Bullish Dangote lifts stock market as bearish trends highlight systemic weaknesses

Alico Dangote

Africa’s leading billionaire is more concerned these days about bottom lines than clinker counts. Aliko Dangote has had to deal with a tough period keeping new refinery expenditures in check as input prices fly through the roof, while hedging domestic political and economic challenges in countries like Cameroon and . Dangote cement’s nine months 2018 results have, regardless of awkward continental situations, proved resilient.

The group’s results for the first three quarters of the year show a 13 per cent rise in gross earnings, with the cement maker stumping up a sizable gross earnings of N685.29 billion up from N603.58 billion in the same period of 2017. Given that 2017 ended the year at a gross earnings figure of N805.6 billion, analysts are of the view that for the financial year ending by December 2018, the buildings material manufacturer could see its net sales figure settle at N914.6 billion, ”on a projected profit margin of about 23 per cent, the company’s yearend after tax profit position could hit N231.9 billion or 13.6 per cent higher than the previous year. That certainly would put smiles on the faces of investors”, says Apel Assets and Trusts chief market analyst, Olusegun Atere.

” If federal capital expenditures rise in the New Year, I think cement makers would be major beneficiaries. With local unemployment rate for Nigerians between the ages of 18 and 35 years at 33 per cent and the average national jobless rate at 18.8 per cent, I think any additional fiscal spending in 2019 would create a positive outlook for employment, especially in the construction and building materials sector”, he notes.

Indeed Dangote Cement’s recent financials look quite robust; for example, gross earnings margins bounced forward marginally from a beefy 57 per cent in the nine months to September 2017 to 58 per cent in the contemporary period of 2018. Operating margins, however, remained stumped at the previous year’s 38 per cent, mainly as a result of a 20 per cent rise in sales and distribution expenses and a further 17 per cent rise in administrative costs.

Despite the fact that inflation numbers have been falling for the broad economy (inflation has been just over 11 per cent per annum), Dangote still has had to deal with a 20 per cent growth in sales, general and administrative expenses (SG&A’s).Chris Okenwa, chief executive officer of FSS Securities admits that, ”this could lay in hard on the company’s yearend profit, but so far the company’s managers appear to have kept the situation under control. The company looks like it has cut back on bank borrowings and kept finance costs down as it tries to push profit forward, but whether it gets away with the tactic is yet to be seen as, in my opinion, larger sales usually come with bigger borrowing needs.”, he argues.

Debt? No problems

Thankfully the company’s debt to equity ratio has remained conservative with its debt constituting less than half of the company’s total equity; Dangote’s debt to equity ratio went from 0.47 in 2017 to 0.48 in the nine months to September 2018. With this low debt to equity ratio the clinker maker has sizably more head room to take on additional loans to finance future growth. Says Okenwa, ”this is really good news for the company, it appears to have adequate wiggle room to defy the problem of weak future borrowing capacity thereby enabling it grow sales and profits when opportunities present themselves down the road, but I think working capital concerns still remain”.

Indeed they do, but other analysts put a different spin on Dangote Cement’s lean working capital position, ”companies like Dangote in mature businesses like cement manufacturing tend to have more cash and lower working capital than you would expect from other emerging  or growing businesses” says industry analysts Chuks Nwajei, senior investment manager at Ganduniyya Equity and Finance Limited. According to Nwajei, ”Dangote has a hefty operating cash flow which looks very strong even when you move out the positive changes in the firm’s capital expenditure or capex, this means that the company has a large amount of free cash flow it can still leverage on to finance its operations or capital acquisitions”.  So far, it seems that school is still out on the Dangote working capital debate, but the building material maker, presently, does not shown signs of operational stress.

Liquidity troubles and other wahala

Dangote’s liquidity ratio, the ratio of its current asset to current or short term liabilities is trimmer than most analyst would like to see. The ratio in the first nine months of 2017 was a skimpy 0.79 (as against analysts usually preferred figure of 2) and remained so until 2018 when its nine months current ratio nested at an equally trim 0.81. When this is adjusted for unsold stock of cement and sundry raw materials the situation looks significantly worse as Dangote’s current ratio adjusted for stocks (or what is called an ‘acid test’ ratio) in 2017 was a tiny 0.06 and became only marginally better in 2018 when it posted a fragile 0.10. ”Dangote’s liquidity concerns are real” notes Oluwarinumi  Olawale, head of operations, Capital Express Securities,  ”asset and liability management must be a nightmare for the company’s managers as its short term assets are barely able to cover immediate liabilities, despite tidy profit numbers”. She also notes that, ”liquidity crunch could poke a few a holes in the company’s pleasing operational story”.

