Dangote Cement last week unveiled its results for 2018, showing improvement and maintaining its leadership position in the industry, writes Goddy Egene
Investors who patronise the stock market in order to get regular dividend payment annually has Dangote Cement Plc among stocks in their baskets. The cement firm, which is the highest capitalised on the Nigerian Stock Exchange (NSE) has remained consistent in payment of dividend. This is has endeared the stock to many investors.
For instance, for the financial year ended December 2016, the company paid a dividend of N8.70 per share. It raised the dividend to N10.50 in 2017.
Last week when the company released its results for 2018 financial year, shareholders were not disappointed as Dangote Cement further raised the dividend to N16 per share.
Financial performance
Dangote Cement Plc in its audited results recorded revenue of N901.21 billion, with Nigerian operations accounting for N618.30 billion, representing an increase of 11.9 percent over N552.36 billion in 2017. Pan-African operations recorded revenues of N263.26 billion, an increase of 9.6 percent over N258.44 billion posted in the corresponding period in 2017. Profit after tax stood at N390.32 billion, up from N204.25 billion while earnings per share rose from N11.65 to N22.83. The company directors are proposing a dividend of N16 per share.
A further analysis of the performance showed that Dangote Cement maintained its dominance of the Nigerian market, accounting for 65 per cent of the total volume sold in the domestic cement sector in 2018. The company also exported 800,000 metric tonnes (MT) of cement to West African countries, strengthening Nigeria’s position as a cement exporting country, creating jobs in the economy, and earning foreign exchange.
The company sold a total of 23.54 MT of cement across Africa indicating an increase of 7.4 per cent over 21.92 MT sold in 2017. Nigerian operations accounted for 14.18 MT representing an increase of 11.4 per cent over the volume of 12.72 metric tonnes sold during the preceding year. The increase in the Nigerian volume is attributable to higher building activities as the economy recovered from recession. The sales volume in Nigeria was quite significant given the turbulent market situation as the election period approached and people usually hedge in the construction industry during such periods.
Commenting on the results, Group Chief Executive Officer, Dangote Cement, Joe Makoju, said: “This is a record financial performance by Dangote Cement, driven by a strong increase in our home market, Nigeria, despite heavy rains and uncertainties about the election.
“Although Pan-African volumes were unchanged in 2018, I am confident that we will see an increase in 2019, driven by higher volumes in Tanzania, Ethiopia, Congo and Sierra Leone. Now that we have gas turbines operating in Tanzania we will also see increased profitability in the Pan-Africa region and this will help to improve overall Group margins.”
Dangote Cement is Africa’s leading cement producer with nearly 46metric tonnes per annum (mtpa) capacity across Africa. It is a fully integrated quarry-to-customer producer, with a production capacity of 29.3mtpa in the home market, Nigeria. The Obajana plant in Kogi state, Nigeria, is the largest in Africa with 13.3 mpta of capacity across four lines; Ibese plant in Ogun State has four cement lines with a combined installed capacity of 12 mtpa, while Gboko plant in Benue state has 4 mtpa.
Through recent investments, Dangote Cement has reduced Nigeria’s dependence on imported cement and has transformed the nation into an exporter of cement serving neighbouring countries. The company has operations in Cameroon (1.5mtpa clinker grinding), Congo (1.5mtpa), Ghana (1.5mtpa import), Ethiopia (2.5mtpa), Senegal (1.5mtpa), Sierra Leone (0.5Mta import), South Africa (2.8mtpa), Tanzania (3.0mtpa), Zambia (1.5mtpa).
Analysts’ assessment
Looking at the revenue of Dangote Cement, analysts at Afrinvest West Africa said recovery in volumes supported the growth. According to them, revenues grew faster at 11.9 per cent to N901.2 billion, 1.2 per cent ahead of their estimates.
The analysts explained that unlike the previous year, this performance was mainly driven by a 7.4 per cent increase in volumes to 14.2mtpa, although this was entirely due to Nigerian operations (+11.4 per cent) despite unfavourable weather conditions in third quarter (Q3) of the year. Volume growth was flat for Pan-Africa operations (+0.1 per cent), but higher cement prices (9.5 per cent) supported stronger revenues.
