Just over 20 years ago the Nigerian corporate landscape was dominated by companies with strong foreign affiliations. Corporate Giants like Nestle, Guinness, Nigerian Breweries, Leventis, PZ, Pocter and Gamble etc were household names everyone could identify with. Even though these companies were largely owned by Nigerians (following the indigenization policies of the 70’s) their foreign counterparts still retained strong managerial influence. A lot has however changed in the last two decades as sweeping economic reforms by successive governments created a platform for indigenously owned Nigerian Companies to emerge. One of such Nigerian companies is the Dangote Group, owners of Dangote Cement, Dangote Sugar, Dangote Flour mills etc. The company founded by Africa’s foremost billionaire Aliko Dangote has grown in leaps and bounds over the last decade owning businesses that span across many consumption needs of Nigerians, sometimes having a near market monopoly in some cases.
Just recently one of the companies within the group, Dangote Cement, released its Financial Results for the year ended December 2011. As expected the company did not disappoint churning out a whopping profit after tax of N125.4b in 2011, an increase of 16% from its 2010 profits of N105.3b. Revenue during the same period (2011) was a whopping N235b making it the fastest growing company within the group. Are these results a true reflection of sustainable business model driven our of pure corporate excellence or simply an exploitation of the doctrine of demand and supply? Is Dangote Cement Nigeria’s own version of Apple Inc? Let is attempt to find out.
Revenue
Dangote Cement sells just one unique product, Cement which it imports and also manufactures from its Cement Plants in Obajana and Gboko. During the year it made turnover of N235b from its Nigerian operations alone. According to a Pan African Capital Plc report, Dangote Cement holds 60% of the Market Share of the Cement industry in Nigeria making it a dominant force within the industry. To put it into better perspective, WAPCO the closest to Dangote in terms of competition had a turnover of N62.5b for the Financial Year ended December 2011, about 27% of Dangote’s revenue.
2011 2010 2009 2008 2007
Turnover 235.7b 202.5b 129.7b 61.9b 34.6b
The company has grown its revenue by 6.8times in just under 5years, a remarkable feat by any standard anywhere around the world. It is no coincidence that their growth began soon after the company’s took advantage of President Obasanjo’s backward integration plans as it consolidated its dominance in the import and distribution market with Manufacturing. Dangote Cement has an import terminal of 6million metric tonnes in Nigeria and 3million in Ghana. They also have a combined installed capacity of 5million metric tonnes for its Manufacturing plants making by far the biggest cement merchant in sub saharan Africa.
Operational Profit
Operational Profit for the company came in at N117b for the year ended December 2011. This translates to a 53% Operational profit margin surpassing the 2010 performance of 50%. It is important to note that the company was still able to keep cost quite low as Admin Expenses largely remained unchanged at N14.6b and N14.7b for 2011 and 2010 respectively. The difference however was selling and distribution expenses which doubled to about N7b in 2011. Despite this, an Operational Profit of 53% is still an impressive return for any industry anywhere in the world.
Interest on Loans
Dangote Cement has a total debt of N148.4b. N30.4b of this amount is short-term whilst the rest is long term. Included in the total debt is a N81b inter-company loan provided by its parent company, Dangote Industries Ltd. N36b of the inter-company loans is interest free while the rest is at an interest rate of 10%. Despite the huge loans, the company still relatively has a comfortable debt to equity ratio coming at about 50%. Interest on loans for the year was N2.3b averaging just 2% of the total loans of N148.4b. This was also no different from 2010 where interest was just about N2.9b. Even with the interest of N2.3b, the company earned interest income of N1.4b thus amounting to a net of just under N1b. For loan sharks Dangote Cement possess every attribute of a company that is not heavily burdened by debt.
Taxation
For 2011 Dangote Cement had a net tax credit of about N7b even though income tax for the year was just over N2b. This was mainly due to the large deferred tax assets carried forward by the company. A major component of the company’s business is tax free hiding under the shelter of a pioneer industry which is a major factor for the company’s low tax returns. At N2b per annum the company effectively incurred just under 2% of the Profit before tax. The company however paid just N1.1b that year and still still owes about N4.2b in outstanding taxes. Its not clear why this is so especially as it is an increase from 2010 which stood at N3.1b. Also unclear is why the taxes are classified as current liabilities even when the N3.1 outstanding in 2010 wasn’t paid. It is either the tax authorities are not aggressive enough in their tax collection or simply just satisfied with the N1.1b they already collected.
