Dangote Cement: Earnings Expands Two-fold on Sharp Revenue Growth
Dangote Cement Plc.’s (ticker: DANGCEM) unaudited financials for the third quarter of 2020 comes with sharp increase in revenues that resulted to two-fold earnings growth amidst moderation in operating cost.
In the 9-month of financial year 2020, the cement company delivered 37.6% uptick in pretax profit which printed at ₦272.0 billion in from ₦197.7 billion in 9M-2019.
On quarter on quarter basis, the group Q3-2020 pretax profit expanded 45.9% above second quarter (Q2) figure to ₦82.5 billion.
Consequently, earnings per share (EPS) jerked up more than two-fold on a sharp pace of revenue growth and moderation in finance charges.
Given the better-than-expected outturn in Q3-2020, the cement company’s EPS for 9M-202 printed at 38.1%, which analysts at Chapel Hill Denham said it is ahead of its 2020 estimate of ₦11.82 on an annualised basis.
Post the publication of the results, analysts said DANGCEM stock rallied by 3.25% on Friday alone and will likely gather momentum this week, on the expectation of an even stronger Q4-20E performance.
Chapel Hill Denham explained that as with BUA cement that recorded 39.7% revenue growth in Q3 and Lafarge 34.1% revenue growth, DANGCEM’s Q3-2020 revenue growth came of 34.2% was volume-led.
Notably, analysts said the group’s volume bounced back from the COVID-induced decline of 2.4% year on year in Q2-2020, notching higher by 23.9%, and thus, effectively over-compensating for the tad slack in the previous quarter.
“We like that volume grew in Nigeria and the Rest of Africa by 39.9% and 9.2% year on year, respectively”, Chapel Hill Denham stated.
In the equity note, analysts observed that capacity utilisation in Nigeria of 56% is at the highest level in, at least, six straight quarters.
The management hinted that the recovery in cement demand was driven by stronger private consumption; with recovery in public demand is still at a snail pace amid pressure on public finances.
Dangote Cement also acknowledged that the unprecedented low yield environments, bolstered appetite for real estate investment, with a positive connotation for cement demand.
Analysts explained further that beyond the stronger volume growth, pricing environments remain favourable.
In the period, the group achieved an average realized price per tonne growth of 8.3% year on year, supported by 2.9% upsurge in Nigeria, and more pertinently, 5.8% growth in Pan Africa space.
Over 9M-2020, the group’s revenue grew by 12.0%, also supported by 6.6% expansion in volume and 5.51% increase in price per tonne.
Regionally, analysts explained that 9M-2020 revenue in Nigeria was 14.0% higher, relative to what was delivered in 9M-2019.
This was driven by the blend of stronger volume growth coming at +10.2% and 3.5% increase in prices year on year.
Of the total 11.9kMT sold in Nigeria, Chapel Hill Denham said about 98% was sold to the domestic market, while the balance was exported.
“We understand that Dangote Cement has resumed cement export by land”, analysts stated.
Management said 69kMT was exported by road, while about 179kMT of clinker was shipped to grinding facilities in Douala, Cameroun, and Pout, Senegal.
Elsewhere, 9M-2020 Pan African revenue grew by 7.7% driven by the combined impact of sturdy volume growth of 3.7% and 3.9% increase in price per tonne year on year.
The significant upsurge in performance is coming amid lockdowns and economic restrictions across countries of operations.
According to analysts, the sales volumes in Pan Africa was supported by Cameroun, Congo, and Ghana, all of which offset the continued weaknesses in South Africa, Ethiopia, and Tanzania.
At the same time, the growth in price per tonne was driven by the translation impact of the exchange rate devaluation from ₦365/US$ to ₦386/US$.
The group’s gross margin improved markedly by 5.2 percentage points in Q3-2020, as cost of goods only grew by 18.9% year on year.
Thus, tracking behind revenue growth despite currency pressure.
“Based on our attribution analysis, most of the improvement came from Nigeria (+3.3ppts), while the rest of Africa (+6.9ppts) also remained supportive”, analysts said.
Chapel Hill Denham stated that it’s imperative to note that energy cost in Nigeria grew by 25.2% year on year in Q3-2020, but energy cost per tonne moderated sharply by 11.1%, as volume growth (+39.9%) outpaced energy cost growth in the same period.
The investment firm explained that energy cost as a percentage of the total cost is now down to 10.5%, from 12.1% in Q3-2019, the lowest level since Q2-2019.
Beyond energy, analysts said the company also achieved 3.5% drop in material cost and 7.9% reduction in total cost on a per tonne basis.