They added that margins were dragged by elevated operating expenses. Cost to sales grew at a slower pace relative to revenue, settling at 9.1 per cent to N383.3 billion, slightly above their estimate by 1.7 per cent. This translated to a lower cost to sales ratio of 42.5 per cent (2017: 43.6 per cent), reflecting improved cost efficiency.
“However, the operations expenses(OPEX) margin was higher at 21 per cent (2017: 19.3 per cent), reflecting a broad-based expansion in operating expenses by 22 per cent, which was 6.3 per cent higher than our estimate. The group’s earnings before interest tax and depreciation and amortization (EBITDA) expanded by 12.1 per cent to N435.6 billion, broadly in line with our estimates which was 0.7 per cent weaker. However, due to higher OPEX, EBITDA margin marginally moderated to 48.3 per cent (2017: 48.5 per cent), pulled lower by pan-African operations as EBITDA margin for Nigeria remained resilient at 64.3per cent (2017: 65.3%). The group’s net finance costs surprised at 3.7x our expectation mainly due to a significant 76.2% contraction in finance income. Consequently, profit-before-tax expanded only by a marginal 3.9 per cent to N300.8 billion, 10.2 per cent below our estimate,” they said.
Afrinvest stated that the biggest boost was seen in profit-after-tax which expanded by 91.1 per cent to N390.3 billion. The investment firm explained that the impressive result was buoyed by tax credits of N89.0 billion, following optimism that the group would secure the approval of the Nigerian Investment Promotion Commission on the two-year extension for Ibese lines 3 & 4 and Obajana line 4, for which taxes had previously been charged.
“Due to the marked rise in PAT, earnings per share almost more than doubled to N22.8 from N11.7 in the previous year. Consequently, the Group announced a dividend of N16.0 per share, 52.4 per cent above the previous year and translating to a dividend yield of 8.2 per cent (based on the closing price of N192.5 on 26/2/2019).
“Based on this, the pay-out ratio was weaker at 70.1 per cent, compared with an average of 93.5 per cent between 2016 and 2017,” they said.
In computing their valuation, the analysts stated that they were optimistic of sustained outperformance in earnings over the medium-term.
“In FY:2019, we expect a 10.4 per cent expansion in revenues to N995 billion, supported by a recovery in volumes in Nigeria and for Pan-African operations. We expect smoother operations in Tanzania due to the recent installation of gas turbines and improved Sub-Sahara Africa (SSA) growth to support pan-African volumes. Given our improved expectation of the group’s performance over the medium-term, we revised our target price slightly upwards to N263.1. This translates to an upside potential of 34.7 per cent based on the closing share price of N195.3 on 28/02/2019, and we attach a “BUY” rating,” they said.
Sectoral improvement
Recently, Afrinvest stated that companies in the cement industry have the capacity to deliver higher returns to shareholders going forward. The investment banking firm said although the companies suffered the pains of a slowing economy, there is great improvement.
“The steep currency devaluation recorded between 2014 and 2017 led to an increase in costs, given the exposure of energy costs and debt to foreign currency risk. Combined with the moderation in the spending power of consumers, high costs led to a steep increase in cement prices, which in turn affected volumes of cement sold. The implications were a broad-based decline in margins across companies, with overall profitability barely growing over a five-year period,” the firm said.
However, it added that in recent times, the cement sector is starting to recover.
“Energy costs have been diversified and foreign exchange (FX) risks are now limited. We are optimistic of a recovery in volumes which will boost revenues, and that lower energy costs will support a fast-paced expansion in profitability in 2018. “Over the medium-term, we believe the cement sector remains well placed to deliver superior returns given the wide infrastructure gap in Nigeria. However, we expect the sector to grow at a gradual pace, given the lack of reforms to drive growth back to long-term trend,” Afrinvest said.
According to the analysts, based on their measured positive outlook, they believe there is still value in cement companies.
“The overall sector is currently priced at a discount with a P/E ratio and EV/EBITDA ratios of 12.5x and 14.0x per cent, which is below the average of 23.1x and 15.9x respectively for select emerging markets and frontier markets peers. Across companies under our coverage, we have issued “BUY” rating to Dangote Cement and “SELL” to Lafarge. For Cement Company of Northern Nigeria Plc (CCNN), we are waiting on the combined books of the newly merged entity before revising our valuation. Lafarge Africa which had high exposure to foreign currency debt has gotten new debt terms that will ensure lower finance costs and a return to profitability,” they said.
