October 27, 2016/Cordros Research

Earlier today, DANGCEM released results for nine months and third quarter ended September 2016. The key features of the Group’s third quarter result are

(1) 21.6% y/y (but -1.2% q/q) revenue growth;

(2) significant gross margin contraction;

(3) opex spike;

(4) considerably weak EBITDA and EBIT margins; and

(5) declines in PBT (37.6% y/y and 66.1% q/q) and PAT (16.8% y/y and 40.6% q/q).

Group revenue growth during the third quarter was driven by both volume and price actions. Volume grew by 9.9% y/y following relatively higher dispatches in Nigeria (5.5% y/y) and Pan Africa (16.8% y/y). Compared to Q2-16 however, Group volume fell by 17.7%, impacted mainly by Nigerian operation wherein volume dipped by 26%. While acknowledging the prolonged heavy rains which affected building activities (and consequently demand for cement) during the three-month period, the N600 increase in per bag price of cement in September also contributed to the reduced demand.

Gross profit was 16.9% and 23.1% lower y/y and q/q respectively. Gross margin contracted significantly (1773bps y/y and 1095bps q/q), stemming from Nigeria where the manufacturing sector broadly experienced cost pressure from further depreciation of the local currency and protracted gas supply shortage.

Nigerian margins could have been worse, save for the price increase in September and increased coal substitution (which reduced reliance on more expensive LPFO) in the fuel mix. Gross margin also declined across the Pan Africa operation, wherein price pressure was experienced in a few markets.

Operating expenses surged by 80.6% y/y, driven by salaries and related staff costs (64.8% y/y), depreciation (107.6% y/y) and haulages expenses (91.9%). A bigger increase in the aforementioned expenses was from the Pan Africa operation, wherein the NGN reporting of most disbursements are subject to forex movement.

Reported Group net forex gain was N11.6 billion, from N52.2 billion gain in Nigeria and N40.6 billion loss outside Nigeria.

Group operating profit was down 52.4% y/y, viz: Nigeria -46.6% and Pan Africa -89.8%. Notwithstanding, PBT (84.5%) and PAT (112.5%) grew in Nigeria, owing to (1) significant exchange gains and (2) a tax credit of N7.4 billion. The Pan Africa operation posted pre (N56 billion) and post (N57.2 billion) tax losses during the three-month period.

Overall, DANGCEM’s third quarter result depicts continued difficult trading conditions across the Group’s operations.

While the latest price increase and increasing reduction of LPFO in the energy mix should positively impact Nigerian margins in Q4, local volumes will suffer from both higher comparatives and (more so by) weak demand. The Group’s shares have lost 4.8% this week.

Cordros Capital’s forecasts are under review.