October 23, 2018/InvestmentOne report

§  Mixed performance in Turnover:  down 0.74% q/q, up 17.51% y/y.

§  Declining gross margin performance: down 270 bps q/q, 130 bps y/y.

§  Increasing Opex/Sales ratio: up 495bps q/q, 256bps y/y.

§  Declining PBT: down 19.85% q/q, 4.30% y/y. 

DANGCEM published its Q3 2018 results yesterday revealing a fairly decent performance, which was indicative of improved volume performance in Nigerian and Pan-African operations. However, rising opex/sales ratio wanes bottom line performance. 

Improved Volume Performance but Lower Margin Performance 

DANGCEM results were indicative of increase in volume sales in both Nigerian operation (+6.16% y/y to 2.95mmt, Q3 2018) and Pan-African operation (+8.22% y/y to 2.46mmt, Q3 2018). Consequently, group sales volume was up by 8.14% y/y in Q3 2018 to 5.41mmt.  

We highlight that, the increase in volume performance drove group revenue up by 6.26% y/y to N202.85billion despite the 3.94% y/y squeeze in prices. However, decline in price led to a 130bps y/y drop in gross profit margin to 55.59% in Q3 2018. 

Cost Pressures: Rising Opex/sales ratio

The cement maker looks to be incurring more on its operating expenditures with haulage cost rising by 16.47% y/y to N22.18 billion in Q3 2018, consequently driving the opex/sales ratio up by 256bps y/y to 23.86%. We spotlight that this may also be resulting from improved routes to market, warehousing and greater availability of delivery trucks as pointed by management.  

The rise in operating expenditure reflected in the company’s EBIT margin performance as it declined to 33% in Q3 2018 from 40% and 36% in Q2 2018 and Q3 2017 respectively. 

However, we highlight the improvement in the firm’s fuel mix as the cement producer has fully dropped the use of LPFO for a cheaper gas and self-mined coal. 

Source: Company Financials and Investment One Research 

Taxes and the Bottom line 

Despite the 10.38% y/y decline in net finance cost to N4.52billion in Q3 2018,  the 378bps y/y decline in EBIT margin led to a 4.30% y/y decline in PBT to N61.83 billion and consequently a 336bps shrink in PBT margin to 30.48%.  

Further down the results, the firm recognized a tax of N16.7 billion in Q3 2018 signifying an effective tax rate of 27% as it is yet to receive approval for pioneer status in its Obajana line 4 and Ibese lines 3 & 4. DANGCEM management is fully confident that they will be awarded the pioneer exemption in Q4 2018 and this will relieve tax liability to about a 15% effective rate at the end of the year. It may also enable it reverse about N134 billion in tax credit. 

Seasonality and Lower Prices Takes Toll on Quarterly performance  

As usual, Q3 has always been a slow quarter for cement producers given the amount of rainfall and this year is not disparate. We saw Q3 volume sales dip by 23.30% q/q in Nigeria to 2.95mmt.  During the conference call with the management, it was pointed out that most of the decline in volume occurred in September due to a heavy rainfall and flood in key demand regions. This led to a drop in group volumes sales to 5.41mmt in Q3 2018 from 6.17 mmt in Q2 2018. 

However, contrary to volume performance in Nigeria, we saw Q3 volume sales rise 5.8% q/q in the cement maker’s Pan-African operations. This may be on the back of improvement in the Ethiopia operation as production stoppages associated with civil unrest in the region have declined on a more favorable landscape, as well as the newly signed an agreement with Tanzania Petroleum Development Corporation for the supply of gas which we believe may have filtered into production and sales volume, signifying a turnaround from shutdowns experienced in Q2 2018. 

The 2.54% q/q decline in prices filtered into margin performance as gross profit margin slowed by 270bps q/q to 55.59% in Q3 2018. Consequently, PBT margin was down 161bps q/q, despite a 76.95% slowdown in net finance cost. 

Decent 9month Result 

Topline performance in the 9month period was up 13.5% as revenue rose to N685billion following the 7.6% y/y rise in volume to 17.76mmt. In the same vein, gross profit margin was up by 107bps to 58% due to higher prices over 9months in 2018 compared to the same period in 2017. Opex/sales ratio also improved by 93bps to 19.74% resulting into a 32bps improvement in EBIT margin to 38.94%.  

However, bottom line performance was impaired by higher net finance cost (N19.5billion in 2018 vs N12.96 billion in 2017), the bulk of which was recognized in H1 2018 as a result of the strengthening of dollar which resulted to FX loss, this drove PBT margin down slightly to 36.10% in 2018 from 36.48% in 2017. 

Outlook 

Going forward we expect further improvement in Pan-Africa performance to be driven by infrastructural spending in Cameroon and Senegal as well as strong economy growth in Ethiopia. However, we are conscious of activities in the cement market and construction industry in South Africa given the recent recession which may lead to a slowdown in market activities. This may be a downside risk to performance of Dangote cement in South Africa. 

Furthermore, the gas agreement in Tanzania and civil rest in Ethiopia should bode well for production as well as volume performance in these two countries. 

In Nigeria, we expect that volume sales will bounce back as we are exit the raining season. This favourably combines with the demand potentials of capital expenditure to put DANGCEM in a better position at the end of Q4 2018. As a market leader in Nigeria cement space we expect that the cement manufacturer will take the most advantage in any government infrastructure spending following the release of N460billion by the federal government.  

Source: Company Financials and Investment One Research 

Source: Company Financials and Investment One Research