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China-Africa Trade Information Service
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China-Africa Trade Information Service
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Improved half-year results and prospects of a higher return on investment is attracting more investors to Dangote Cement Plc, writes GoddyEgene
Dangote Cement Plc has a vision to “be Africa’s leading cement company, respected for the quality of our products, for our service and for the way we conduct our business.”
Similarly, the company’s mission is to “deliver strong returns to shareholders by selling high-quality products as affordable prices, backed by excellent customer service.”
Dangote Cement is a fully integrated cement company and has projects and operations in Nigeria and 14 other African countries; Dangote Cement's current total production capacity in Nigeria from its three existing cement plants namely Obajana (10.25MMTPA), Ibese (6.0MMTThe Obajana Cement Plant (OCP) located in Kogi State is reputed to be one of the single largest cement plants in the world with a combined capacity of 10.25MMTPA.A fourth line which add 3.0MMTPA to the existing capacity will bring the total capacity of Obajana to 13.25MMTPA by 2015. Dangote Cement is also the biggest quoted company in West Africa and the only Nigerian company on the Forbes Global 2000 Companies.PA) and Gboko (4.0MMTPA) is 20.25MMTPA.
Dangote Cement, which accounts for about 31 per cent of the market capitalisation of the Nigerian Stock Exchange (NSE) has shown its determination to realise that vision and mission since its listing on the exchange. Although the company has suffered its own rough patch due to the challenging operating environment, on the average, it has performed well to the admiration and satisfaction of many shareholders and many stakeholders.
It has posted impressive results over the years and is set to deliver another improved performance at the end of the current financial year, going by its results for the half-year (H1) ended June 30, 2017.
The past performance and bright future prospects probably made more foreign investors to buy into the cement company last week.
Half -year financial results
Having delivered improved full-year results for 2016, Dangote Cement Plc recorded another improved performance for H1 of 2017, sending positive signals to investors to expect another bounteous harvest at the end of the year.
According to unaudited results, Dangote Cement posted a revenue of N412.7 billion, up by 41.2 per cent from N292.2 billion in the corresponding period of 2016. Production cost of sales rose from N139.2 billion to N177 billion, while administrative expenses grew marginally from N19 billion to N20.9 billion. Sale and distribution expenses rose by 39 per cent from N37.2 billion to N51.8 billion, while finance cost rose by 46 to N24.4 billion, compared with N16.7 billion in 2016.
Dangote Cement ended the H1 with profit before tax (PBT) of N155.5 billion, showing an increase of 24 per cent from N124.8 billion in 2016. Profit after tax (PAT) grew faster by 39 per cent to N144 billion, from N103 billion in the corresponding period of 2016.
Analysts’ assessment
Commenting on the second quarter(Q2) results, analysts at Cordros Capital Limited, said revenue rose 34.8 per cent, earnings before interest tax, depreciation and amortisation (EBITDA) rose by 67.5 per cent, and PAT 45.1 per cent at the group level.
According to Cordros Capital, revenue was ahead of their estimate by 3.9 per cent while PAT lagged by 9.3 per cent.
“Compared to Q1-17, revenue (-1.8 per cent) and EBITDA (-2.3 per cent) declined while PAT, owing to lower net finance cost and effective tax rate, grew by 4.1per cent. The revenue growth was underpinned by higher average prices (58 per cent), which more than compensated for the decline in volume (14.6 per cent),” they said.
They explained that the expectedly, the group volume was dragged by the Nigerian operation, wherein sales fell by 27.5 per cent y/y and 18.2 per cent q/q in response to: higher prices (75.1 per cent y/y and 11.5 per cent q/q); the still-weak construction activities nationwide, and long/heavy rain.
The analysts said the non-Nigerian volume grew by nine per cent y/y but was lower by 11 per cent q/q, amidst 42 per cent y/y and six q/q increase in average realised price.
Cordros Capital noted that the group gross margin of 56.1 per cent was ahead of Q2-16’s (49.2 per cent), but below the 57.8 per cent recorded in Q1-17.
“Gross margin in Nigeria remained well-above the previous year’s figure, but declined marginally relative to Q1-17, wherein the increase in price was offset by increase in production cost. To be clear, energy cost in Nigeria surprisingly increased by 19.5 per cent q/q. On the other hand, while the non-Nigerian gross margin improved by 475 bps q/q (owing to higher price and lower production cost), it fell by 225 bps on y/y basis (as higher production cost offset higher prices),” the analysts said.
According to them, net finance cost of N26.4 billion was reported by pan-African in 2017 (vs. N15 billion in Q1-17) and Nigerian net income of N24.4 billion (vs. N9.1 billion in Q1-17). They noted that Nigerian operation reported forex gain of N21 billion (vs. N5.9 billion in Q1-17) during the period.
Robust top-line
In their own assessment of the H1 performance, analysts at WSTC Financial Services Limited said Dangote Cement Plc delivered a robust top line performance in H1’17, driven entirely by series of price increases effected during the period as well as in H2’16 in reaction to elevated input cost. Revenue soared by 41per cent to N412.67 billion in H1’17 from N292.19 billion in H1’16, despite a 22 per cent decline in volume sold in Nigeria to 6.85 million tonnes from 8.77 million tonnes as the higher pricing dampened demand during the period.
Improved operating efficiency
Dangote Cement also benefitted from sizeable efficiency gains contributed by more favorable fuel mix from the increased use of cheaper energy sources; gas and internally manufactured coal, as against the more expensive alternatives – low pour fuel oil and imported coal. As a result, Gross profit margin increased to 57 per cent in H1’17 (52 per cent in H1’16).
Despite the increased spending on operating activities on its pan-African businesses, the group still recorded a sizeable growth in operating margin to 40 per cent in H1’17 (H1’16 34 per cent). Accordingly, bottom line rose by 25 per cent to N155.58 billion (H1’16 N124.89 billion).
Recommendation
According to WSTC Financial Services Limited, they expect top line in H2’17 to benefit from the price increases effected in H1’17.
“However, we believe the high base effect of the price increase in H2’16 will temper the pace of top-line growth in H2’17. We expect the effect of the series of price increases introduced earlier and the prolonged rainy season to weigh on volume in H2 2017. In addition, we expect more expansion in operating margin in H2’17 stemming from improved operating efficiencies due to favorable fuel mix. Using a blended discounted cashflow (DCF) and relative valuation approach, we arrived at a fair value estimate of N219.15 for Dangote Cement. We place a hold recommendation on the stock at the current market price of N240.00 (as at last Friday), which is at a 9.51 per cent premium to our fair value estimate,” they said.
New foreign investors
Apparently seeing the prospects in Dangote Cement Plc, some foreign investors bought 2.3 per stake in the company for N86.1 billion ($236 million) last week. The sale involved 416 million shares that was consummated in six off market deals on the NSE. This is the third time foreign investors are buying into Dangote Cement.
South Africa’s Public Investment Corporation (PIC) had bought 1.5 per cent for $289.3 million in 2013, while Sovereign fund Investment Corp of Dubai (ICD) acquired 1.4 per cent for $300 million in 2014.
Commenting on the transaction, a leading stockbroker, Mr. David Adonri said it as good development for both the company and the Nigerian economy.
“As you are aware, Dangote Cement is a multinational entity. It is capable of eliciting global interest. New foreign investment can be viewed from the perspective that the company is performing very well and that the Nigerian economy is providing it with necessary enabling environment,” he said.
With this sale of 2.3 per cent, the holdings of Dangote Industries Limited in the cement subsidiary have reduced to 88.63 per cent from 90.93 per cent as at last February.
