Columnists
Dangote Cement retains BUY status despite weak revenue
Based on the recently released FY 2019 results published by Dangote Cement, revenue declined albeit marginally by 1.1% y/y to N891.7 billion.
Based on the recently released FY 2019 results published by Dangote Cement, revenue declined albeit marginally by 1.1% y/y to N891.7 billion. The weak topline performance coupled with an increase in Operating Expenses (+17% y/y to N184.6 billion) and Finance Cost (+16% y/y to N57.7 billion) led to a decline in Pre-tax Profit (down 16.7% y/y to N250.5 billion) in FY 2019.
The reported Revenue for FY 2019 (N891.7 billion) missed our estimate by 3% (CSL FY 2019 forecast; N922.3 billion).
Similarly, the Pre-tax Profit of N250.5 billion underperformed our FY 2019e of N276.9 billion. Although, Revenue performance was unimpressive in Q4 (down 0.1% q/q), the strong growth of 23.6% in Pre-tax Profit during the quarter was driven by lower cost of sales (down 8.5% q/q) as well as a reduction in Net Finance Cost (down 13.5% q/q).
Dangote cement factory
The decline in Group Revenue (down 1.1% y/y) was due to weak Revenue from its Nigerian operations (-1.3% y/y to N610.2bn) amidst the subdued performance from Pan African operations (down 0.2% y/y to N282.7bn).
We, however, note that the sales promotional activities embarked by the firm (which kicked off in Q2 2019) continued to provide support for volume growth, as Revenue from Nigerian operations grew albeit marginally in Q4 (up 2% q/q).
Notwithstanding, we think the uninspiring performance in the Nigerian Operations during 2019 reflects the weak growth in the Cement sub-sector, which grew slower by 3.1% in 2019 compared to 4.5% in 2018 based on the latest GDP numbers released by National Bureau of Statistics.
On the other hand, Revenue from its Pan African operations fell in Q4 (down 5% q/q). Overall, Group sales volumes was flat y/y, coming in at 23.5 million tonnes in FY 2019.
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Despite the moderation in Cost of Sales (adjusted for depreciation), which declined by 1.3% y/y in FY 2019, EBITDA was pressured as it declined 9.1% y/y to N395.4 billion owing largely to the rise in Selling and Distribution Expenses (+22.8% y/y to N136.8 billion).
Accordingly, EBITDA margin declined 3.9ppts to 44.3% in FY 2019 (vs 48.3% in FY 2018). The increase in Selling & Distribution expenses (adjusted for depreciation) was driven by the increase in Haulage costs (+22% y/y to N107.2 billion) as well as Advertisement and promotion cost (+115% y/y to N8.6 billion).
Based on our last communication, the management noted that the increase in both cost items was due to their efforts in strengthening consumer loyalty and improving route to market.
Meanwhile, management kept a lid on Administrative Expenses, as it grew marginally (+2.9% y/y). The increase in OPEX (up 17% y/y) further drove the rise in OPEX/sales ratio to 0.21x in 2019 from 0.18x in 2018, indicating more was spent in generating N1 of Revenue.
Net Finance Cost also grew 30.2% y/y t0 N50.1 billion in FY 2019, owing to the increase in Finance Cost (up 16% y/y to N57.7 billion) amidst the decline in Finance Income (down 33% y/y to N7.6 billion). We highlight that the rise in Finance Cost was due to a Foreign exchange loss of N13.5 billion arising from its Pan African Operations.
[READ MORE: Dangote Cement signs pact with GE to digitise plants]
Pre-tax Profit declined by 16.7% y/y to N250.5 billion in FY 2019. Profit after tax, however, declined sharply, down 48.5% y/y to N201.2 billion in FY 2019 vs N390.9bn in FY 2018- the steep decline was due to a tax charge of N49.9 billion in FY 2019 compared to the tax credit of N89.5 billion in FY 2019. Consequently, Earnings per share settled at N11.79/s in FY 2019 compared to N22.83/s in FY 2018.
The firm declared a final dividend of N16.0/s, translating to a dividend yield of 9.4% based on today’s closing price of N170.0/s.
We have a BUY recommendation on Dangote Cement with target price of N224.4.
_______________________________________________________________________
CSL STOCKBROKERS LIMITED CSL Stockbrokers,
Member of the Nigerian Stock Exchange,
First City Plaza, 44 Marina,
PO Box 9117,
Lagos State,
NIGERIA.
