Event: DANGCEM published Q1-22 unaudited financials last week Friday (April 29), reporting PAT growth of 18.0% y/y to NGN105.85 billion while EPS grew by 17.0% y/y to N6.18/s. The growth in EPS was driven mainly by the strong topline growth (+24.2% y/y), which proved sufficient in offsetting the spikes in cost of sales ex-depreciation (+23.3% y/y) and OPEX ex-depreciation (+39.4% y/y).

The group’s aggregate revenue grew by 24.2% y/y to NGN413.18 billion in Q1-22, driven mainly by expansion in Nigeria operations (+34.3% y/y) as revenue from Pan African operations (-1.8% y/y) faltered. The revenue growth in Nigeria was primarily driven by the increase in price per tonne (+36.4% y/y) as volumes (-1.5% y/y to 4.83MMT) declined marginally. Management noted that the decline in Nigerian sales volumes was due to the high base of Q1-21, further exacerbated by energy supply disruptions which impacted production in Q1-22. On Pan African Operations, we understand that the decline in volumes (-7.6% y/y to 2.40MMT) was occasioned by global supply chain disruptions and increasing commodity prices, shut down of its Congo plant for over two months and extended plant maintenance in Senegal. Overall, the group’s sales volume declined by 3.6% y/y to 7.25MMT in Q1-22.

Group EBITDA grew by 18.4% y/y in Q1-22, as the growth in revenue (+24.2% y/y) overshadowed the increases in the cost of sales ex-depreciation (+23.3% y/y) and operating expenses ex-depreciation (+39.4% y/y). However, the Group EBITDA margin declined by 2.5ppts to 51.0% in Q1-22. We attribute the weakness in margins to cost pressures in Nigerian Operations, evident by the faster increase in cash cost/tonne (+49.9% y/y) compared to the price per tonne (+36.4% y/y). Management revealed that costs were pressured by the surge in commodity prices (particularly gas), which led to a spike in energy cost/tonne in Nigerian Operations (+46.7% y/y). In addition, margins were impacted by the deterioration in OPEX/sales ratio (17.2% in Q1-22 vs 15.3% in Q1-21).

Net finance cost grew by 22.0% y/y to NGN26.41 billion in Q1-22, following the surge in finance income (+183.4% y/y to NGN10.36 billion), which outweighed the increase in finance cost (+45.3% y/y to NGN36.76 billion). The finance cost growth reflects the impact of higher interest expenses on debt (+27.6% y/y to NGN18.35 billion) and FX loss (+71.6% y/y to NGN18.22 billion). On the other hand, we imagine the growth in finance income was supported by increased deposit rates and growth in cash and cash equivalents (+47.6% y/y to NGN218.30 billion).

Overall, PBT grew by 20.2% y/y in Q1-22. Following the significant increase in tax charge (+25.1% y/y in Q1-22), PAT grew slower by 18.0% y/y in Q1-22.

Comment: We are impressed that DANGCEM was still able to deliver growth in revenue and bottom line in the face of the challenges that constrained operations in its home market and across Pan African Operations. We expect margins to remain under pressure in the near term, given supply chain disruptions, as well as elevated gas and diesel costs. However, we remain cautiously optimistic that the increase in cement prices in its home market will continue to limit the magnitude of the decline in margins, given rising cost pressures. We would engage with management to gain insights on progress made with the usage of alternative fuels and the extent to which one-off challenges relating to the shutdown of the Congo plant and maintenance activities have been addressed. Our estimates are under review.