Dangote Cement, Nigeria’s largest company by market value just reported sterling results for year-end 2015, but look underneath the numbers and there are some troubling signs, investors should be aware of.
Fig 1: Segment revenues and results
Source: Company Financials
Looking at the segment revenues and results across DANGCEMs regions of operation across Africa, one can see that Nigerian operations have abnormally high margins.
For example the Nigerian operations made N389.2 billion in revenue and N193.6 billion in operating profit, equivalent to a margin of 49.7 percent.
In West and Central Africa, DANGCEMs operations generated revenues of N42.26 billion and operating profits of N4.72 billion, equivalent to margins of 11.18 percent.
Meanwhile in the South & East Africa regions, DANGCEMs operations yielded N61.2 billion in revenue, and N8.6 billion in operating profits, equivalent to 14 percent margins.
Our major concern
Dangote Cement is projecting an increase in annual capacity to about 77.3 million tons of cement by the end of 2019.
Most of this expected increase in capacity will come from outside Nigeria and certainly will continue to drag down margins as volumes grow.
Dangote Cement with capacity of 43.6 million tons last year is already richly valued at 5.5 x sales (price to sales ratio) and market capitalisation of $13.6 billion (N2.72 trillion).
In comparison, LafargeHolcim with 386 million tons of capacity is valued at 0.78 x sales and has a market capitalisation of $24.7 billion.
The largest Cement maker in China Anhui Conch Cement Co Ltd, with 285 million tons capacity is valued at 1.46 x sales, and has a market capitalisation of $12.8 billion or 99.58 billion Hong Kong Dollars.
While some of Dangote’s premium valuation can be justified by high growth in its markets of operation and low debt levels, as margins fall with expansion, then also will valuation fall.
If DANGCEMs were to be valued at a more appropriate 2.5 x sales then it would be a N1.22 trillion or $6.1 billion company.
The bottom-line is DANGCEM is a fine cash generating firm, but valuations are steep for a company about to be hit with falling margins going forward.