March 3, 2020/InvestmentOne Report

·         Turnover Performance: down by  0.09% q/q and 1.87% y/y.

·         Gross margin performance: up by 320bps q/q and 182bps y/y.

·         OPEX/Sales ratio: down by  27bps q/q, up 60bps y/y.

·         PBT Margin Performance: up by  502bps q/q and 17bps y/y. 

Dangote Cement published its Q4 2019 results last week displaying a 1.87% y/y decline in its topline. However, cement prices were slightly higher in Q4 2019 compared to same period in 2018 causing gross profit margin to improve by 182bps to 57.54%. Increase in OPEX/sales was offset by the decline in net finance cost, which provided some cushion for bottom line performance with PBT margin rising to 24.92%, from 24.75% in Q4 2018. 

Top-line Performance

The cement producer recorded a slight decline in volume sales in Q4 2019 (5.60mmt, -2.77% y/y), which pushed revenue downwards by 1.87% y/y to N211.88billion. Nonetheless, the slightly higher cement prices (N43,103 per ton, +0.36% y/y) and lower COGS (down -5.91% y/y) in the quarter was able support the firms margin performance, as it GPM registered at 57.54%, a 183bps improvement from the same quarter in the previous year. 

In Nigeria, volume sales were down by 3.47% to 3.30mmt. This may have been due to the heavy rainfall experienced during the quarter that may have slowed down construction activities and demand for cement. Furthermore, the slow implementation of the 2019 budget may have as well contributed to the drop in volume performance. Observing the GDP numbers released by the National Bureau of Statistics, construction activities grew at a slower pace (1.31% y/y) in Q4 2019, compared with 2.05% in Q4 2018.  

In Sub-Saharan Africa (ex. Nigeria), the firm recorded slower volume performances in Cameroon, Ethiopia and South Africa. This impacted the firms volume sales in the region as total volume sold came in at 2.30mmt in Q4 2019, from 2.34mmt in Q4 2018. 

Operating Margin and Bottom-line Performance

Following through from above, we saw the company’s OPEX/sales ratio inch up by 60bps y/y as it recorded a 9.56% y/y rise in Administrative expenses. Although, selling and distribution expenses were down by 2.19% y/y to N38.66 billion in the quarter, operating profit was down 4.77% y/y on the back of decline in other income (down c.86% y/y). The decline in other income was due to a provision reversal in sundry income (down by c.56% y/y) as well as a decline in government grants (down by c.44% y/y). The decline in OPEX/sales ratio was enough to outweigh the increase in gross profit margin as operating margin declined by 98bps y/y to 32.29%. 

Nonetheless, PBT margin improved by 17bps as a result of the decline in net finance cost (down c.14% y/y) to N16.26billion. We spotlight that the cement producer recognized an N89.52billion tax credit (resulting from its pioneer tax incentives) in 2018, which boosted its bottom-line performance for that year. Following through, the PAT in 2019 came in lower (c.N50billion in Q4 2019 vs c.N232billion in Q4 2018), as it returned to normal levels.  

We highlight that the cement producer still has the opportunity to apply pioneer status on some of its facility lines (Ibese Lines 3 & 4 and Obajana Line 4)  in the near to medium term. 

On a sequential basis, the company reported a decent q/q performance. Topline came in flat, losing a marginal 0.09%. This may have been due to more than normal rainfall during the quarter, which slowed constructions and demand of cement. Nonetheless, the decline in cost of sales (down 7.09% q/q) supported GPM (up 320bps q/q to 57.54%).  

In the same light, we saw OPEX/sales drop by 27bps q/q and net finance down by 13.48% q/q. This performance filtered into bottom-line performance as PBT margin improved to 24.92%, from 19.90% in Q3 2019. 

Decent Performance For the Year

In FY 2019, turnover printed at N891.67billion, down marginally by 1.06% y/y compared to FY 2018; gross profit margin declined by 8bps to 57.38% following decline in average cement prices (N43,236/ton in 2019 vs N43,565/ton in 2018). Moving down the P&L the trend was similar as the company recorded a drop in PBT margin (down to 28.09%, from 33.38% in FY 2018) on the back of a 307bps y/y rise in OPEX/sales ratio to 24.09%. 

Going into 2020, we expect cement price to remain stable, with a possibility of a further decline. Our view is centered on the degree of competition from other cement players. BUACEMENT recently merged its operations in Nigeria (CCNN and Obu Cement) while Lafarge Africa has divested from its South Africa operation, giving the firm the opportunity to focus on the Nigeria market. We believe these firms might adopt strategies to increase their respective market shares and perhaps, cause a decline in price of cement. 

Nonetheless, we expect cement demand from the government to improve slightly on the back of improved budget implementation (Budgeted Capital expenditure of N2.78trillion in 2020), as FG commences a January – December budget cycle. However, this may be limited by the government’s ability to generate revenue as oil price continues to decline on the back of the outbreak of Coronavirus (COVID-19) in China, which has now spread to over 59 countries (Nigeria inclusive). Furthermore, a downside risk of the virus outbreak is a slowdown in construction activities from the private sector.

Source: Company Financials, Investment One Research