August 13, 2024/CSL Research

Dangote Cement’s unaudited results for the first half of 2024 showed strong Revenue growth of 85.1% y/y to N1.76 trillion from N950.83 billion in the same period of 2023. The substantial increase was propelled by both price and volume increases. The company’s sales volume rose by 3.83% y/y, reaching 13.93 million metric tons in H1 2024, compared to 13.42 million metric tons in H1 2023. Additionally, the average price per ton increased significantly by 78.28%, rising to N126,314/ton in H1 2024 from N70,852/ton in H1 2023.

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 that volume growth from the company’s Nigerian operations will remain strong on the back of improved CAPEX by the government and private spending. Also driven by both price and volume growth, we expect the company’s Pan-African Revenues to rise in 2024. Overall, we raise the Revenue projection for Dangote Cement in FY 2024 to N3.48 trillion from N2.21 trillion, previously, indicating a 56.48% y/y increase.

We have revised our target price upwards to N512.62 from N480.48/s, previously reflecting the company’s strong revenue growth potential. However, we maintain our SELL recommendation as we believe the stock is overvalued at current levels. The stock currently trades at an EV/EBITDA ratio of 10.07x, which is higher than its EMEA peers of 9.67x. We arrived at our target price using a blend of DCF and Relative valuation in the ratio of 60:40. Current Price: 591.10/s.

Price and volume increment drives Revenue growth

Dangote Cement’s unaudited results for the first half of 2024 showed strong Revenue growth of 85.1% y/yto N1.76 trillion from N950.83 billion in the same period of 2023. The company’s quarterly performance was also impressive, with Revenue growing by 15.3% q/q to N942.71 billion in Q2 2024, up from N817.35 billion in Q1 2024. This substantial Revenue growth was driven by both price and volume increases. The company’s sales volume rose by 3.83% y/y, reaching 13.93 million metric tons in H1 2024, compared to 13.42 million metric tons in H1 2023. Additionally, the average price per ton increased significantly by 63.82%, rising to N116,064/ton in H1 2024 from N70,850/ton in H1 2023.

Revenue from Nigerian operations was a significant contributor to overall growth, with Revenue from this segment increasing by 60.3% y/y to N991.38 trillion in H1 2024, up from N618.545 billion in H1 2023. This impressive growth was driven by a strong rebound in Nigerian sales volumes, which rose by 10.9% y/y to 8.99 million metric tons in H1 2024, compared to 8.11 million metric tons in H1 2023. The broad-based Revenue growth reflects rising demand, fueled by increased government capital expenditure (CAPEX) and heightened private-sector activity. As the government continues to prioritize infrastructure development, demand for cement is expected to remain robust.

Despite the government’s efforts to cap cement prices, market prices have continued to align with macroeconomic realities. Looking ahead, further price increases are expected in H2 2024 to protect profit margins amid inflationary pressures. Consequently, we have projected an 34% y/y increase in price per tonne for 2024 (reaching N125,200/ton) and a 12% y/y volume growth (reaching 18.3 million metric tons). As a result, Revenue from Nigerian operations is anticipated to grow by 59% y/y, reaching N2.06 trillion in FY 2024.

In H1 2024, Dangote Cement’s Pan-African Revenues surged by 139.9%, reaching N807.11 billion, up from N336.39 billion in H1 2023. This substantial growth was driven by a significant 137.01% increase in prices, with only a marginal 1.2% rise in sales volumes. The company attributes the volume growth to strong performances in Ghana, Congo, and Zambia and capacity maximization in Senegal, Ethiopia, and Cameroon. Pan-African volumes now make up 39.4% of the Group’s total volume in H1 2023 highlighting the success of its diversification strategies.

Looking ahead, there is optimism about further production volume increases in the Pan-African region, particularly with the ramped-up production at the 0.45 million metric tons per annum (Mta) grinding plant in Ghana and plans for clinker export to Cote d’Ivoire by 2024. Given these developments, we forecast a 6.2% increase in sales volume and a 45.0% y/y price growth in the Pan-African segment for 2024. This is expected to lead to a 53% y/y rise in Revenue from Pan-African operations. Consequently, we have raised our overall Revenue projection for Dangote Cement in FY 2024 to N3.48 trillion, indicating a 56.48% y/y increase.

Inflationary and FX pressures drive company’s Cost.

