Dangote Cement: Reaping the Benefits of Expansion
Goddy Egene writes that the financial results of Dangote Cement Plc for the half year ended June 30, 2015, show that the company has begun to reap the benefits of its expansion across Africa
Dangote Cement Plc (DCP) recently inaugurated its new cement plant in Zambia. The event was graced by Vice-President Yemi Osinbajo, Edo State Governor, Adams Oshiomhole; Chairman UBA Plc, Tony Elumelu among other dignitaries from Nigeria and Zambia.
The Zambia plant, the sixth integrated plant outside Nigeria, was in line with the company’s plan to invest massively in Africa bearing in mind the impact it would have on Africans.
The company, which is the highest capitalised on the Nigerian Stock Exchange (NSE), accounting for almost 30 per cent of the total market value, had announced plans to create 16 cement plants across Africa to produce at least 80 million tons of cement and address the infrastructure needs of the continent.
Although the Zambia plant has just been inaugurated, it is believed its contribution would further enhance DCP’s bottom-line. Going by the financial results of the company for the half year (H1) ended June 30, 2015, DCP has started to reap the benefits of its expansion across Africa.
2014 Half Year Performance
According to the H1 2015 results of the leading cement giant, revenue stood at N242 billion, up 16 per cent from N208 billion in 2014. The high cost of doing business in the Nigeria reflected in the company’s performance as administrative expenses jumped by 86 per cent from N7.3 billion to N13.6 billion. Similarly, sales and distribution expenditure went up by 30 per cent to N23.4 billion, compared with N18 billion in the corresponding of 2014.
Finance costs soared by 201 per cent from N8.1 billion to N24.4 billion, while the profit before tax stood at N128.7 billion, up by 20 per cent from N107 billion in 2014. The company reduced income tax payment by 40 per cent from N11.6 billion to N6.9 billion in 2015. Consequently, DCP ended the H1 with profit after tax of N121.8 billion, showing an increase of 28 per cent compared with N95 billon recorded in 2014.
Analysts ‘Assessment
Based on the HI results, analysts at Dunn Loren Merrifield (DLM) said they updated their view and re- established their mediumto-long term buy recommendation on the stock of DCP.
According to them, the company posted earnings per share (EPS) of N7.2 on revenues of N242.22billion, which was up 15.94 per cent above our estimate of N231.29billion, realised on total production capacity of 40mmt, operational across Africa.
“The quarter‘s revenue exceeded its eight quarters average of N102.15billion, reinforced by improvement in asset turnover. The growth in revenue indicates the company‘s drive to grow revenues generated outside of Nigeria and reduce its concentration risk. While it sees good potential in sub-Saharan Africa where infrastructure spending is high, we believe the Ethiopia, Cameroon and Zambia plants will improve sales and enhance competitive advantage. The key drivers of performance for the period stem from price increase in Nigeria to N1,630/50kg bag–which is the ex-factory, ex-VAT price of the 42.5-cement grade, with an additional increase to N1,660 in June, therefore bringing the price to N33,000 per tonnes. Beside the price increases, it is worthy to note that the relative stability in power supply boosted the overall performance of the company in the period under review,” they said.
DLM explained that while sales volume in Nigeria declined by 7.5 per cent to 6.31mmt, (1H‘14: 6.82mmt.), due to delayed price increases by its major competitor, in retaliation to DCP‘s price increase in December, downturn in the domestic economic, and uncertainty surrounding the 2015 general election resulting in subdued demand for cement.
“Adding to the above is the observed logistics challenges that stalled shipments to customers. We believe this will be resolved in the near term as the company has already made significant investment in new vehicles and logistics expertise to ensure more efficient distribution,” they said.
They disclosed that 1.82mmt cement representing 22 per cent were sold from operations outside Nigeria, which include South Africa, Senegal, Cameroon, Ethiopia and Zambia, as well as import operation in Ghana.
