August 4, 2020/InvestmentOne Report

Turnover Performance: down by 8.63% q/q and up by 0.04% y/y.

·         Gross margin performance: down by 122bps q/q and 192bps y/y.

·         OPEX/Sales ratio: down by 1bps q/q and 131bps y/y.

·         PBT Margin Performance: down by 249bps q/q and 39bps y/y. 

Dangote Cement published its Q2 2020 results displaying a flattish performance in its topline. Although the cement producer’s OPEX/sales ratio declined by 131bps y/y, a 192bps y/y decrease in gross profit margin and 23.63% y/y rise in net finance cost pushed PBT margin down by 39bps y/y to 32.85%. 

Lockdown Impacts Volume Performance

Dangcem’s Q2 performance reflected the impact of the national lockdown imposed in countries around Africa, especially in Nigeria. Its Nigeria volume sales dipped by 5.66% y/y, however, this was offset by increased volume sales in its pan-African operations (up 4.25% compared to Q2 2019). Nonetheless, overall group volume sales for the quarter fell by 1.75% y/y. The slower volume sales was mainly on the back of the total lockdown imposed during the month of April 2020 in most African countries. 

According to our estimates, its average cement price during Q2 2020 in Nigeria and other pan-African countries were slightly higher by 2.41% y/y and 3.29% y/y respectively. This offset the overall decline in group volume sales (down 1.75% y/y to 5.85mmt) as group revenue printed at N227.67billion – rising marginally by 0.04%y/y.  

However, the higher cement price was not enough to offset increased COGS (up +4.70% y/y) in the quarter as its GPM registered at 56.91%, a 192bps decline from the same quarter in the previous year. We point out that, the increase in COGS resulted from increase in energy cost (N5,294.08/ton , up 5.37% y/y) and material consumed (N33.09billion, up 7.57% y/y). According to management, energy was mainly impacted by the devaluation of Naira, which increased the gas price as it is priced in dollars. 

Elsewhere, in a move that further consolidates its position as a leader in cement manufacturing in Africa, Dangcem shipped its first clinker cargo (27,800kt) to Senegal from their new cement terminal in Apapa, Lagos. 

Bottom line Holds Stable

Following through from above, we saw a decline in the company’s OPEX to N49.49billion (-5.65% y/y) as it recorded a 10.87% y/y fall in selling and distribution expenses which offset the 12.42% y/y increase in Administrative expenses. The fall in S&D expenses was majorly on the back of a 16.98% decline in haulage expense. Consequently, OPEX/sales ratio dropped by 131bps y/y to 21.74%.  

However, a 23.63% y/y rise in net finance cost – fostered by increased interest expense – pushed PBT margin down by 39bps to 32.85%. We opine that the increase in interest expenses may not be unconnected to the rise in the company’s borrowings, which is up 15.47%, from the same period last year. 

A Decent Run into 2020 despite Pandemic

The decline in group volume sales so far this year has resulted from the economy lockdown in most African countries. Total lockdown in April across major cities in Nigeria (Lagos, Abuja, and Abeokuta) saw Nigeria H1 volume sales fall by 2.44% y/y. While economy lockdown also affected sales in South Africa and Ghana, the manufacturer recorded a marginal volume growth of 0.70% y/y in its pan-African operations as Ethiopia, Senegal and Cameroon delivered a strong performances. 

The cement producers’ half-year numbers came in decent with topline increasing slightly by 1.95% to N476.85billion, as a 3.77% y/y increase in average price offset the 1.46% y/y slip in group volume sales.  

Furthermore, a faster rise in COGS pressured gross profit margin lower to 57.55%, from 58.70% in H1 2019. We saw OPEX/sales drop by 77bps y/y and net finance down by 29.18% q/q.; these filtered into the bottom-line as PBT margin improved to 34.15%, from 33.24% in H1 2019. 

Stable Performance to be sustained?

Going into the third quarter of the year, we expect the company’s topline performance to remain somewhat stable. While there continues to be easing in economic lockdown across Africa, which should support cement demand and construction activities, we pinpoint that Q3 is usually a slow quarter for cement manufacturers owing to heavy rainfall. 

In addition, the prospects of volume demand from the public sector may be weak as government revenue generation for the rest of the year comes under pressure. We believe the downward review of government revenue will have a negative impact on its capital budget implementation.  

Nonetheless, we opine that its export strategy should bode well for topline performance in the medium and long term given the existing demand for cement and clinker in West Africa. This should also bode positively for FX revenue as well as lower clinker cost for some of its grinding factories/subsidiaries in Africa. 

Elsewhere, the company recently received approval from SEC for its share buyback program, which is expected to be completed over 12months. The cement producer plans to buy back 10% of its issued share capital at a 5% premium on the prevailing market price at the time of execution. We opine that this may serve as an increase in value for shareholders.

Source: Company’s Financials, Investment One Research 

*Estimated from our model

Source: Company Financials, Investment One Research