July 30, 2019/InvestmentOne Research

§  Turnover Performance: down 5.24% q/q, 5.31% y/y.

§  Gross margin performance: up 25bps q/q, 54bps y/y.

§  OPEX/Sales ratio: up 105bps q/q, up 414bps y/y.

§  PBT Margin Performance: up 75bps q/q, 153bps y/y. 

Dangote Cement published its Q2 2019 results on Monday. The cement producer’s turnover was down by 5.31% y/y to c.N228billion. However, decline in production cost led to a slight improvement in gross profit margin (up by 54bps y/y to 58.83%). At the bottom-line, the company recorded improvements as PBT margin ticked up to 33.63% in Q2 2019, from 32.10% in Q2 2018.

Top-line Performance – Not so much Momentum

Following slowing momentum in cement demand in Q1 2019, Dangcem’s Q2 2019 results shows that momentum still seems to be on a downturn despite exit from election period. The firm recorded decline in volume sales in its Nigeria market (down 6.17% y/y) as well as Pan African market (down 0.60% y/y). The slowdown in Pan African market can be attributed to slow down in infrastructural spending in South Africa and economic challenges in Ethiopia. 

Nonetheless, we spotlight that the cement maker took a price increase in May 2019 (N150/bag) and this may have contributed positively to the firm’s top-line performance. In addition to the price increase, Dangcem reported a decline in production cost, owing to a drop in energy cost (down 14.45% y/y) and raw materials consumed (down 6.87% y/y). These factors combined, led to a slight improvement in gross profit margin; 58.83% in Q2 2019 (vs. 58.58% in Q1 2019 and 58.29% in Q2 2018).

Operating Margin and Bottom-line Performance

Following through from above, we see the company’s OPEX/sales ratio inch up by 414bps y/y as it recorded a 34.09% y/y rise in haulage expenses. We believe the increase in haulage expenses may be due to the firm’s investment in distribution (route to market) as it plans to expand its market outreach to the Northern region of Nigeria. 

However, as a result of a significant decline in net finance cost (down 71.49% y/y), PBT margin improved (33.63% in Q2 2019 vs 32.10% in Q2 2018). The decline in net finance cost was spurred by the drop in FX loss (down 94% y/y to N956million). 

Looking Forward to a Better Half?

On a sequential basis, the company reported a decent q/q performance. While topline declined by 5.24% q/q. Price increase, combined with a decline in cost of sales (down 5.81% q/q), led to 25bps q/q improvement in gross profit margin.  

However, we highlight that OPEX/sales inched up by 105bps q/q but the 40.71% q/q decline in net finance cost was able to filter into bottom-line performance as PBT margin grew slightly by 75bps. 

Q3 2019 may be a tepid quarter due to the rainy season, which slows construction. However, going forward, we expect the company’s top-line performance to see support from potential increase in FG capex spending following the appointment of executive cabinet and implementation of 2019 budget.  

In addition, the cement producer should also benefit from its investment in distribution/route to market. As the producer is increasing its number of trucks in both Nigeria and Pan Africa market, we see potential improvements in top-line performance in the near to medium term. Furthermore, infrastructure projects and housing expenditure is also expected to drive sales in some pan-African countries such as Tanzania, Ghana, Senegal and Sierra Leone.  

For margin performance, judging from its track record, we expect that Dangcem will continue to keep its cost contained. We note that its factories no longer utilize LPFO as a source of energy as it has shifted focus to the use of its owned mined coal, which is relatively cheaper.

Source: Company financials, Investment One Research

Source: Company financials, Investment One Research

§  Turnover Performance: down 5.24% q/q, 5.31% y/y.

§  Gross margin performance: up 25bps q/q, 54bps y/y.

§  OPEX/Sales ratio: up 105bps q/q, up 414bps y/y.

§  PBT Margin Performance: up 75bps q/q, 153bps y/y. 

Dangote Cement published its Q2 2019 results on Monday. The cement producer’s turnover was down by 5.31% y/y to c.N228billion. However, decline in production cost led to a slight improvement in gross profit margin (up by 54bps y/y to 58.83%). At the bottom-line, the company recorded improvements as PBT margin ticked up to 33.63% in Q2 2019, from 32.10% in Q2 2018.

Top-line Performance – Not so much Momentum

Following slowing momentum in cement demand in Q1 2019, Dangcem’s Q2 2019 results shows that momentum still seems to be on a downturn despite exit from election period. The firm recorded decline in volume sales in its Nigeria market (down 6.17% y/y) as well as Pan African market (down 0.60% y/y). The slowdown in Pan African market can be attributed to slow down in infrastructural spending in South Africa and economic challenges in Ethiopia. 

Nonetheless, we spotlight that the cement maker took a price increase in May 2019 (N150/bag) and this may have contributed positively to the firm’s top-line performance. In addition to the price increase, Dangcem reported a decline in production cost, owing to a drop in energy cost (down 14.45% y/y) and raw materials consumed (down 6.87% y/y). These factors combined, led to a slight improvement in gross profit margin; 58.83% in Q2 2019 (vs. 58.58% in Q1 2019 and 58.29% in Q2 2018).

Operating Margin and Bottom-line Performance

Following through from above, we see the company’s OPEX/sales ratio inch up by 414bps y/y as it recorded a 34.09% y/y rise in haulage expenses. We believe the increase in haulage expenses may be due to the firm’s investment in distribution (route to market) as it plans to expand its market outreach to the Northern region of Nigeria. 

However, as a result of a significant decline in net finance cost (down 71.49% y/y), PBT margin improved (33.63% in Q2 2019 vs 32.10% in Q2 2018). The decline in net finance cost was spurred by the drop in FX loss (down 94% y/y to N956million). 

Looking Forward to a Better Half?

On a sequential basis, the company reported a decent q/q performance. While topline declined by 5.24% q/q. Price increase, combined with a decline in cost of sales (down 5.81% q/q), led to 25bps q/q improvement in gross profit margin.  

However, we highlight that OPEX/sales inched up by 105bps q/q but the 40.71% q/q decline in net finance cost was able to filter into bottom-line performance as PBT margin grew slightly by 75bps. 

Q3 2019 may be a tepid quarter due to the rainy season, which slows construction. However, going forward, we expect the company’s top-line performance to see support from potential increase in FG capex spending following the appointment of executive cabinet and implementation of 2019 budget.  

In addition, the cement producer should also benefit from its investment in distribution/route to market. As the producer is increasing its number of trucks in both Nigeria and Pan Africa market, we see potential improvements in top-line performance in the near to medium term. Furthermore, infrastructure projects and housing expenditure is also expected to drive sales in some pan-African countries such as Tanzania, Ghana, Senegal and Sierra Leone.  

For margin performance, judging from its track record, we expect that Dangcem will continue to keep its cost contained. We note that its factories no longer utilize LPFO as a source of energy as it has shifted focus to the use of its owned mined coal, which is relatively cheaper.

Source: Company financials, Investment One Research

Source: Company financials, Investment One Research