“The growth in sales volume in these counties helped to offset the lower sales volume in Nigeria. The company‘s strategy is to enter markets with higher-quality cement produced at lower- cost plants. This has enabled the company to build strong shares in key African markets, despite well-established competition. With this in mind, we believe the company will build on these successes in Africa and continue to expand its business across the continent most especially in Cameroon where the government recently banned importation of cement as part of measures to encourage domestic producers,” they said.
Accelerated Profits
DLM’s analysts said DCP posted pre-tax profit of N128.73billion, which was up by 20.23 against N107.10billion in the preceding year and below their estimate of N141.99billion.
“By our assessment, the growth in pre- tax profit was largely driven by the positive growth of 9.30 per cent in operating profit to N122.41billion, (111.99 billion in H1 of 2014). This is in addition to N30.70 billion financial gain which arose as a result of gains from assets denominated in foreign currency. Hence, pre-tax profit margin rose to 53.15 per cent from 51.25 per cent in the previous year. Furthermore, a 40.52 per cent decrease in income tax provision further boosted post-tax profit by 27.63 per cent to N121.81billion, (N95.44 billion in 2014), with a net profit margin of 50.29 per cent,” they said.
Borrowings Increase Leverage
In 2015 H1, DCP’s debt rose by 27.46 per cent to N309.20billion (N242.58billion in 2014), driven largely by increase in short term borrowings to N176.44billion, representing 57.10 per cent of total debt.
“It is also worth noting that DCP’s total debt has followed a continuous upward trend since 2011 financial year. The growth in debt has resulted to an overall gearing ratio of 50.46 per cent, which is comparatively higher than its peer but below our estimated limit of 60 per cent. It is worth noting that the growth in gearing ratio was due largely to debt taken for its Pan African expansions. However, the company has generated strong cash flow from operating activities of N179.77billion (N145.36billion in 2014) and is likely to generate a stronger cash flow from operating activities in years end, even though it is in expansion phase. Stronger cash flow would be useful for the company to de-leverage its balance-sheet and for inorganic growth,” DLM said.
Outlook and valuation
According to the analysts, while revenue growth in the past has been strong, they believe the company will record even stronger growth going forward despite the reduction in cement demand in Nigeria during the first half of 2015 due to subdued government spending on infrastructure.
“While we our maintain that capacity overhang will increase competition in the Nigerian cement market significantly, however, we favour DCP for its expected lower energy cost/ton as well as high gross profit and EBITDA margins of 65.11 per cent and 60.2 per cent respectively. With production capacity already at 40mmtpa following the inauguration of the Zambia and Ethiopia factories, additional 3mmt will come on-stream in the remaining half of 2015. Hence, the company‘s total capacity will move to 43mmtpa,as a result, we raised our expected sales volume for the year to 17,500 tonnes with an average price of N30,000/tone, and other African operations accounting for 27.14 per cent of the total volume,” they said.
The analysts expect revenue growth of 35 per cent in FY‘15, with a Compound Annual Growth Rate (CAGR) of 13.24 per cent, that is from N528.71billion in 2015 to N869.55billion in 2019, driven largely by expected better regional sales matrix, economies of scale and energy mix strategy initiated by the company resulting to lower energy used/tonne and unit cost of power. “The operating profitability or EBITDA of DCP remains strong as it currently trade above the minimum break-even EBIDTA/ tone of $ 21 - which is the minimum a cement capacity must earn in order to provide for depreciation and interest costs. Currently, DCP trades at replacement cost (EV/ton) of $491.12, based on FY15 estimated capacities and our target price. From valuation perspective, while we retained our long term growth rate, we employed several valuation metrics such as: the discounted cash flow model (70 per cent); maintainable earnings (simple, weighted average and five year projected earnings 15 per cent); peer method based on trailing price to earnings (15 per cent). From this methodology we derive a target price of N230.66/share. Hence, we maintain our buy rating on the stock,” they said.