November 1, 2019/InvestmentOne Report

Q3 2019 result highlight:

§  Turnover Performance: down 6.82% q/q, up 4.54% y/y.

§  Gross margin performance: down 450bps q/q, down 126bps y/y.

§  OPEX/Sales ratio: up 291bps q/q, up 210bps y/y.

§  PBT Margin Performance: down to 19.90%, from 33.24% and 30.48% in Q2 2019 and Q3 2018.

Dangote Cement published its Q3 2019 results on Wednesday displaying a 4.54% y/y growth in its topline. Although cement prices were slightly higher in Q3 2019 compared to same period in 2018, gross profit margin shrank by 126bps to 54.333%. Increase in OPEX/sales as well as net finance cost impaired the bottom line performance with PBT margin dropping to 19.90%. 

Top-line Performance

Due to its marketing (Bag of Goodies promotion) in July 2018, the cement producer was able to improve volume sales in Q3 2018, selling a total of 3.22Mt of cement in Nigeria (up 9.30% y/y) and 2.46Mt (flat y/y) outside Nigeria. While slight increase in price of cement (up 0.35% y/y to N43,337/ton) also supported the 4.54y/y increase in revenue to N212.06billion, the closure of border challenged the export of about 0.5Mt of cement. 

Dangcem reported an increase in production cost, owing to an increase in energy cost (up 5.56% y/y) and plant maintenance (13.35% y/y). These factors combined, led to a decline in gross profit margin; 54.33% in Q3 2019 (vs. 58.83% in Q2 2019 and 55.59% in Q3 2018).

Operating Margin and Bottom-line Performance

Following through from above, we see the company’s OPEX/sales ratio inch up by 210bps y/y as it recorded a 19.05% y/y rise in selling and distribution expenses. The increase in selling and distribution expenses was as a result of increase advertisement and promotion (up 292% to N4.89billion) – Bag of Goodies Promo. 

Furthermore, as a result of a significant increase in net finance cost (up 316.07% y/y), PBT margin dropped (19.90% in Q3 2019 vs 30.48% in Q3 2018). The decline in net finance cost was spurred by the jump in FX loss (up to N6.99billion, from a gain of N5.03billion in Q3 2018). 

Been Quite a Tough Year

On a sequential basis, the company reported a less inspiring q/q performance. Topline declined by 6.82% q/q due to rainy season, which slowed constructions and demand of cement. Furthermore, the slight increase in cost of sales (up 3.36%q/q) combined with the aforementioned to depress GPM (down 449bps q/q to 54.33%).  

In the same light, we saw OPEX/sales inched up by 291bps q/q and net finance up by 236% q/q. This performance filtered into bottom-line performance as PBT margin dropped to 19.90%, from 33.63% in Q2 2019. 

In 9M 2019, turnover printed at N679.79billion, down marginally by 0.88%y/y compared to 9M 2018. Moving down the P&L the trend was similar as the company recorded an drop in PBT margin (down to 29.08%, from 36.10% in 9M 2018) on the back of a 73.38% y/y ride in net finance cost  as well as a 385bps y/y increase in OPEX/sales ratio to 23.59%. 

The management of Dangote Cement announced during the week that the company’s Board of Directors has agreed to recommend a share buyback and reverse split to its shareholders. While this proposal is still subject to regulatory approvals, it was stated that the purpose of the buyback is to return value to shareholders. We expect the buyback to be made at a premium to the current market price. As such, we believe this is positive for current shareholders. 

Going forward, we expect the firm to improve volume sales as we exit the rainy season and construction activities resume. Also supportive of improved topline performance is the implementation of the capital expenditure of the 2019 budget. Furthermore, Dangcem’s management expects sales to improve in some Sub-saharan countries such as Tanzania and Sierra Leone as they expect increase in infrastructural spending. 

Due to its ability to deliver value considering its market’s size, diversified operation and efficiency, Dangote Cement is one of the stocks we like in the cement space. Our valuation model is under review.