November 2, 2023/CSL Research

Dangote Cement’s operations were affected negatively by the election uncertainty and cash unavailability which impacted business operations in Q1 2023. The company also noted that the significant FX devaluation in Q2 2023 also hampered sales volumes. Consequently, the group sales volume declined 2.3% y/y to 20.29m MT in 9M 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 28.7% y/y in 9M 2023. We believe constrained purchasing power and low CAPEX expenditure by the government continue to affect sales volumes across the whole industry.

Dangote cement controls the largest market share in the industry (61.2%) and is well-positioned to meet increased demand when industry volumes pick up. Also, we are optimistic that the Pan-African region will continue to support the company’s topline. The management announced the commencement of operations at its 0.45Mta grinding plant in Ghana and noted that the company has reached an advanced stage in the deployment of 1.5Mta grinding plant in Cote d’Ivoire. Clinker export to Cote d’Ivoire is also expected to commence in 2024.

We forecast total price increase of 20%, which will be the main driver of the group’s topline performance for 2023e (14.4% price growth ytd) while we expect a marginal 5% increase in volume due to the identified concerns. We maintain our price target of N428.36/s, with a BUY recommendation. We arrived at our target price using a blend of DCF and Relative valuation in the ratio of 50:50. Current Price: N328/s.

Price increment drives revenue growth

Dangote Cement’s recently released 9M 2023 results showed the company’s revenue increased by 28.7% y/y, to N1.51tn in 9M 2023 from N1.18tn in 9M 2022. On a quarterly basis, performance was resilient, as Revenue was up marginally by 3.6% q/q to N563.77bn in Q3 2023 from N544.11bn in Q2 2023. Given a 2.4% decrease in group sales volumes to 20.29m MT from 20.80m MT, we attribute the growth in Revenue to price increases. Specifically, Revenue from the Nigerian operations increased by 4.8% y/y to N933.0bn in 9M 2023 from N890.65bn in 9M 2022 and we also attribute the growth in Revenue to price increases as we saw price per tonne increase y/y to N77,628 from the N66,072 recorded as at 9M 2022, indicating a y/y increase of 17.49% amidst a y/y decrease in volumes (10.9% to 12.02m MT).

The company attributed the y/y decline in sales volumes to multiplier effects of election uncertainty, cash unavailability which impacted business operations in Q1 2023, and the significant FX devaluation in Q2 2023. We believe that constrained purchasing power and low CAPEX expenditure by the government continue to affect sales volumes across the whole industry. We believe further price increases will be required to protect profit margins, thus we forecast a 20% y/y growth in price per tonne for the year (14.4% ytd price increase) 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.

The Pan African region recorded significant Revenue growth in 9M 2023. Revenues grew by 103.9% to N588.24bn from N288.51bn in 9M 2022. The growth in revenue reflects strong growth in sales volumes, up 15.2%, as well as strong growth in prices. According to the management, volume growth was driven by strong performances from Ethiopia, Cameroon, Senegal, Zambia, and Congo operations. The company’s Pan-African volume now accounts for 42% of the Group’s total volume, reinforcing its diversification strategies. It was noted that there was capacity maximization in its Senegal, Ethiopia, and Cameroon operations. Going forward, we are optimistic about an increase in production volumes in the Pan-African region. The management announced the commencement of operations at the 0.45Mta grinding plant in Ghana and noted that the company is at an advanced stage of the deployment of the 1.5Mta grinding plant in Cote d’Ivoire. The company also noted that it will start clinker export to Cote d’Ivoire in 2024. This makes us believe that the pan Africa region’s production volumes will maintain its uptrend trajectory and continue to support Revenue growth. Consequently, we maintain our forecasts and expect 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

In 9M 2023, Cost of Sales (adjusted for depreciation) increased by 32.8% y/y to N560.06bn. A significant growth in other production expenses (86.51% y/y) drove the y/y growth in Cost of Sales (adjusted for depreciation). Increases in plant maintenance costs (+34.32% y/y) and fuel and power consumed (+28.91% y/y) also contributed to the increase in Cost of Sales. Gross profit climbed by 26.3% y/y to N954.54bn in 9M 2023, up from N755.65bn in 9M 2022. However, on a quarterly basis, Gross Profit fell by 4.6% to N335.74bn in Q3 2023 from N352.09bn in Q2 2023. Gross margin fell 1.2% y/y to 63% in 9M 2023, down from 64.2% in 9M 2022.

Amidst the current inflationary environment and persistent Naira depreciation which has negatively impacted operating costs, we saw the company’s operating Expenses (adjusted for depreciation) rise by 24.23% y/y to N327.06bn in 9M 2023 from N263.28bn in 9M 2022. The growth in Opex reflects the 22.2% y/y and 45% y/y growth in Selling and distribution Expenses (adjusted for depreciation) and Administrative Expenses (adjusted for depreciation), respectively. Other Income rose by 434% to N16.64bn in 9M2023. EBITDA increased by 28.5% y/y to N662.76bn in 9M 2023 from N515.59bn in 9M 2022. EBITDA margin remained constant at 43.8% in 9M 2023. Despite a 24.1% y/y rise in Depreciation and amortization to N101.75bn, EBIT climbed by 29.4% y/y to N561bn in 9M 2023 from N433.62bn in 9M 2022.

We expect EBITDA Margin to remain stable, driven by strong double-digit Revenue growth and continued cost containment measures. Though inflationary pressures on energy costs remain a downside risk, we expect the Okpella alternative fuel system which is expected to be commissioned in December, and the Phase transition from diesel power trucks to Compressed Natural Gas (CNG) to provide respite. Overall, we estimate EBITDA of N930bn in 2023, which translates to an EBITDA Margin of 47.9% in 2023.

Net Finance Cost increased by 178% y/y to N70.41bn in 9M 2023 from N25.33bn in 9M 2022. While Finance Cost was up 68.15% y/y to N91.08bn, Finance Income was down by 28.32% y/y to N20.67bn. We note that the company recorded a Net FX loss of N99.01bn, a 37.5% rise from the N72.39bn recorded in 9M 2022.

Pre-tax profit was up by 20.5% y/y to N404.89bn in 9M 2023 from N335.90bn in 9M 2022. We saw a slight increase of 3.7% y/y decrease in Tax Expense, However, Net Income grew significantly by 30.2% y/y to N277.55bn in 9M 2023 from N213.10bn in 9M 2022. Overall, Earnings per Share settled at N16.08/s in H1 2023 compared with N12.41/s in H1 2022.

We note that Dangote Cement successfully completed Tranche I of its second share buyback program in July, repurchasing 0.71% of outstanding shares. The buyback was exercised at an average price of ₦339.00/s. This brings the total number of outstanding shares to 16,841 from 16,883 as of 9M 2022.

Valuation

We maintain our price target of N428.36/s, with a BUY recommendation. We arrived at our target price using a blend of DCF and Relative valuation in the ratio of 50:50. Current Price: N328/s.

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