while selling and distributions expenses increased significantly by 29.22% to ₦80.31 billion as against ₦62.15 billion last year. The increase in the selling and distribution expenses can be mainly attributed to higher haulage expenses, particularly in Nigeria during the period.

Although Nigerian cement volumes fell by 2.80%, there was an increase in the size of the company’s truck fleet as well as the proportion of sales distributed by the trucks to the customers, as opposed to sales by self-collection.

Consequently, earnings before interest, tax, depreciation and amortization, EBITDA, dropped by 11.41% to ₦217.94 billion in the first half, from ₦246.01 billion in comparable period last year. Tax exemption benefit offsets the unimpressive operating performance as profit after tax rose by 5.37%

Nigerian operations continued to benefit from tax exemption on Ibese Production Line 3 & 4 and Obajana Production Line 4, which was granted in the fourth quarter of 2018. These lines, according to the company, are entitled to additional two-year extension of tax exemptions and this resulted in reduced tax effective rate of 19.00% in the first half of 2019 compare with 32.00% in the first half of 2018.

The effective tax rate of 19.00% in the first half of 2019 was attributed to the mix of production lines that were out tax exemptions and the lines that are still entitled to tax exemption under the Pioneer Status Incentive.

On the basis of tax exemptions on the three major operation lines, the company made a lower provision of ₦36.25 billion for tax as against ₦72.37 billion in first half of 2018 and as a result, profit after tax increased by 5.37% to ₦119.24 billion in the first half of 2019 compare with₦113.16 billion in 2018.

Consequently, profit after tax increased by 5.37% to ₦119.24 billion as against ₦113.16 billion in the first half of 2018. PAC Research opened that the company’s 12-month trailing EPS rose to ₦23.26, from ₦12.18 recorded in the previous period.

The firm however said, “We downgrade our target price per share to ₦214.44 as against previous target price of ₦215.73 and also maintain a BUY recommendation on the company shares”. Dangote Cement maintains a strong balance sheet; impressive historical dividend payment to continue in 2019

The balance sheet position of the company remains solid, reflected in lower liabilities during the period. Total liabilities of the company declined significantly by 17.60% to ₦0.83 trillion in the first half of 2019 as against ₦1.00 trillion in comparable period in 2018.

This is due to significant reduction in deferred tax liabilities, lower financial liabilities, reduced current tax payables, trades and other payables. As a result of lower bank & cash balances, reduced inventories and lower prepayments & other current assets, total assets of the company decreased by 4.21% to ₦1.66 trillion in the first half of 2019 as against ₦1.73 trillion in the comparable period in 2018.

Consequently, the net assets of the company increased by 14.20% to ₦0.83 trillion in the half year of 2019 as against ₦0.73 trillion achieved in the half year of 2018. This translated to a net asset per share of ₦48.78 compare with ₦42.71 in 2018.

“With a solid balance sheet position and expectation of improved revenue in the coming quarters, we presume the company to pay at least a dividend of ₦12.50 per share in the full year of 2019”PAC stated. We maintained a BUY recommendation on the stock of the company”, PAC Research said.

WSTC observed that a new direction in the competitive landscape of the cement industry is     taking shape. Recently, a major competitor, BUA Cement, expanded capacity by merging two of its subsidiaries – CCNN and Kalambaina Cement; in which CCNN’s capacity grew from 500,000 metric tonnes per annum to 2 million metric tonnes per annum.

Considering that Dangote Cement sales in the North are about 28% to total sales, and also taking into account the strong market presence of CCNN in the North, analysts believe that Dangote cement lost part of its market share during the period which contributed to the revenue decline.

“We also expect heightened competition beyond current levels going forward, from major competitors – BUA Cement and Lafarge Africa Plc; especially following the latter’s turnaround initiatives in the first half of 2018.

“We expect to see continued improvement in the Pan-African business. In the first half of 2019, a strong performance was recorded in Tanzania, after the successful installation of gas turbines.

“Sales volume grew by 172% in Tanzania and is expected to improve subsequently, on the back of an increase in government infrastructure spending, and other core projects”, analysts at WSTC added.