”Dangote is a great long term investment but its managers need to get a handle on the company’s agonizingly slow current assets ratio. To be sure, thinning working capital could interrupt the company’s smooth operations and perhaps harm future earnings.” she insists.

Another area of concern for outsiders is the manufacturers growing receivables or the size of credit it gives to its distributors. The company’s receivables (mainly credit sales) rose from N30 billion in September 2017 to N43.43 billion by the same month of 2018. This represents a whopping 44 per cent rise in credit sales. While selling on credit is normal practice in the cement and other businesses, a massive 40 per cent rise in credit sales on a sales increase of just 13.5 per cent is bothersome and partly explains the company’s poor recent working capital position.

Competition, What competition?

Dangote Cement controls 65 per cent of the local Nigerian market. Its nearest rival is the local subsidiary of global cement giant Lafarge which presently is going through a rather rough patch in the local Nigerian market. In the 9 months to September 2018 Lafarge grew net sales from N223.7 billion in September 2017 to N234.3billion in 2018 or by 5 per cent. Net profit, on the other hand, skidded from a relatively impressive N937.9million in September 2017 to a screeching loss of N10.4 billion in September 2018. Lafarge’s blindingly large loss sent investors and analyst into shock.

The company’s major problem is its inability to cap off burgeoning costs. Sales and marketing costs rose by 50 per cent from N3billion in the 9 months to September 2017 to N4.5 billion in the corresponding period of 2018. Administrative expenses leaped from N29.2 billion over the first three quarters of last year to N32.6 billion in the three quarters of 2018, representing a rise of 11.6 per cent. To make matters worse the company’s finance charges equally spiraled from N928.4 million in 2017 to N1.4 billion or 51 per cent in the last but one quarter of 2018. Lafarge’s management has clearly found itself stuck in the mud as expenses begin to outstrip revenues. FSS’s boss Okenwa politely observes that, ”even if Lafarge is the second largest cement maker in the country, its recent fortunes are disturbing after all even children’s nursery character Humpty Dumpty had a great fall and not even all the king’s horses and all the king’s men could put him together again. ”, says Okenwa, ”this corporate giant needs to rethink structure, costs and character”.

A major reason for Lafarge’s weakness is its staggering losses from associate companies on an equity accounting basis. The loss last year from this accounting line item was a towering N28.5 billion which grew to a staggering N34.9 billion in 2018. Hence, underlining concerns about the company’s value-killing associate businesses.

To be sure, Dangote cement is clearly unconcerned about its rival clinker producer’s fate, as managers at the country’s largest cement manufacturer continue to grow both profit and revenue while dominating market share.

Aside tight liquidity and slow moving stock the Dangote Cement Empire is in fine shape. The company’s liquidity troubles are not, fortunately, mirrored in management’s efficiency ratios.  Return on assets (ROA) has remained a snappy 16 per cent in both 2017 and 2018, making it one of the highest asset returns for all companies listed on the Nigerian Stock Exchange (NSE) as at 2018. Managers at Dangote have been skillful to squeeze an income of N16 per every N100 spent on assets in the course of the year. For shareholders, however, the story has been somewhat better as Dangote achieved a robust return on equity (ROE) of 20 per cent, making it easily one of the highest yielding stocks on the local stock market.

The company’s earnings per share rose from N9.04 in the nine months of 2017 to N9.29 in the first three quarters of 2018, a leap of 28 per cent. This means that managers of the company were able to generate 28 per cent more profit after tax per unit of shares held by existing owners of the company. This has proven that even the non-banking sector can rise above the clouds to return decent yearend cash to investors.

Happy days ahead at the market

It has been a torrid time for investors on the Nigerian Stock Exchange (NSE) as the local bourse, like other kindred Exchanges across the globe has had to shed weight. Dangote Cement, a major listed company on the NSE, has had its own fair share of weight loss over the last one year. The company saw prices tumble somewhat from N266 per share in March 2018 (it’s highest in the course of the year) to a more recent price of N209 per share, or what amounts to a six month 7.5 per cent dip. But signs of a recovery do appear on the horizon as the 9 month result of the company seems to be nudging investors to be more bullish about the stock.  But Dangote, in the course of the next five months, may not exceed N231 per share which on its present price of N209 per share, suggests an 11 per cent hidden value opportunity on a price earnings multiple (P/E) of 21. In other words, investors holding Dangote Cement for another half year or thereabouts could make an 11 per cent return on investment (excluding consideration of dividend payments.

This is slightly below the average national annual inflation rate of 11.48 per cent, but if a projected dividend yield of  4 per cent is also considered, Dangote’s total investment yield could round up to 15 per cent for 2018; a pretty decent walk with Africa’s largest cement merchant, or so it seems.