In H1 2024, the Cost of Sales (adjusted for depreciation) increased by 122.5% y/y, rising to N738.79 billion from N332.03 billion in H1 2023. This growth was primarily driven by a significant increase in plant maintenance costs (+141.54% y/y). Additionally, increases in fuel and power consumed (+138.71% y/y) and materials consumed (+95.40% y/y) contributed to the higher Cost of Sales. Despite these cost increases, Gross Profit climbed by 65.00% y/y, reaching N1.02 trillion in H1 2024, up from N618.8bn in H1 2023. However, Gross Margin fell by 7.1 ppts y/y, dropping to 58.0% in H1 2024 from 65.1% in H1 2023.

Given the current inflationary environment and persistent Naira depreciation which have negatively impacted operating costs, the company’s Operating Expenses (adjusted for depreciation) rose by 105.92% y/y, increasing to N384.13 billion in H1 2024 from N186.54 billion in H1 2023. This increase reflects a 103.9% y/y growth in Selling and Distribution Expenses (adjusted for depreciation) and a 113.3% y/y rise in

Administrative Expenses (adjusted for depreciation). Other Income, which includes insurance claims, government grants, and other miscellaneous sources, grew by 161.9% to N28.96 billion in H1 2024. EBITDA increased by 50.1% y/y to N665.18 billion from N443.26 billion in H1 2023. However, the EBITDA margin contracted by 8.8 ppts to 37.8% from 46.6% in H1 2023. Despite a 79.7% y/y rise in Depreciation and Amortization to N113.58bn, Operating Profit climbed by 45.1% y/y to N551.60 billion from N380.04 billion in H1 2023.

We anticipate that Dangote Cement’s EBITDA margins will remain stable, driven by strong double-digit Revenue growth and effective cost-control measures. Despite inflationary pressures on energy expenses, relief is expected from the company’s progress in transitioning from diesel-powered trucks to CNG. The firm noted that the recent arrival of 300 new CNG-powered trucks is part of a larger plan to adopt the use of a total of 1,500 CNG-powered trucks. Additionally, the company has commissioned 11 alternative fuel projects across its operations, which are expected to significantly support its cost-minimization initiatives. Taking these factors into account, we have raised our EBITDA forecast to N1.38 trillion for FY 2024 from 1.14tn previously, representing a 56% rise from the N886.12 billion recorded in 2023. This reflects an EBITDA margin of 41.0% in 2024, an improvement from the 40.0% recorded in 2023.

In H1 2024, Dangote Cement’s Net Finance Cost increased by 109.6% y/y to N307.72 billion, up from N146.84 billion in H1 2023. This significant rise was driven by a substantial increase in Finance Cost, which grew by 103.94% y/y to N332.52 billion from N163.05 billion. The primary factor behind the rise in Finance Cost was foreign exchange losses, which surged by 77.16% to N201.30 billion, compared to N113.63 billion in H1 2023. The company noted that the FX losses were a result of the devaluation of its FX-based loans primarily used for its working capital (notably energy costs). On the other hand, Finance Income also increased, reaching N24.80 billion from N16.21 billion in H1 2024. Dangote Cement aims to reduce its FX obligations by increasing its export capacity, which will help bolster its FX reserves. Notably, from its Nigerian operations, the company exported 14 ships of clinker to Ghana and Cameroon, with Nigeria’s cement and clinker exports up 55.2% y/y in H1.

In FY 2024, we anticipate a further rise in Net Finance Costs, largely driven by expected increases in FX losses due to FX volatilities on additional borrowings to aid their working capital. As a result, we have forecasted Net Finance Costs to reach N502.38 billion in 2024, marking a 77.17% increase from the N283.56 billion recorded in 2023.

Pre-tax Profit increased by 22.1% y/y to N292.96bn from N239.86bn. The expiration of the pioneer tax incentive on the company’s Okpella line resulted in a 68.2% increase in Tax Expenses, rising to N103.05 billion. Despite this, Net Income grew by 6.3% y/y, reaching N189.90 bi llion, up from N178.60 billion. Earnings Per Share (EPS) settled at N11.26 in H1 2024, compared with N10.39 in H1 2023. We have forecasted a PBT of N722.20bn in FY 2024.

Valuation

We have revised our target price up to N512.62/s from N480.48/s, previously reflecting the company’s strong Revenue growth potential. However, we maintain our SELL recommendation as we believe the stock is overvalued at current levels. The stock currently trades at an EV/EBITDA ratio of 10.07x, which is higher than its EMEA peers of 9.67x. We arrived at our target price using a blend of DCF and Relative valuation in the ratio of 60:40. Current Price: 591.10/s.

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