The group’s aggregate revenue declined by 1.9% y/y in Q4-19, weighed by moderation in volume growth (-2.3% y/y), which offset the slight price increase (+0.9% y/y) achieved. Coming from its weakest quarter, we found surprising that volume growth declined sequentially by 1.0% y/y. We believe a tighter competitive landscape in its key markets (Nigeria and South Africa) must have affected sales volume over the period. For 2019FY, revenue only moderated by 1.1%, following a 3.0% y/y decline in average price, even as volume grew slightly (+0.1% y/y).

On a regional breakdown, revenue in Nigeria dipped by 3.1% y/y, following a disappointing volume outturn (-3.0% y/y) and average prices (-0.1% y/y). We suspect that the drive to gain market share by competitors must have led to volume loss, especially where consumers are price sensitive. Management confirmed that it sustained its “Bag of Goodies” promotion in a bid to ward off competition. To underscore the scale of things, management wasn’t able to implement the price increase announced in Nigeria in April 2019 (+NGN150/bag).

For the rest of Africa, revenue grew by 0.9% y/y in Q4-19, supported by higher average prices (+1.9% y/y), which masked the decline in volume growth (-1.1% y/y). Across its different regions of operation, while higher infrastructure spending in Tanzania and Senegal supported sales volume, we understand that weaknesses in Congo, Ghana, and Cameroun were the spanner in the works. Management highlighted that security challenges in the North and South West region of Cameroun continued to impact sales volume. Meanwhile, the absence of major infrastructure spending, together with the slow pace of economic recovery impacted sales in Congo. We understand that DANGCEM’s market share declined by 6.0% y/y in Ghana, owing to the intensely competitive environment.

Despite the weaknesses in revenue, the Group’s gross margin improved markedly by 180bps in Q4-19, following a faster decline in COGS (-5.9% y/y). Most of the improvement came from Pan Africa (+810 bps y/y), which was enough to offset the pressures in Nigeria (-60bps). For clarity, total cost/tonne declined by 8.5% in Pan Africa, supported by a significant decline in energy cost/tonne (-35.2% y/y). Management said cash cost in Tanzania reduced meaningfully owing to the use of the temporary gas turbines. Also, against the reduced volume, manufacturing costs decreased in Ghana, South Africa, and Cameroon. Elsewhere, total cost/tonne in Nigeria rose by 2.0% y/y, driven by royalty (+16.3% y/y) and salaries and related (+4.4% y/y) cost.

Further down, Q4-19 operating expenses were higher by 5.8% y/y, driven by both administrative (+49% y/y) and selling and distribution (+2.0% y/y) expenses. We noted that haulage cost/tonne rose by 15.8% y/y. Management said it took control of the delivery of more volumes directly to customers in order to reach untapped markets, hence, the reason for higher haulage cost. That, together with the sharp decline in other income (-83.7% y/y), led to a 5.0% y/y decline in EBITDA, with related margin moderating by 140bps to 43.5%. On the positive, however, energy cost/tonne in Nigeria dipped by 6.2% y/y. Unlike in Q3-19 where management said heavy rainfall had forced higher usage of more expensive gas, we believe cheaper coal now contributes higher energy-mix in its cost structure.

DANGCEM’s cash balance rose by 34.9% y/y, paving the way for a 131.0% y/y expansion in finance income, despite the lower yield environment. Meanwhile, finance cost declined by 9.0% y/y, following a slight decline in total debt (-8.0% y/y). Overall, PBT and PAT came in lower by 1.2% y/y and 1.6% y/y, respectively, however, related margin improved by 20bps and 80bps, respectively, owing to a faster decline in revenue.

Comment: The direction of EPS over 2019 was not surprising, however, the magnitude of the decline was steeper than our initial thought. DANGCEM’s inability to implement the price increases announced in April 2019 highlights the scale of competition it faces in the Nigerian market. We believe that DANGCEM’s scale, superiority, and efficiency will allow it to respond quickly to price pressure. We expect market reaction to be neutral. The stock is trading at 2019E P/E and EV/EBITDA multiples of 11.80x and 5.97x, respectively, a discount to the Middle East and Africa peer averages of 11.80x and 9.18x, respectively. Our estimates are under review.