Dangote Cement Plc. Q1 2020 Results: Positive Performance Top to Bottom

May 29, 2020/InvestmentOne Report

·         Turnover Performance: up by 17.61% q/q and 3.76% y/y.

·         Gross margin performance: up by 60bps q/q, down 44bps y/y.

·         OPEX/Sales ratio: down by 393bps q/q and 25bps y/y.

·         PBT Margin Performance: rose to 35.34% from 24.92% in Q4 2019 and 32.88% in Q1 2019. 

Dangote Cement published its Q1 2020 results displaying a 3.76% y/y rise in its topline on the back of higher cement prices. However, gross profit margin performance was limited by increase in cost of sales. Nonetheless, the decline in OPEX/sales ratio and net finance cost provided some cushion for bottom line performance, with PBT margin rising to 35.34%, from 32.88% in Q1 2019. 

Higher Cement Prices Push Top line

Although Dangcem recorded slight increase (+0.70% y/y) in Nigeria cement sales (local sales and exports) where domestic sales were up +5% y/y in the face of zero exports through the land borders; the cement producer recorded a flattish performance in its overall volume sales in Q1 2020 (6.29mmt, -0.63% y/y) on the back of slower cement sales from its Pan-Africa business (down 2.9% y/y to 2.28mmt). However, increase in cement price was enough to offset decline in gross volume performance as revenue recorded an uptick of 3.76% y/y to N249billion. According to management, Pan-African volume sales were largely affected by the full economic lockdown (towards the end of March 2020) in South Africa owing to COVID-19, as well as technical issues in its Tanzanian operations. 

Nonetheless, the slightly higher cement price (N39,565.26per ton, +4.41% y/y) was not enough to offset increased COGS (up +4.87% y/y) in the quarter as its GPM registered at 58.13%, a 44bps decline from the same quarter in the previous year. We point out that, the increase in COGS resulted from increase in energy cost (N5,321.68/ton , up 4.42% y/y) and other production expenses (N4.04billion, up 178.70% y/y). According to management, the jump in other production expenses resulted from challenges experienced at its Ethiopian mining operations in relation to hiring of equipment; however, this should temporary. 

Bottom line Bolstered by Declining OPEX/Sales and Net Finance Cost

Following through from above, we saw a slight uptick in the company’s OPEX to N54.20billion (+2.59% y/y) as it recorded a 4.43% y/y increase in selling and distribution expenses. According to management, the rise in selling and distribution cost resulted from delivery to farther locations with the company’s trucks which increased haulage costs in Nigeria. Furthermore, advertisement and promotion expenses rose by 96.48% y/y to N3.70billion. 

However, due to the increase in price, OPEX/sales ratio dropped by 25bps y/y to 21.75%. This, combined favorably with a decline in net finance cost, fostered a 171bps improvement in PBT margin to reach 35.34%. We point out that the decline in net finance cost resulted from the record of N3.75billion FX gain, from N3.07billion FX loss in the same period in 2019.  

A Good Quarter

On a sequential basis, the company reported a commendable q/q performance. Topline came in higher, increasing by 17.61%; this was as a result of a low base effect following poor volume sales in Q4 2019. GPM also improved by 60bps on the back of 4.57% q/q increase in cement prices. 

In the same light, we saw OPEX/sales drop by 394bps q/q and net finance down by 77.11% q/q. These performances filtered into the bottom-line as PBT margin improved to 35.34%, from 29.08% in Q4 2019. 

Will Resilient Performance be sustained?

According to management, overall performance so far in Q2 2020 has been decent. Although cement sales were pressured in states where full lockdown was imposed (FCT, Lagos and Ogun State), operations and sales continued in states where there was no enforced economic lockdown. 

In its Pan-African operations, company’s performance may be affected by the full economy lockdown in South Africa, Ghana, Congo etc. However, management expects the impact of the virus to be minimal without significant effects on the company’s performance going forward. Furthermore, its new export terminal that is expected to be commissioned in Q2 2020 should also support topline. 

Nonetheless, we remain concerned about the prospects of volume demand from the public sector as revenue generation for the rest of the year comes under pressure. We believe the downward review of government revenue will have a negative impact on its capital budget implementation. Another downside risk to topline performance is the possibility of a second wave of coronavirus, which may once again push the economy to another lockdown, limiting construction activities by both private and public sector. 

Elsewhere, the company recently received approval from SEC for its share buyback program, which is expected to be completed over 12months. The cement producer plans to buy back 10% of its issued share capital at a 5% premium on the prevailing market price at the time of execution. We opine that this may serve as an increase in value for shareholders.  

Following the successful issuance borrowing of N100 billion Series 1 5-year bond in Q2 2020, management has affirmed that it will continue to look for opportunities to raise cheaper debt as a means to fund growth as well as refinance short-term debt position (debt maturity profile for 2020 sits at N200billion). Consequently, we expect the cement producer’s capital structure to include more debt going forward with its leverage ratio (Debt/Equity stands at 0.42 after bond issuance) rising in the near term. Nonetheless, we are confident of the firm’s financial capacity on the back of significant cash flow generated from its operations.

YE(DEC)

Q1 2020

Q/Q

Y/Y

Sales

249,182

17.61%

3.76%

Cost of Sales

(104,325)

15.95%

4.87%

Gross Profit

144,857

18.83%

2.97%

Gross margin

58.13%

60bps

-44bps

OPEX

(54,200)

-0.42%

2.59%

OPEX/sales

21.75%

-394bps

-25bps

Net Finance Cost

(3,722)

-77.11%

-60.50%

PBT

88,057

66.78%

11.52%

PBT margin

35.34%

1042bps

171bps

Tax Credit/ (Expense)

(27,465)

314.38%

46.82%

Tax rate

31.19%

-1864bps

750bps

PAT

60,592

31.23%

0.56%

PAT margin

24.32%

253bps

-77bps

Q1 2020 CEMENT COMPANIES COMPARISON SHEET

NGN billion (unless stated otherwise)

DANGCEM

LAFARGE

Key Income Statement Figures

Production capacity (mmt)

45.60

10.50

Volume Sales (mmt)

6.30

1.43

Average Price (N/mt)

    39,565.26

   44,604.34

Revenue

249.18

63.70

Cost of Sales

       (104.33)

        (46.07)

Gross Profit Margin

58.13%

27.67%

OPEX/sales

21.75%

9.28%

EBIT Margin

36.83%

18.59%

PBT Margin

35.34%

14.73%

EPS

3.60

0.5

Key Balance Sheet Figures

Total Assets

1,797.61

491.81

Total Liabilities

849.12

138.83

Total Equity

948.50

352.98

Net Debt

191.37

39.18

EBITDA margin

45.84%

30.31%

Energy Cost/ton

       5,321.69

7422.27

Interest Cover

10.31

5.62

Debt/Equity

0.31

0.17

P/E ratio

41.67

22.00

ROE

6.39%

2.29%

ROA

3.42%

1.63%

Current ratio

0.65

0.92

Source: Company’s Financials, Investment One Research

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