Profit After Tax
Dangote Plc earned profit after tax of N125b a massive 53.2% of turnover. Return on Equity is also 42% and return on assets 30%. The company surely is swimming in profits any investor will love to be submersed in. The company’s profitability all stem from a massive sales revenue generated during the period. The massive sales revenue has made cost items such as depreciation, staff cost, sales and distribution cost all seem like an impressive cost efficient machinery is in place by management. For example, Staff Cost and Depreciation as a percentage of Gross Profit was 5% and 11% respectively. Overheads in total was just 16% of the Gross Operating Profit. With the sky high cement prices and oligopolistic nature of the cement market in Nigeria, it is difficult to see margins nose dive in the near future. This is provided the company does not incur any extra-ordinary cost such as a force major or a cost from massive law suits or face a less friendly government who can use stiff regulations to drive down prices. High depreciation cost arising from purchase of capex may also be a factor just as cost of acquiring new businesses can as well. For now though, this all look unlikely at least in the next three years or as long as PDP is in power.
Can I buy the shares?
The company is currently priced at N122 at the time of this review and has a P.E ratio of 15x which when compared to Wapco’s 23x is fairly ok (GTB has a P.E of 27x). The company also has a market value of N1.8tr making it the most capitalized stock on the exchange making up 26% of the entire NSE market capitalization. The company also generates a massive free cashflow of N107b and operational cashflow of N165.7b making it a cash cow. To give you an idea of how massive this is GTB during the same period had an operational cashflow of N154b whilst Zenith had N43b. By applying the multiple of 15 to their operating cash flow of N1165b you get a value of N2.475tr, a cool N500b more than its market capitalization. However, it is one thing for company’s to generate massive cashflows and another to be able to utilize them well. One of such use is paying dividends.
In 2010, N34.8b was paid out as dividend out of the profit after tax of N105b for that year about 33% of profits. Even though this might be considered low by some the company justified its reason for reinvesting 67% of the profits into the business by churning out a return on equity of 42%. A return any value investor will surely savor. Dividend for 2011 was just N19.3b (N1.25) per share as against N2.25 paid in 2010 and at current rates gives you a dividend yield of 1%. Its not hard to reason why this is so. The company on the back of its 42% returns on equity believes it can provide more value for shareholders and as such will like to invest profits back into its business. These profits will be massively useful in their expansion plans in the next couple of years giving them an even greater market share.
It is nearly inconceivable for Value investors (like me) not to have this stock in their portfolio despite the poor dividend yield. Shareholders still have a choice to vote for higher dividends come May 24th when they have their AGM’s. I suspect Mutual Funds, Pension Funds and many institutional investors who rely heavily of dividend payouts rather than market value push for a higher dividend payout to at least N1.75 which will take total dividend paid to about N27b (70% of what was paid last year). Their share price probably will see modest growth even though you expect investors to scramble for it. This is because its double digit pricing makes it far beyond the reach of most buyers despite its low P.E ratios.
Finally
Dangote Cement surely justifies its position as the most capitalized stock on the Nigerian Stock Exchange. It will continue to dominate the Nigerian Cement market in years to come as the demand for cement will continue to rise on the back of various housing scheme embarked upon by both the Government and Private Sector. The country’s GDP growth rate of 7%, if it’s anything to go buy also helps validate its future earning potential and ability to continue to grow earnings at the current rate of 16% per annum. Dangote Cement might not have $100b in cash reserves like Apple Inc, USA but with a net cash reserve of N13b at the end of the year and free cashflow of N107b it’s not hard to see similarities between this company’s viz a viz their respective countries. Just as Apple sells millions of ipad every year (40m last year) Dangote by my estimate sold over 150million bags of Cement in Nigeria alone.
Mr ugo please can I get your phone number?I am a fan of yours athats wants to learn to analyse companies properly.please reply
Hi Steve,
Thanks for your kind words. Why not send me an email. ugodre@gmail.com