A similar pattern played out in 9M-2020, with the group’s input cost growth running below revenue growth, underpinning margin improvement in the period.
Analysts reckoned that the blend of a slight 1.2% expansion in operating expenses and a deceleration in other income by 14.9%, were not enough to offset revenue growth over Q3-2020.
As a result, Dangote Cement’s earnings before interest tax depreciation and amortisation (EBITDA) surged by 60.6% year on year in Q3-2020, with the impact cascading to a 7.9 percentage points expansion in EBITDA margin.
Overall, analysts detailed that the group more than doubled its net income in Q3-2020, even as effective taxes grew by 6 percentage points.
Chapel Hill Denham noted that the group’s profit after tax margin of 29.0% is the highest since Q4-2018 when the company reported a tax credit of over ₦89 billion.
In the period, Dangote Cement maintained robust balance sheet.
The group cash balance grew by 42.6% year to date to ₦176.7 billion, the best among its peers – Lafarge (Cash balance: ₦64.9bn), and BUA (Cash balance: ₦76.6bn).
“We like that the group’s net operating cash flow rose by 27.9% in 9M-2020, following its better working capital management. Overall, adjusted free cash flow improved by over two-fold”, analysts explained.
“We retain our BUY rating on DANGCEM with a 12-month target price of ₦189.67”, analysts at Chapel Hill Denham noted.
Unaudited financials shows that Dangote cement Plc reported a 12.0% year on year growth in revenue to ₦761.4 billion in 9M-2020 from ₦679.8 billion in the comparable period in 2019.
In Q3 2020 standalone, performance was quite impressive as revenue was up 25.0%quarter on quarter and 34.2% year on year to ₦284.6 billion.
CSL Stockbrokers stated that the group annualised 9M-2020 revenue is ahead of its 2020 estimate by 5.8%.
The sterling revenue generation outing was supported by both volume and price growth.
CSL Stockbrokers explained that cement & clinker volume grew by 6.6% year on year to 19.2 million tonnes in 9M-2020 from 18.0m tonnes in 9M-2020.
On a quarter on quarter basis, Cement & Clinker volume improved by 21.9% to 7.1 million tonnes.
“The quarter on quarter volume growth comes on the back of resumption in construction activities in Q3 following removal of covid-19 restrictions which impacted construction projects across the company’s markets”, analysts at CSL Stockbrokers explained.
That said, the firm noted that revenue growth was stronger than volume growth which implies the company implemented price increases.
“We estimate about 10.1% price increase implemented by the company line with our channel checks which shows a bag of cement is now priced at about ₦3,000/bag from about ₦2,550/bag – ₦2,700/bag”, CSL Stockbrokers remarked.
On its cost profile in the period, analysts said reported growth in cost of sales adjusted for depreciation largely tracked revenue growth.
Cost of sales rose 11.7% year on year to ₦269.3 billion in 9M-2020 from ₦241.1 billion in 9M -2019.
However, on quarter on quarter basis, adjusted Q3-2020 cost of sales growth tracks below revenue growth.
Its Q3 cost of sales went up 19.4% quarter on quarter compare to 25% increase in revenue to ₦98.5 billion.
Analysts explained that the growth in cost of sales was driven by double-digit upticks in material consumed which expanded 10.1%, fuel & power consumed expanded 13.0% – both of which grew stronger than 6.6% volume growth.
Thus, implies increased cost pressures which necessitated the recent price hikes bags of cement.
On the financing side, the group net finance cost declined 52.8% year on year to ₦16.0 billion in 9M-2020 from ₦33.8 billion in 9M-2019.
The net position was strong as finance income surged 206.3% year on year while finance cost slowed down by 13.8%.
Analysts said the surge in finance income was primarily due to the FX gain of ₦9.8 billion booked by the company in 9M-2020 compared with nothing in 9M-2019.
Nevertheless, analysts at CSL Stockbrokers noted that excluding the FX gain, finance income still grew 43.2% year on year which reflects strong cash generation.
The result shows that the group’s cash and cash equivalents grew 76.4% year on year which muted the impact of lower yields on investment assets.
In addition, the group finance cost declined despite the 14.1% year on year uptick in total financial liabilities reflective of the company’s debt refinancing activities.
“We note the company refinanced some of its expensive debt instruments with lower priced instruments following the crash in interest rates leading to 0.9 percentage point decline in average effective interest rate for the company”, CSL Stockbrokers stated.
“We have a target price of ₦182.40/s with a BUY recommendation on the stock”, CSL Stockbrokers stated.
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Dangote Cement: Earnings Expands Two-fold on Sharp Revenue Growth
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