March 9, 2023/InvestmentOne Report

• Steady Top-line Growth: Full year 2022- up 16.96% y/y, Q4 2022- up 22.03% y/y and 19.46% q/q.
• Mixed gross margin performance: Full-year 2022- down 114 bps y/y, Q4 2022- up 0.25% y/y and 3.11% q/q. 
• Increasing Opex/Sales ratio: Full-year 2022- up 468bps y/y, Q4 2022- up 584bpsy/y and down 7bps q/q.
• Mixed PBT Performance: Full-year 2022- down 2.67% y/y, Q4 2022- up 41.56% y/y and 164.90% q/q. 
• Lacklustre PAT Performance: Full-year 2022- up 4.90% y/y, Q4 2022- up 96.32% y/y and % 312.74% q/q. 
  

DANGCEM published its FY/Q4 2022 audited financial results last week revealing a relatively decent performance, with the group’s turnover maintaining a double-digit growth both on a year -on-year and quarter-on-quarter basis. However, the higher pace of growth recorded in both production and operating costs led to a decline in the performance of gross profit and operating profit margins. Additionally, the increase in OPEX/sales ratio further led to the decline in bottom-line performance. 

Higher Prices Buoy Resilient Top-line Performance

According to the earnings report, Dangote Cement Group recorded a revenue growth of 16.96% y/y in full-year 2022 to N1.62 trillion from N1.38 trillion in 2021. Revenue growth was recorded across the Nigerian and Pan-African Operations. Revenue from Nigeria’s operations rose by 21.34% y/y to N1.21 trillion (74.40% of total revenue), while that of the Pan-Africa operations improved by 4.40% to N414.38 billion (25.60% of total revenue) for full year 2022. The resilient top-line performance was primarily aided by higher pricing, a strategy deployed to offset runaway inflationary pressures amid the decrease recorded in sales volumes across operating geographies.  

Group volumes for the period declined by 5.10% y/y from 29.2 MMt in 2021 to 27.78MMt in 2022. Sales within the Pan-Africa operation took the lead with a decline of 8.10% y/y (9.98MMT in 2022 vs. 10.86MMT in 2021), while Nigeria operations sales slipped by 4.10% y/y (17.84MMT in 202 vs. 18.61MMT in 2021). According to the management team, the drop in sales volumes for Nigeria was against the backdrop of the high base effect of 2021, high inflationary environment, and energy supply disruptions (low gas availability) which impacted production. For the Pan-Africa Operations, extended plant maintenance in Congo and Senegal, landing costs volatility in countries like Ghana, Cameroon, and Sierra-Leone and lastly, elevated commodity prices globally were factors that hampered sales cross the region. Although gross profit rose by 14.75% to N955.43 billion, the higher production costs incurred, a reflection of elevated inflation pressures, rose by 20.30% y/y (2022: N662.89 billion vs. 2021: N N551.02 billion) outweighed the 16.96%y/y improvement in revenue thereby, dragging gross profit margin for the year by 114bps to 59.04% in 2022 from 60.18%in 2021. 

Cost Pressures Weigh on Bottom Line

A further dive into the income statement revealed that the leading cement producer was embattled with steep increases in its operating expenses, up by 46.52% y/y to N375.11 billion 2022 from N256.01 billion. This was mainly driven by selling & distribution and administrative expenses rising by 54.04% y/y and 24.13% y/y. Consequently, opex/sales ratio rose by 468bps y/y to 23.18% in 2022 from 18.14% in 2021.  As a result of a 103.94% increase in net finance costs to N91.66 billion due to finance costs rising by 98.41% y/y which offset the 86.44% y/y advancement in finance income. The jump in higher interest expense (2022: N75.24 billion vs. 2021: N57.17 billion) 31.60% by and fx depreciation (2022: N53.93 billion vs. 2021: N 8.77 billion) by 515.21% was responsible for that significant rise.  This led to a 2.67% y/y decline in the group’s PBT as well as PBT margin dropping by 653bps to 32.38%. However, a reduction in income tax expense by 18.535 y/y (2022: N141.69 billion vs. 2021: N N173.93 billion) was able to push up net profit by a marginal 4.90% y/y to 382.31 billion, while net profit margin slipped by 272bps to 23.62%.  

Decent Q4 Performance

The performance of the cement giant in the fourth quarter of the year was quite impressive as turnover increased by 22.30% y/y to N441.07 billion in Q4 2022 (Q4: 2021 N361.451 billion) and 19.46% q/q (Q3 2022: N369.22 billion). Gross profit margin was up by 25bps y/y to and 311bps q/q to 59.40% as revenue growth outstripped the rise in production costs. Opex/sales ratio printed at 25.36% for the quarter, an increase of 584bps y/y (Q4 2021: 19.52%) as cost pressures exacerbated during the period relative to a year ago. On a quarter-on-quarter basis, opex/sales ratio declined by 7bps compared to 25.42% in Q3 2022.  

Bottom line for the period printed strongly as PBT surged by 41.56% y/y and 164.90% q/q to N188.10 billion and PBT margin improved by 588bps y/y and 2341bps to 42.65% as a result of a net finance income of N6.06 billion recorded in the quarter as against a net finance cost of N10.11billion and N44.49 billion in Q4 2021 and Q3 2022 respectively. Net profit also followed suit with an increase of 96.32% y/y and 312.74% q/q to N169.21 billion benefitting from the tax credit of N32.04 billion gained within the period.   

Outlook

Going forward, we opine that the cement producer’s top-line should remain strong on the back of higher prices in tandem with inflationary pressures across its Nigerian and Pan-African operations, particularly reflecting the resilient growth in the non-oil sector of its main base, the Nigerian economy. Although we do not expect to see a significant rebound with respect to sales volumes, we think the group’s cost optimization strategy will remain a plus as it consolidates higher pricing for steady profitability going forward. For context, the alternative fuel feed systems that were commissioned at the Obajana lines I and V and the Ibese line II in December 2022 should cushion the effect of the rise in AGO, gas, and coal prices, bringing about a significant reduction in production costs for the business going forward. It is also worthy of note that as a market leader in the cement space, we envisage Dangote Cement Plc benefiting from the infrastructure and capital project plans of the incoming administration, as stipulated in the manifesto of the current president-elect.