April 15, 2024/CSL Research

The growth prospects of Dangote Cement were dampened by various factors in 2023, including the effects of the general election, limited cash availability, currency devaluation and constrained purchasing power. Consequently, the group experienced a decline in sales volumes, dropping by 1.8% year-on-year to 27.28 million metric tons. Given Dangote Cement’s dominant market share of 61.2%, it bore the brunt of these challenges. Despite the volume setback, the company managed to achieve double-digit revenue growth, thanks largely to significant price hikes of 38.88% year-on-year.

Looking ahead, we retain our view that further price increases will be needed to protect profit margins given the elevated inflationary environment. We also believe we will see volume growth in the company’s Nigerian operation, as we expect less distortions to the company’s volume growth prospects. Thus, we forecast a 10% y/y growth in price per tonne for the year to N107,445/ton while projecting a 6% y/y volume growth to 17.32m MT. Overall, we expect Revenue from the Nigerian operations to increase by 19% y/y to N1.55tn in FY 2023.

Driven by both price and volume growth, we expect the company’s Pan African Revenues to rise in 2024. We forecast an increase in sales volume by 10.3% y/y in 2024 while assuming price growth of 11% y/y in the Pan-African segment. Thus, we forecast Revenue from Pan-African operations to rise by 27% y/y in FY 2023. Overall we forecast FY 2024 group Revenue to grow by 26.8% y/y to N2.80tn.

We have revised our target price slightly upwards to N480.48 from N428.36/s, previously. However, we downgrade our recommendation to a SELL from a BUY previously as we believe the stock is overvalued at current levels. The stock currently trades at an EV/EBITDA ratio of 13.7x, which is higher than its industry average of 11.98x. We arrived at our target price using a blend of DCF and Relative valuation in the ratio of 60:40. Current Price: 686.70/s.

Price increment drives Revenue growth

Based on Dangote Cement’s recently released FY 2023 results, the company’s Revenue increased by 36.4% y/y, to N2.21tn in 2023 from N1.62tn in 2022. Quarterly, performance was resilient, as Revenue was up by 23% q/q to N693.49bn in Q4 2023 from N563.77bn in Q3 2023. Given a 1.8% decrease in group sales volumes to 27.28m MT from 20.77m MT in 2022, we attribute the growth in Revenue to price increases. The company’s average price rose by 38.88% to N80,942/ton in 2023 from N58,282/ton in 2022. Specifically, Revenue from the Nigerian operations increased by 7.7% y/y to N1.298tn in 2023 from N1.21tn in 2022 and we attribute the revenue growth to price increases in line with inflationary realities as we saw a y/y decrease in volumes (8.1% to 16.39m MT).

The decline in year-on-year sales volume at Dangote Cement was attributed to several factors, including the impact of the 2023 general elections, cash shortages, and the currency devaluation, particularly affecting its Nigeria operations. We believe that the industry-wide challenges of constrained purchasing power and reduced government spending on capital projects have further exacerbated the situation. Given Dangote Cement’s commanding market share of 61.2%, it is likely to bear the brunt of these challenges. Looking ahead, we anticipate that the company will need to implement further price increases to safeguard its profit margins in the face of the prevailing inflationary environment. However, we also foresee potential growth in sales volume for Dangote Cement’s Nigerian operations, as we expect fewer disruptions to its growth prospects. Consequently, we have projected a 10% year-on-year increase in price per tonne for 2024 (reaching N107,445/ton) and a 6% year-on-year volume growth (reaching 17.32 million metric tons). Overall, we anticipate a 19% year-on-year revenue growth from the Nigerian operations, reaching N1.55 trillion in FY 2023.

In 2023, Dangote Cement’s Pan-African revenues surged by an impressive 123.2%, reaching N925.9 billion, up from N414.93 billion in 2022. This substantial growth was driven by a 12.7% increase in sales volumes and strong price growth. The management attributes the volume growth to outstanding performances from its operations in Ethiopia, Senegal, Zambia, and Congo, with Pan-African volumes now constituting 41.2% of the Group’s total volume, showcasing the effectiveness of its diversification strategies. Notably, capacity optimization efforts were observed in Senegal, Ethiopia, and Cameroon operations. Looking ahead, there’s optimism regarding further production volume increases in the Pan-African region. The company has already commenced operations at its 0.45 million metric tons per annum (Mta) grinding plant in Ghana and is in an advanced stage of deploying a 1.5Mta grinding plant in Cote d’Ivoire. Additionally, plans for clinker export to Cote d’Ivoire by 2024 are underway, reinforcing expectations for sustained growth in production volumes in the Pan-African segment, which will in turn support revenue growth. Based on these developments, we forecast a 10.3% increase in sales volume in 2024, coupled with an assumed price growth of 11% year-on-year in the Pan-African segment. Consequently, we anticipate Pan-African operations’ revenue to rise by 27% year-on-year in FY 2023. Overall, our projection for FY 2023 Group Revenue stands at a robust 26.8% year-on-year growth, reaching N2.80 trillion.

