Dangote Cement Plc reported a marginal decrease of 0.8% y/y in revenue to N240.2bn in Q1 2019 from N242.1bn in Q1 2018. The annualised Revenue for Q1 2019 (N960.6n) came in below of our FY 2019 forecast of N980.5bn.
Why the decline in revenue?: The marginal decline in revenue was due to lower Revenue (-2% y/y to N169.8bn) from its Nigeria operations (accounted for 71% of group revenue in Q1 2019) which offset the Revenue growth (up 2% y/y to N70.3bn) from its Pan African operations (accounted for 29% of group revenue in Q1 2019).
Despite the loss of weekends to elections in the quarter, management noted that Nigerian operations delivered nearly 4.0 million tonnes, recording its third-highest quarterly volume. Hence, we believe the decline in Revenue from Nigeria was possibly due to lower pricing of cement. Pan-African volumes up 4.8% y/y to 2.3 million tonnes in Q1 2019. Overall, Group volumes was up 2.3% y/y to 6.3 million tonnes in Q1 2019.
Cost of sale increased: Amidst the marginal decline in Revenue, Production Cost of Sales (adjusted for depreciation) rose by 2.2% to N83.2bn in Q1 2019 from N81.3bn in Q1 2018 despite the decline in revenue. Thus, gross margin declined by 1.0% y/y to 65.4% in Q1 2019 from 66.4%.
Management noted that the rise in Production Cost of Sales was driven mainly by uptick in raw materials costs (up 3% y/y) on the back of unfavourable movements in foreign exchange, possibly from its Pan African Operations.
Selling & Distribution expenses (adjusted for depreciation) rose significantly by 36.8% y/y to N34.1bn in Q1 2019 from N24.9bn in Q1 2018, driven by the increase in haulage costs (+33% y/y). We think management efforts in improving its route to market could be responsible for the rise in Haulage costs. Similarly, Administrative expenses (adjusted for depreciation) rose 12.4% to N11.7bn Q1 2019. Overall, OPEX grew 29.6% y/y to N45.8bn in Q1 2019.
EBITDA declined by 11.2 percent: Driven largely by the rise in operating Expenses, EBITDA declined 11.2% to N111.8bn in Q1 2019 from N125.9bn in Q1 2018 while EBITDA margin also fell to 46.5% in Q1 2019 from 52% in Q1 2018. The rise in depreciation (+5.6% y/y) further weighed on EBIT margin as it moderated to 36.8% in Q1 2019 from 42.9% in Q1 2018.
How Foreign Exchange impacted the company’s operation: The absence of foreign exchange gain in Q1 2019 (the firm realized foreign exchange gains of N12.5bn in Q1 2018) also impacted on Finance income, down to N2.3bn in Q1 2019 vs N15.1bn in Q1 2018. This coupled with the rise in Finance cost (+11.7% y/y to N11.7bn) drove Net Finance Cost to a negative of N9.4bn Q1 2019 compared to the positive figure of N4.6bn recorded in Q1 2018.
Decline in profit: Consequently, Pre-tax Profit declined by 27.2% y/y to N78.9bn from N108.4bn. Profit after tax also declined 16.5% y/y to N60.3bn in Q1 2019, owing to lower effective tax rate of 24% compared to 33% in Q1 2018. Earnings per share settled at N3.54/s in Q1 2019 compared to N4.20/s in Q1 2018.
Our Recommendation on the company’s stock: We have a BUY recommendation on Dangote Cement with target price of N288.20. Current Price; N186.90.
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