July 24, 2024/GCR Ratings

GCR Ratings (GCR) has affirmed the national scale long-term and short-term issuer ratings of AA+_(NG) and A1+_(NG), respectively, accorded to Dangote Cement Plc. Concurrently, GCR has affirmed the national scale long-term issue rating of AA+_(NG) accorded to each of Dangote Cement Plc’s existing Senior Unsecured Bonds. The N3.6bn Series 1 Tranche A Senior Unsecured Bond was fully redeemed in May 2024, and the rating has been withdrawn. The outlook on the ratings is stable.

Rating Rationale

The affirmed ratings reflect DCP’s sustained competitive advantages and market leadership, translating to strong earnings and cash generation. These strengths are, however, balanced against the elevated short-term debt and the consequent increase in finance cost, which, combined with high dividend payouts, creates further liquidity pressures. The ratings also remain constrained by the relatively weaker credit profile of DCP’s parent company, Dangote Industries Limited (DIL or the group).

The competitive strengths of DCP are anchored by its substantial operational scale, higher production capacity, and greater geographical diversification relative to its peers. The company’s current installed capacity is 52 million tonnes across ten African countries, unlike its closest peers, who operate solely in Nigeria and have a combined 21.5 million tonnes capacity. Despite pan-African revenue doubling recently, Nigeria still accounts for over 70% of the company’s EBITDA. Looking ahead, the focus is to facilitate export operations from Nigeria to other West African markets, which would diversify operations and create better competitive advantages over the long term.

Earnings assessment remains a key rating strength, notwithstanding the weaker market demand in Nigeria. Revenue increased by 36% to N2.2trn (US$3.4bn) for the financial year ended 2023, with a further annualised top-line growth of 48% in Q1 2024. Growth was largely driven by higher pricing and the effect of translation gains from Pan-African earnings given the weaker Naira. Despite these price adjustments, the EBITDA margin contracted to 35% in March 2024 from 39% in 2023 (2022: 43%) as costs could not be fully transferred to consumers. We expect a steady increase in volumes driven by a robust public construction pipeline over the next two years, while the margin should be supported at around 37% over the next 18 months on the back of further price increases and cost optimisation plans.

Despite the consistent rise in debt, the strong earnings and cashflows continue to support a positive leverage assessment. Gross debt spiked to N1.3trn as of 31 March 2024 (2023: N736bn; 2022: N588bn), following the issuance of commercial papers in 2023 to fund DCP’s share buyback scheme, as well as the impact of devaluation on the USD-denominated debt. Nevertheless, net debt to EBITDA was maintained below 1x (2023: 0.7x; 2022: 0.6x). DCP’s debt metrics are moderated by its strong cash flows, underpinned by favourable credit terms with suppliers from 38 days in 2022 to 67 days in 2023. Thus, operating cash flows (OCF) covered an improved 91% of debt in Q1 2024 compared to 56% in 2023 and 48% in 2022. We expect these metrics to be sustained strongly over the review period based on robust earnings and cashflows.

Conversely, we have negatively considered the elevated short-term debt (60% of total) and the consequent rise in finance cost, which narrowed interest coverage to 5.9x in March 2024 from 7.2x in 2023 and a high of 18.6x in 2022. DCP plans to raise debt to refinance existing loans, but the new debt would be costlier given the higher lending rates. This notwithstanding, we expect a modest improvement in interest coverage to around 7x-9x over the outlook period on the back of better earnings.

Liquidity assessment remains a negative rating factor due to the low liquidity sources versus uses coverage 1.2x over the next 12 months. This is predicated on the sustained high short-term debt redemption of N638bn and our expectation that dividend payouts will remain high until DIL’s large projects are fully operational. We expect capital spending to be modest over the rating horizon, largely related to replacement costs and some capacity expansion programmes across the company. Against these, we have considered the strong cash holding of N626bn as of March 2024 and the projected robust operating cash flows, which would be complemented by substantial unutilised committed credit facilities of about N500bn and the company’s access to a very diverse funding base. A persistent rise in short-term debt or material underperformance of operating cashflows could worsen liquidity pressures.

A negative adjustment has been applied to DCP’s ratings to reflect the relatively weaker creditworthiness of DIL. This is because GCR considers DCP a core part of the group, accounting for over 70% of group revenue in 2023. DIL’s credit profile assessment is constrained by the high debt to fund the fertiliser and refinery projects. These projects have yet to contribute meaningfully to group revenue. However, this should change within the next 18 months as operations attain a greater scale, with robust earnings and cash flows allowing DIL to reduce debt gradually.

DCP’s N100bn in Series 1 bonds, N46.4bn Series 1 (Tranche B & C) bonds and N116bn Series 2 (Tranches A-C) bonds are direct, unconditional, senior, unsubordinated, and unsecured obligations of DCP. Hence, they rank pari passu with all other senior unsecured creditors of the company, and the bonds bear the same national scale long-term rating accorded to DCP. Accordingly, any change in DCP’s long-term corporate rating would impact the bonds’ ratings. We have reviewed the trustee’s bond performance report dated July 9, 2024, and no breaches were identified.

Outlook Statement

The stable outlook reflects GCR’s view that DCP’s strong market position will continue to support robust earnings and cash flows, notwithstanding financial disruptions to the Nigerian economy. While we also expect the liquidity pressures from the high short-term debt and huge dividend payouts, these should ease as DIL’s large projects become fully operational.

Rating Triggers

Given that DCP’s ratings are currently capped to the group’s ratings, a rating upgrade could follow an improvement in DIL’s ratings as significant earnings growth emanates from the refinery business and facilitates deleveraging.

Conversely, negative rating action could result from an escalation in debt to support its parent if DIL’s earnings targets are not achieved. A downward rating movement could result from sustained high short-term debt amid the rising interest rates, which weakens interest coverage below 4x and further exerts pressure on liquidity between the aggressive dividend payouts.

Dangote Cement Plc – Ratings History

Salient Points of Accorded Rating

GCR affirms that 

1. Business activities of the credit rating agency influenced no part of the rating process. 
2. The rating process was based solely on the merits of the rated entity, security or financial instrument being rated and
3. The rating process was an independent evaluation of the risks and merits of the rated entity, security, or financial instrument. The credit ratings have been disclosed to the rated entity. The ratings above were solicited on behalf of the rated entity.