Inflationary pressures drive company’s Cost.

Cost of Sales (adjusted for depreciation) increased by 54.5% y/y to N883.77bn in FY 2023 from N572.13bn in FY 2022. A significant growth in plant maintenance costs (+62.27% y/y) drove the y/y growth in Cost of Sales (adjusted for depreciation). Increases in materials consumed (41.88% y/y) and fuel and power consumed (+49.80% y/y) also contributed to the increase in Cost of Sales. However, Gross Profit rose by 26.6% to N1.32tn in FY 2023 from N1.05tn in FY 2023. Gross margin fell by 4.7ppts y/y to 60% in FY 2023, down from 64.6% in FY 2022.

Given the current high inflationary environment and persistent Naira depreciation which has negatively impacted operating costs, we saw the company’s operating expenses (adjusted for depreciation) rise by 34.0% y/y to N462.99bn in FY 2023 from N345.48bn in FY 2022. The growth in Opex reflects the 22.1% y/y and 92.5% y/y growth in Selling and distribution Expenses (adjusted for depreciation) and Administrative Expenses (adjusted for depreciation), respectively. Other Income rose by 367.9% to N24.95bn in FY 2023. Though EBITDA increased by 25.4% y/y to N885.43bn in 2023 from N706.27bn in 2022, EBITDA margin contracted by 3.5ppts to 40.1% from 43.6% in FY 2022. Despite a 25.6% y/y rise in Depreciation and amortization to N151.16bn, Operating Profit climbed by 25.3% y/y to N734.27bn in FY 2023 from N585.88bn in FY 2022.

We anticipate the company’s EBITDA margins to remain stable, driven by robust double-digit revenue growth and ongoing efforts to control costs. However, there are concerns regarding inflationary pressures on energy expenses. Nevertheless, we expect relief from the recently implemented alternative fuel systems in Okpella and Ibese, as well as the continued transition from diesel-powered trucks to Compressed Natural Gas (CNG). Taking these factors into account, we estimate that the company’s EBITDA will reach N1.14 trillion in 2024, marking a 29% increase from the N886.12 billion recorded in 2023. This translates to an EBITDA margin of 41% in 2024, compared to the 40% reported in 2023.

In FY 2023, the company experienced a significant surge in Net Finance Cost, increasing by 209.4% year-on-year to N283.56 billion from N91.66 billion in FY 2022. This rise was primarily propelled by a substantial increase in Finance Cost, which escalated by 138.52% year-on-year to N310.96 billion in FY 2023 from N130.37 billion in FY 2022. The spike in Finance Cost can be attributed to the FX losses incurred by the company due to the depreciation of the Naira. Specifically, the company’s FX losses soared by 204.25% to N164.08 billion in FY 2023 from N53.93 billion in FY 2022. Conversely, Finance Income decreased to N27.41 billion in FY 2023 from N38.72 billion in FY 2022. Looking ahead to 2024, we anticipate a decline in Net Finance Costs, driven by expectations of reduced FX losses amid an improving exchange rate environment. Consequently, we have forecasted a Net Finance Cost of N199.01 billion in 2024, representing a 29.82% decrease from the N283.56 billion recorded in 2023.

Pre-tax Profit was up by 5.6% y/y to N553.10bn in FY 2023 from N524.00bn in FY 2022. Given a 31.2% y/y decline in Tax Expense to N97.52bn in FY 2023, Net Income grew significantly, up 19.2% y/y to N455.58bn in FY 2023 from N382.31bn in FY 2022. Overall, Earnings per Share settled at N26.47/s in FY 2023 compared with N22.27/s in FY 2022. In 2024, we expect the company’s profitability to grow, we have forecasted PBT of N725.05bn in 2024 from the N553.10bn recorded in 2023.

Valuation

We have revised our target price upwards to N480.48 from N428.36/s, previously. However, we have downgraded our recommendation to a SELL from a BUY previously. We believe that the stock is overvalued at current levels. The stock currently trades at an EV/EBITDA ratio of 13.7x, which is higher than its industry average of 11.98x. We arrived at our target price using a blend of DCF and Relative valuation in the ratio of 60:40. Current Price: 686.70/s.

Kindly click on the below link to download the full report.

​CSL Dangote Cement FY 2023 Earnings Review.pdf​​​​​​​​​​​​​