Columnists
Are we heading towards a food crisis?
The government may need to review the protectionist measures in place in order to avert a food crisis.
Based on the selected food price watch data for August 2020 released by the National Bureau of Statistics (NBS), major consumer staples showed substantial increases between August 2019 (when the land border closure took effect) and August 2020. The steep price increases across the food items is consistent with the increase in food inflation from 13.17% in August 2019 to 16.0% in August 2020. Of more concern is the fact that rice, the most
widely consumed food staple among consumers showed substantial increase in the two variants; local sold loose (up 37.5% y/y) and imported high quality sold loose (up 40.7% y/y).
Explore the Nairametrics Research Website for Economic and Financial Data
READ: Nigeria among countries to be worst hit by food crisis globally
In our view, the predominant factor behind the surge in the prices of major food items is the closure of the land borders, which has been exacerbated by administrative controls employed by the monetary and fiscal authorities in rationing foreign exchange. We recall that in July, the CBN included Maize on the list of items ineligible for FX from official sources. Recently, President Muhammadu Buhari ordered the Central Bank of Nigeria (CBN) not to allocate foreign exchange to importers of food and fertilizer. We also understand that heavy rainfalls in the northwestern part of the country have also affected farmlands, as the head of Kebbi state branch of the Rice Farmers Association of Nigeria revealed that about 90% of the 2 million tons of rice to be harvested were destroyed.
READ: Has the President erred in stopping CBN from funding food imports?
The persistent increase in the prices of food items despite the protectionist measures implemented by the government suggests that local production still lags consumption significantly. Considering the weak harvest season due to the impact of the global pandemic amidst higher distribution costs linked to higher PMS prices following the deregulation of the downstream sector, we believe price of food items will continue to trend upwards.
Additionally, we expect the pass-through impact of the devaluation in the local currency to put further pressure on imported food inflation. Overall, we think the government needs to review the protectionist measures in place in order to avert a food crisis.
CSL Stockbrokers Limited, Lagos (CSLS) is a wholly owned subsidiary of FCMB Group Plc and is regulated by the Securities and Exchange Commission, Nigeria. CSLS is a member of the Nigerian Stock Exchange.
Columnists
Has the President erred in stopping CBN from funding food imports?
What implication does the President’s directive to the CBN hold for the economy?
The President of Nigeria, President Muhammadu Buhari, last week said, “I am restating it that nobody importing food or fertilizer should be given foreign exchange from the Central Bank. We will not pay a kobo of our foreign reserves to import food or fertilizer. We will instead empower local farmers and producers.”
Why is the president stopping the CBN from funding food imports? The answer is simple. The CBN Exchange rates are cheaper than autonomous sources. The CBN lists the exchange rate for the Dollar at $1 to N379, however the Naira is being sold on the parallel market at N440. Hence, importers prefer to access CBN funds to import, because it reduces the cost of those imports. In effect, at N379, the CBN is subsidizing those imports via a ‘strong Naira’
The President’s directive is thus in line with his new overall push to eliminate all subsidies especially subsidies funded by the scare US dollar. In this aspect, the President is simply seeking to protect the foreign reserves which are paying for other imports. So, he is right.
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Is this a wise strategy?
Nairametrics earlier reported on the NBS recently released report on Nigeria’s total spending, which indicated that about N22.7 trillion was spent on food in 2019. This is 56.7% of the total spending (N40.2 trillion) for that period.
Where does the food Nigerians eat come from? Clearly Nigeria has a large agricultural base, but a significant proportion of Nigeria’s food is imported, and the cost of those imports have risen, as the value of the Naira has depreciated in relation to the US dollar.
(READ MORE: Agrorite leading the fight against food insecurity using Agtech)
According to data from the NBS, Nigeria’s spending on food and drink importation increased from $2.9bn in 2015 to $4.1bn in 2017, but dipped in 2018.
Have these imports plus local production met local demand on a consistent basis? The answer is no. Take rice for instance, the BBC reports that, “Between 2015, when the foreign exchange restrictions for rice came into effect, and early 2017, the price of a 50kg bag of rice went from $24 to $82 and fell in mid-2017 to $34, but in June 2019, the price stood at $49.”
The law of supply in economics, states that when the price of a commodity increases, its supply also increases. Hence, there is a direct relationship between price and supply of a commodity. In other words, if the price of rice goes up, more suppliers will enter the market to supply rice.
