September 1, 2023/CSL Research

Dangote cement’s Revenue in H1 was impacted by the current inflationary pressures, FX depreciation and supply chain disruptions as its group volumes declined 5.5% y/y to 13.4m MT in H1 2023. However, the combination of increases in prices and strong volume growth from its Pan African operations came to the rescue, resulting in Revenue growth of 17.7% y/y in H1 2023. Net Income was N178.6bn in H1 2023, a 3.8% y/y growth compared to H1 2022.

The company’s management noted that the Naira cash crunch and the distortion of trading days caused by the general elections affected production volumes in H1 2023. Given its sizable market capacity, we believe that Dangote cement is well positioned to meet increased demand when industry volumes pick up. We are also optimistic that production volumes in the Pan-African region will increase as the commencement of operations in the 0.4Mta grinding plant in Ghana was announced and the 1.5Mta grinding plant in Cote d’Ivoire is in its final stages.

We forecast price growth of 15%, which will be the main driver of the group’s topline performance for 2023e while we expect a marginal increase in volume growth of 5% due to the identified concerns. We have a price target of N428.36/s, with a BUY recommendation, our price target implies a 15.8% upside potential from the last closing price of N369.8/s. We arrived at our target price using a blend of DCF and Relative valuation in the ratio of 50:50.

Price increment drives revenue growth

Dangote Cement reported a double-digit increase in Revenue, up 17.7% y/y to N950.8bn in H1 2023 from N808bn in H1 2022 based on its recently released H1 2023 results. On a q/q basis, performance was impressive, as Revenue was up 33.8% q/q to N544.1bn in Q2 2023 from N406.7bn in Q1 2023. We note that there was a slight 9% increase in volumes in Q2 2023, which we attribute to the firm’s pan-African operations. Y/y, Revenue growth was price-induced amidst a decline in volume growth in H1 2023. Specifically, Revenue from the Nigerian operations decreased by 0.7% y/y to N618.5bn in H1 2023 from N622.9bn in H1 2022, due to a significant y/y decrease in volume (down 13.2% to 8.1m MT). The management attributed the decline in local production volumes to the naira cash crunch and the distortion of trading days caused by the general elections witnessed in Q1 2023.

However, we believe additional volumes from its Planned 6Mta Itori Plant would help improve production volumes and support the firm’s earnings. In our view, further increases in price would be necessary to protect profit margins in H2. This makes us estimate a 15% y/y growth in price per tonne for the year while projecting a 5% y/y volume growth. Overall, we expect Revenue from the Nigerian operations to increase by 15% y/y to N1.5tn in FY 2023 from the N1.2tn recorded in FY 2022.

Though the Pan African region also raised prices in the review period, Revenues was also boosted by a 11.3% increase in volume growth, which led to the 81.8% y/y increase in Revenue to N336.3bn in H1 2023. According to the management, volume growth was driven by Ethiopia, Senegal, Cameroon, Congo and Zambia operations. It was noted that there was capacity maximization in its Senegal, Ethiopia and Cameroon operations. Going forward, we are optimistic of an increase in production volumes in the in the Pan-African region. The management noted that its 0.4Mta grinding plant in Ghana has commenced operations and the company is at an advanced stage in the deployment of 1.5Mta grinding plant in Cote d’Ivoire. This makes us believe that the pan Africa region production volumes will maintain its uptrend in H2 and continue to support Revenue. Consequently, we forecast sales volume to increase by 10% y/y in 2023, while assuming price growth of 10% y/y in the Pan-African segment. Thus, we forecast Revenue from Pan-African operations to rise by 9% y/y in FY 2023. All in, we forecast the FY 2023 Group Revenue to grow by 26.0% y/y to N1.9tn.

Cost pressures on the horizon

Cost of Sales (adjusted for depreciation) was up by 18.2% y/y to N332bn in H1 2023. The y/y growth in Cost of Sales (adjusted for depreciation) was mainly driven by other production expenses (79% y/y). Also, marginal increases in fuel & power consumed (+5.9% y/y) and Plant maintenance cost (+16.6% y/y) contributed to the rise in Cost of Sales. The significant growth in Cost of Sales despite a 5.5% decline in sales volume points to cost pressures from inflation, FX depreciation, energy disruptions, and supply chain bottlenecks. OverallGross profit increased by 17.4% y/y to N618.8bn in H1 2023 from N527.1bn in H1 2022. Similarly, on a q/q basis, Gross Profit increased by 32% to N352bn in Q2 2023 from N266.7bn in Q1 2023. Gross margin shrunk by 0.25% y/y to 65.1% in H1 2023 from 65.2% in H1 2022.

EBITDA increased by 18.9% y/y to N443.2bn in H1 2023. Consequently, EBITDA margin grew by 1.02% to 46.6% in H1 2023 from 46.1% in H1 2022. The pressure on EBITDA margin stems from the 16.8% y/y and 30.2% y/y growth in Selling & Distribution Expenses (adjusted for depreciation) and Administrative Expenses (adjusted for depreciation).

Going forward, we expect EBITDA Margin to remain stable, driven by Revenue growth and continued cost containment measures. Though inflationary pressure on energy costs remains a downside risk, we expect the gradual shift to alternative fuel, which the company is exploring for an optimal energy mix, to provide respite. Overall, we estimate EBITDA of N930bn in 2023, which translates to an EBITDA Margin of 47.3% in 2023 compared to 43.8% for FY 2022.

Net Finance Cost increased by 164.2% y/y to N33.2bn in H1 2023 from N12.57bn in H1 2022. While Finance Cost was up 42.9% y/y to N49.4bn, Finance Income was down by 26% y/y to N16.2bn. We note that the recent devaluation of the Naira led to a steep 179.5% increase in FX losses to N113.6bn as the company revalued its liabilities. This dragged Pre-Tax profit down by 9.4% y/y to N239.8bn in H1 2023 from N264.8bn in H1 2022.

We note that the company is currently enjoying a tax holiday, thus we saw a 34% y/y decrease in Tax Expenses resulting in a 3.8% y/y growth in Net Income to N178.60bn in H1 2023 from N172.1bn in H1 2022. Overall, Earnings per Share settled at N10.39/s in H1 2023 compared with N10.10/s in H1 2022.

Valuation

We have a price target of N428.36/s, with a BUY recommendation, our price target implies a 15.8% upside potential from the last closing price of N369.8/s. We arrived at our target price using a blend of DCF and Relative valuation in the ratio of 50:50.

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​​​​​Dangote Cement Company Update.pdf​​​​​