Dangote Cement: Resilient Performance Driven By Robust Demand Across Africa

Despite the effect of COVID-19 on businesses in 2020, Dangote Cement recorded improved cement demand across Africa, especially in the second half of 2020, due to the gradual easing or total lifting of the lockdown in various countries. With the improved cement demand by the governments, businesses and households across Africa, the Group revenue increased by 15.98% to ₦1.03 trillion in full-year 2020 (vs. ₦891.67 billion in FY’19).

Of the company’s cement capacity of 45.55 million tonnes per annum across Africa, a total of 25.72 million tonnes was produced in FY’20 (vs. 23.68 million tonnes in FY’19), driven by strong performance in Nigeria, Ethiopia, and Senegal.

Overall, the production cost of sales rose by 15.26% to ₦437.97 billion in FY’20 (vs. ₦379.99 billion in FY’19), as a result of higher cement volumes in Nigeria and Pan-Africa (i.e. other African nations except for Nigeria). With effective cost control measures, the total selling and administrative expense were relatively flat at ₦214.25 billion in FY’20 (vs. ₦214.77 billion in FY’19).

Consequently, Dangote Cement’s EBITDA increased by 20.47% to ₦476.27 billion in FY’20 (vs. ₦395.36 billion in FY’19).

The net finance loss of Dangote Cement improved by 71.69% to ₦14.17 billion in FY’20 (vs. ₦50.06 billion net financial loss in FY’19), due to higher interest-earning cash balances, exchange gain in Nigeria and lower average effective interest rate on borrowing. With the impressive performance across the board, profit before tax increased significantly by 49.04% to ₦373.31 billion in FY’20 (vs. ₦250.48 billion in FY’19).

Dangote Cement made a higher provision of ₦97.24 billion for tax in FY’20 when compared with ₦49.96 billion in FY’19. Consequently, profit after tax improved significantly by 37.68% to ₦276.07 billion in FY’20 (vs. ₦200.52 billion in FY’19). The company rewarded the shareholders with a final dividend of ₦16.00 per share (vs. ₦16.00 DPS in FY’19). With this impressive performance, we upgrade the target price per share to ₦256.84 (Previous Target Price: ₦242.49) and maintain a BUY recommendation.

Revenue improves by 15.98% (year on year), supported by strong cement demand across Africa:

The first half of 2020 witnessed lower cement demand across Africa, due to the lockdown of economic activities and restriction of movements in most African countries. However, the demand for cement increased significantly in the second half of 2020 as most African countries either lifted or gradually eased the lockdown of economic activities.

With improved private and public spending in real estate investments and infrastructural development, cement volume across Africa increased by 8.60% to 25.72 million tonnes in FY’20 (vs. 23.68 million tonnes in FY’19).

Specifically, the total cement volumes in Nigeria improved by 12.90% to 15.94 million tonnes in FY’20 (FY’19: 14.12 million tonnes), driven by promotion activities, increased real estate demand and lower rains. Also, cement volumes in Pan-African operations increased by 4.40% to 9.98 million tonnes in FY’20 (FY’19: 9.56 million tonnes), driven by improved cement demand in Ethiopia, Senegal, Cameroon, Sierra Leone, South Africa and Congo.

In addition, the net revenue per tonnes in Nigeria increased by 4.50% to ₦45,179 in FY’20 (vs. ₦43,222 in FY’19). The increase in the cement volume across the board and higher prices, especially in Nigeria, reflected on the Group revenue as it increased by 15.98% to ₦1.03 trillion in full-year 2020 (vs. ₦891.67 billion in full-year 2019). Nigeria remains a major market for Dangote Cement as it contributed 69.61% to total revenue in FY’20 (vs. 68.44% contribution to revenue in FY’19).

As a result of higher cement volumes in Nigeria and Pan-Africa, Group manufacturing costs increase by 15.26% year-on-year:

The manufacturing costs of the Group increased by 15.26% to ₦437.97 billion in full-year 2020 (vs. ₦379.99 billion in full-year 2019), mainly driven by higher cement volumes in Nigeria and Pan- Africa. Specifically, the manufacturing cost in Nigeria increased by 24.70% to

₦225.70 billion in FY’20 (vs ₦181.00 billion in FY’19), due to higher cement volumes, high inflation rate and foreign exchange impacts on USD denominated expenses during the period. The manufacturing cost of Pan-African operations increased by 6.70% to ₦212.20 billion in FY’20 (vs ₦199.00 billion in FY’19), due to a strong volume increase in Ethiopia, Congo and Cameroon.

