March 4, 2019/InvestmentOne Report

§  Positive performance in Turnover: up 6.44% q/q, 6.89% y/y.

§  Rising gross margin performance: up 12bps q/q, 97bps y/y.

§  Increasing Opex/Sales ratio: up 122bps q/q, 439bps y/y.

§  Declining PBT: down 14.47% q/q, 23.81% y/y.

Dangote Cement published its Q4 2018 results last week revealing a decent performance. The cement producer grew its turnover by 6.89% y/y to c.N216billion. This trickled down to improve gross profit, which increased by 8.79% to c.N120billion. However, following the jump in net finance cost, PBT dropped by 23.81% y/y to c.N53billion in the period under review. 

Top-line and Margin Performance

Despite slow volume growth in its Pan-African operations as well as drop in Nigeria prices (-2.44% y/y to N42,947/tonne), group turnover was up 6.98% y/y to N216bn with support from appreciable volume growth in Nigeria operation (up 10.61% y/y to 3.42mmt). We highlight that volume performance in its Pan-African operation came in somewhat flat at 2.36mmt in Q4 2018 (vs. 2.34mmt in Q4 2017); this may be due to lower demand in South Africa and low government spending in Congo. However, turnover from the region was up 3.55% (c.N69 billion) because of price increase in some parts of the region. 

The group achieved a gross profit margin of 55.71%, growing by 98bps y/y. This is reflective of the group’s ability to control production cost, which grew at a slower rate compared to revenue. This may have also been reflective of price increases in Pan-African region as stated earlier in addition to gains from improved efficiency in its fuel mix. 

OPEX and Bottom-line Performance

Moving down the P& L line, opex/sales ratio expanded by 439bps y/y. In the same vein, a combination of 53.69% y/y jump in finance cost, due to FX loss of N8.11bn in Q4 2018, and a 92.15% y/y fall in finance income drove PBT margin down by 987bps y/y to 24.49%. 

However, the company reaped benefits of approved pioneer taxation in its Obajana line 4 and Ibese lines 3 & 4. Hence, the cement producer recorded a profit after tax of N231billion wholly resulting from about c.N178 billion in tax credit in Q4 2018. 

A Trillion Naira Turnover in Sight

The company reported an impressive performance for FY 2018 as top line rose by 11.87% y/y to c.N901billion, resulting from a 7.39% y/y increase in cement sales volume during the year. The Nigerian operation accounted for about 68.61% of total group revenue, growing to c.N618 billion in 2018, from c.N552 billion in 2017. We highlight that revenue from its Pan-African operation grew by 9.60% y/y to c.N283 billion in 2018. 

The rise in revenue reflected in gross profit performance, which in turn grew by 14.00% y/y to c.N518 billion. Gross profit margin (57.47%) also inched up by 107bps owing to improved fuel cost mix.  

Nonetheless, we highlight that operating expenses rose by 21.98%, pushing opex/sales ratio up by 174bps to 21.02%. This, combined with a 129.10% surge in net finance cost, contributed to the drop in PBT margin to 33.32%. However, PAT margin took a leap to 43.25% in FY2018 from 25.35% in FY2017, thanks to its tax credit. 

Going forward, we expect growth in revenue to remain sustained. With the incumbent government receiving mandate for a second tenure, we expect continuity in infrastructural projects and budget implementation to bode well for cement consumption. The cement producer’s self-sufficiency in power generation through its own coal mine should continue to bode well for cost containment. 

In its Pan-Africa operation, we also expect improved growth in revenue following the fuel switch to gas in Tanzania and potential growth in Ethiopia. This should combine positively with start-up in Republic of Congo where the company achieved market leadership in Q3 2018; it is likely that cement demand will be mostly driven by commercial building and private infrastructure projects in that space. However, the mute South Africa market may be a downside to growth in turnover from the region. 

In the same vein, we believe the firm may enjoy increased demand in Nigeria following the signed Executive Order 007 on the road infrastructure.  

Source: Company financials, Investment One Financial Services Research