[ANALYSIS] Foreign Markets Are Paying off For Dangote Cement

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Dangote Cement Plc. (9 months ended September 2015)

Rising non-Nigerian footprints: Top-line booster, bottom-line dampener

Dangote Cement Plc (Dangcem) released unaudited results for 9 months ended 30th September 2015 wherein revenues grew 18% YoY to N365 billion while PBT and PAT rose 31% and 37% YoY to N201 billion and N193 billion respectively.

Rising non-Nigerian  operations spares Nigerian market blushes 

Dangcem’s Q3 15 revenues rose 22% YoY to N123 billion–1% higher than our estimate–on the back of a 45%YoY  jump in volumes to 4.9 million tones. Similar to the last two quarters, Dangote’s African operations continued to gain traction in Q3 15 with an over five fold jump in sales volume to 1.9MT and a 2% YoY rise in average non-Nigeria prices. Particularly, management noted that the business has already secured ~40% market share of Senegal’s ~2.7MTPA cement market with South Africa, Cameroon, Zambia and Ethiopia also gaining traction in the period. Thus, output from other African countries now accounts for 39% of overall group output (vs. 10% in Q3 14). In contrast, volumes in Nigeria fell 1%YoY to 2.98MT (vs. 4%YoY contraction in market demand to 4.9MT). Interestingly, the slower dip in output, relative to industry, shows that Dangcem gained market share in the period (+1ppt QoQ to 59% in Q3 15). Indeed, we had noted, in our 9M 15 earnings update, that Lafarge’s delayed response to price cuts by Dangcem led to some loss in market share to the latter. On the flip side, reduction in cement prices (-7%YoY in our estimates) dragged Dangcem’s Nigerian revenues ~8% lower YoY to N88billion.

… though ramp up of non-Nigerian expenses stokes margin pressures

However, Q3 15 COGS rose faster than revenues (+54% YoY to N54billion), leaving gross profits only 4% higher YoY at N69 billion and related margins 9.3pps lower YoY at 56%. Input cost pressures in the quarter was largely driven by rising materials costs which mirrored increases in non-Nigerian production as well as higher depreciation and plant maintenance. Importantly, according to management, input cost pressures would have been higher without significant cost moderation in Nigeria due to substitution of coal for expensive LPFO.

Operating expenses rose 20% YoY to N20 billion largely reflecting 65% YoY rise in selling and distribution expenses to N14billion. According to management, sharp increases in selling and distribution expenses reflects ramp up of administrative and logistical capabilities to support maiden market entry in Ethiopia and Zambia. In addition, the reported acquisition and assembling of 2000 distribution trucks also underpinned OPEX pressures in the quarter. Thus, despite a more than two fold YoY jump in other income to N2billion on the back of higher sundry incomes, EBIT grew only 1.3% YoY to N51billion. Accordingly, EBIT margin contracted 8.3pps YoY to 41.5%.

Higher interest rate environment aggravates margin compression…

Dangcem reported a threefold YoY jump in Q3 15 net finance cost to N13 billion, mainly reflecting a twofold YoY increase in finance charges to N14billion and a 23%YoY decline in finance income to N1billion. Management linked the jump in finance expense to increase in interest on domestic debt (+4pps to 14%), rise in debt and eventual recognition of initially capitalized interest charges  as expenses in the quarter. Consequently, PBT (N38billion) and PAT (N36billion) were 19% and 20% lower YoY with their respective margins declining ~15pps YoY to 31% and 29.4%.

…Earnings pressure to subsist on rising non-Nigerian expenses

Overall, growing non-Nigerian output continues to offset impact of weak Nigerian volumes—underpinning output growth resilience. With Zambian and Ethiopian plants already gaining traction therefore, we expect overall volume growth to remain strong in the near to medium term.  Nevertheless, rising expenses associated with the business’ growing footprint across Africa is likely to leave both input cost and operating expenses higher for the rest of 2015—extending margin compression. On other fronts though, significantly benign effective taxes (average of 5.5% in the last three quarters)—in line with management’s expectation for the full year—, should slightly taper earnings pressure in the near term. Dangcem trades at 2015 EV/EBITDA of 11.06x relative to 7.5x for Bloomberg EMEA peers. Following net adjustments for the company’s 18% price slash and rising capacity utilization across non-Nigerian plants in September 2015, our FVE is now 4% lower at N173.97. We remain NEUTRAL on the stock.

 ARM Research