Although the Group’s manufacturing costs increased by 15.26%, the cost-to-sales ratio fell slightly to 42.35% in FY’20, from 42.62% recorded in FY’19.

With effective cost control measures, the total selling and administration expenses were relatively flat at ₦214.25 billion in FY’20, when compared with ₦214.77 billion in FY’19. Although the total volumes sold in Nigeria increased, improvement in efficiency and turnaround time led to a slight decrease in haulage costs to ₦69.80 billion (vs. ₦70.70 billion in FY’19). The Pan-African operation also experienced a similar trend as haulage costs fell by 19.9% to ₦29.20 billion in FY’20 (vs. ₦36.5 billion in FY’19), due to a reduction in the use of third-party trucks.

With impressive performance across the board, profit before tax rises significantly by 49.04% year-on-year:

Impressively, the Group benefited from the lower yield environment in Nigeria, interest-earning cash balances and devaluation, which impacted non-operating activities positively. The average effective interest rate on borrowings was 9.67% in FY’20, compared to 10.87% in FY’19. Also, there were higher interest-earning cash balances which translated to higher interest income for Dangote Cement. In addition, the Nigerian Naira depreciated to ₦400/1$ in FY’20 (FY’19: ₦365/1$) and this resulted in net exchange gains of ₦16.63 billion (vs. loss of

₦13.48 billion in FY’19). The improvement in effective interest rate, exchange gain and increased interest-earning cash balances translated to lower net finance costs of ₦14.17 billion in FY’20 (vs. ₦50.06 billion in FY’19).

As a result of the impressive operating and non-operating performance of the Group, the profit before tax increased significantly by 49.04% to ₦373.31 billion in full-year 2020 (vs. ₦250.48 billion reported in full-year 2019). However, the company made a higher provision of ₦97.24 billion for tax in FY’20 (vs. ₦49.96 billion in FY’19). The effective tax rate of Nigerian operations was 18.10%, representing a mix of non-taxable income (for production lines still under the pioneer tax holiday) and taxable income (for production lines out of pioneer tax exemption).

However, the Group’s effective tax rate was higher at 26.00% in FY’20, due to Pan- African subsidiaries that made losses, which reduced the Group’s profit without direct tax benefits for those losses. Even with higher provision for tax during the period, profit after tax increased by 37.68% to ₦276.07 billion in FY’20 (vs. ₦200.52 billion reported in FY’19) and this translated to earning per share (EPS) of ₦16.14 in FY’20 (FY’19:

The balance sheet remains strong and solid; Directors recommend a dividend of ₦16.00 per share:

In the period under review, Dangote Cement increased total non-current assets by 10.32% to ₦1.47 trillion, from ₦1.33 trillion reported in 2019. This was mainly driven by more investment in property, plant and equipment. The Group invested an additional ₦183.94 billion in property, plant and equipment in Nigeria and Pan-African operations from twelve-month to December 2020.

As a result, the total assets of the Group increased by 16.07% to ₦2.02 trillion in 2020 (vs. ₦1.74 trillion recorded in 2019). However, total liabilities of the Group increased significantly by 33.98% to ₦1.13 trillion in FY’20 (vs. ₦844.51 billion in FY’19) as a result of higher trade & other payables, higher financial liabilities and current tax liabilities. Consequently, the net assets of Dangote Cement declined marginally by 0.78% to ₦890.97 billion in full-year 2020, from ₦897.94 billion recorded in full-year 2020 and this translated to a net asset per share of ₦52.29 (vs. ₦52.69 in FY’19).

With the robust balance sheet, Dangote Cement paid almost all the profit recorded during the period as dividend in order to match the dividend paid last year. The directors recommended a dividend payment of ₦16.00 per share in 2020 (2019: ₦16.00 dividend per share).

Valuation

Our valuation puts the target price of the stock at N256.84, representing an increase of 19.46%, from the current price of N215.00. In arriving at the target price, we employed Discounted Cashflow Valuation methodology. Consequently, we maintain a BUY recommendation on the stock of the company.

Our valuation and forecasts considered several factors (both quantitative and qualitative) among which are; the previous financial reports of Dangote Cement, the current figures released by the company, the strong recovery in the cement market, and the outlook of the management.