READ: Naira devaluation would affect our profit margins – Flour Mills
However, In Nigeria, as the price of food is rising, the NBS in the latest Inflation report, says the composite food index rose by 15.48% in July 2020 compared to 15.18% in June 2020. This rise in the food index was caused by increases in prices of Bread and cereals, Potatoes, Yam and other tubers, Meat, Fruits, Oils and fats, and Fish. (essentially everything). The NBS says, the average price of 1kg of rice (imported high quality sold loose) increased year-on-year by 37.72%.
So why has the supply of rice not risen to correspond with rise in prices? Well, because the supply of rice and other foodstuff have indeed risen, but the problem remains logistics processing & storage.
In Nigeria, you only eat corn during corn season, same with mangoes, and tomatoes. Prices fall during harvest, then rise after harvest. The problem is not just with the harvest, but getting that harvest to market, storing the excess, and processing its supplies all year round. Therefore, imports are needed to plug supply holes.
READ: CBN removes “third parties” from buying forex routed through Form M
Nigerians in 2019 alone spent N1.9trillion or 4.7% of their budget on rice alone. When the President banned food importers from getting the CBN dollar at N379; he simply pushed them to import rice at N440; a N61 difference that will be added to the cost of imports, and will fuel imported inflation.
Where the president got it wrong is trying to fix a local logistics problem with a foreign exchange fix.
READ: Official: Nigeria spends N1.2 billion only on imports of Arms and Ammunition
The solution is to go back to the various food supply value chains, de-risk and de-cost them. If food is cheap and plentiful, there will be no need for imports and inflation will fall.
Columnists
Can Agriculture replace Oil in Nigeria?
To truly diversify from oil and create proper value, agriculture must give birth to an industry.
Over the years, Nigerians have clamored for a diversified economy, that is not over-reliant on crude oil. Recently there have been several talks about agriculture being on the front-burner of our exports.
But the reality is that there is a gulf in difference between the revenue agriculture can bring in and what Oil currently generates. Despite the steady growth in the value of Nigeria’s agricultural exports over three years (2016 to 2018), the country’s agricultural exports to total exports remained below 2%.
READ: Nigeria’s top 10 agricultural exports hit N289.3 billion, as Sesamum seeds, Cocoa top list
Overview
During the period of independence, Nigeria was a major exporter of food to West African nations; Unfortunately, she has morphed into a net importer. With the advent of oil in the 1970s, fiscal and economic policy was one-sided, and the country’s domestic and foreign investments were on oil, at the expense of other sectors of the economy. Inadvertently, Government revenue has increasingly come from oil and remains hostage to volatile oil prices.
In a recent report, the National Bureau of Statistics (NBS) claimed that Nigeria earned close to N289.3 billion from the exportation of the top 10 agricultural produce between April 2019 and March 2020. The report asserted that both commodities (sesamum seeds and cocoa) accounted for over 60% of the country’s exports as they are the most sought after internationally. Comparatively, the top 10 agricultural produce made N289.3 billion across three quarters. These figures are relatively low compared with the Q2, 2020 proceeds of crude oil which stands at N1.6 trillion.
(READ MORE:Africa may lose $4.8 billion in crop exports due to Coronavirus)
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Other commodities
From the above diagram, Oil generated N1.6 trillion in Q2 2020, while the other commodities combined to record about N612 billion in Q2 2020. One trillion naira lesser (considering Oil prices were significantly low during that quarter). A 2018 report from PWC showed that oil revenue accounts for more than 80% of total value of annual Nigerian exports. Ironically, the agriculture industry contributed an estimate of 25% to total GDP in 2018, while the oil’s share of GDP was 8.6% over the same period. Since the agriculture sector is the largest contributor to Nigeria’s GDP, it has potentials to contribute a larger percentage of our annual export revenue.
Explore the Nairametrics Research Website for Economic and Financial Data
Recommendation
Agriculture toppling Crude oil as our main export might be a tall order, but if we want to truly diversify from oil and create proper value, agriculture must give birth to an industry.
If agriculture currently employs, say, one million Nigerians; the agro-allied industry can employ five million in the value chain. In a monetary context, if Nigeria produces cocoa beans, which recorded over N30billion revenue in 2018, an industry that processes cocoa to chocolates & beverages would produce double the revenue or more.
Oil would be the main commodity for a long time, but it is possible to create more financial values from other commodities.
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