DANGCEM: How competition, expired pioneer tax credit affect 2019 result

Dangote Cement Plc had it tough in 2019 with excess capacity brought into the market by its major competitors.

BUA Cement consolidated position as Lafarge continues to restructure for better positioning too, and these affected demand structure.

Strategists at LSintelligence Associates have also predicted an improve promotion as price war is more likely to ensue in 2020.

“Dangote Cement would up its promotional and market engagements to consolidate its market leadership which has been threatened by activities of BUA and Lafarge.

“Last year, Dangote Cement raised price. That was reactionary due to price adjustment made by its rivals. Due to weak purchasing power and lower demand, it is likely to see some load down as part of promotion in 2020”, the Consultants said in an email.

In its audited statement, the Company’s topline plunged marginally by 1.06% to N891.671 billion from N901.213 billion in 2018.

Analysts at Greenwich said despite constant production output, revenue slowed as a result of the slower sales and price cut following the heightened competition in the cement industry.

“We noted cost of sales dropped marginally by 0.87%, due to cost savings on production materials, reduction in fuel and power consumption, and fewer plant maintenances.

“However, despite lower cost of production, we saw gross margin thin out by 1.20% to settle at N511.682 billion from N517.902 billion”, analysts held.

Greenwich analysts said they also observed a marginal increase in administrative expense, owing to the spike in salaries and related staff cost by 13.5% as well as rent, rates and insurance by 23.16%.

Read also: Dangote Cement to repurchase shares as equities market slump

Likewise, the rise in advertisement and promotion expense up 115.46% as the company seeks to drive and improve product visibility in a bid to recover lost market share.

Analysts at FSDH believe the company’s largest market Nigeria, is under severe pressure from a weak consumer base.

The macroeconomic environment remains challenging. While the company launched aggressive sales promotions in 2019, volume growth remained weak.

“Going forward, we expect the company to retain its volume-centric strategy with increasing competition in the cement industry, following BUA’s onboarding.

“Looking at the positive, we think the early implementation of the budget presents the cement giant an opportunity to improve Revenue from public contracts, which we think would support earnings significantly”, analysts forecasted.

Meanwhile, the 21.74% increase in haulage expense resulted from the persistent gridlock and dilapidation of road networks and round distribution networks.

Consequently, operating profit declined by 11.45%, while 11.46% drop in finance income and 15.86% increase in finance cost resulted in a 16.73% decrease in profit before tax (PBT) to N250.48 billion as against N300.81 billion in the corresponding period of 2018.

Moving on, profit after tax settled 48.63% lower than 2018 to print N200.521 billion.

Despite a slowdown in bottom line, DANGCEM declared a dividend of N16 per share, same as previous year, representing a dividend yield of 9.4% and a dividend payout ratio of 135.71%.

CardinalStone Partners also held that the performance was weighed by pressures on finance expense, higher selling & distribution cost, and a surprise effective tax rate of 19.9% as against tax credit in the previous year.

Meanwhile, DANGCEM grew Pan-African volumes by 1.9% despite aggressive competition.

Analysts at Cardinalstone think that the traction on this front was supported by 94% growth in Tanzanian and 116% in Sierra Leonean operations which offset weaknesses in some other Pan-African markets.

“In our view, the commissioning of the 1.5MTPA Ivory Coast plant slated for Q4’20 is likely to provide support to non-Nigerian volume growth in coming quarters”, Cardinalstone analysts projected.

Though cash & bank balances contracted by 29.5%, the cement giant declared a N16 dividend per share.

In addition, the company revealed that it is seeking regulatory approval for its planned share buyback programme.

Management also disclosed that it is open to part financing the share buyback programme with a debt raise although other options are still on the table.

“To our minds, expected improvement in future cash flows and the tax deductibility of interest could provide some support for the debt option even though other risks abound”, analysts said.

Share Buyback to gulp about N300 billion

The higher the market price of the stock, the higher the amount that would be needed to complete the share buyback of the company, LSintelligence told MarketForces.

Also, analysts at Cardinalstone stated in a note that considering that the firm is aiming to buy back up to 10% of its total issued shares, the proposed 12-month buy back exercise could require N289.7 billion -using last market closing price- in funding.

“If the program is approved, the company is likely to deploy the balance of cash after it adjusted for dividend payment and funds from other sources to the transaction”, analysts held.

Cardinalstone believes that the buyback programme highlights management’s confidence about the prospects of the business.

Analysts raised Concerns, though

However, they raised some concerns that Nigerian volumes (14.1MT) remained flat at the end of 2019, despite heavy investments in the bag of goodies promotion.

Nigerian volumes have been negatively impacted by rising competition in the domestic market and knock-on effect of border closure on exports dropped 41% year on year.

That said, management has revealed plans to commission the Apapa and Onne export terminals by end of second quarter in 2020.

This will enable the business export cement via waterways and reduce the impact of land border restriction on volumes.

The cement company’s operating margin printed at 32.3% in the fourth quarter of 2019 compare with 33.3% in the comparable period.

Analysts held that surge in advertising, promotional, and haulage expenses and were the key pressure points in the review quarter.

Again, net finance expense rose by 16.6% the fourth quarter of 2019 result, following increased commercial paper (CP) issuance.

Despite moderation in interest rate, possibility of more CP issuances could drive volume-induced pressure on finance expense.

Surprisingly, income tax came in at N49.9 billion as against the N89.5 billion tax credit in 2018, despite the N58.4 billion tax credit associated with pioneer tax status on some lines.

Management linked pressures on taxation to the N20.6 billion charged on lines with expired pioneer tax status.

FSDH analysts explained that net finance cost climbed higher by 30.2% on the back of a 15.9% climb in finance costs, while finance income dipped 32.8% to N7.6bn.

“The jump in finance cost was driven by the FX loss of N13.5bn, booked by Dangote Cement which was a 66.2% increase.

“Meanwhile, the increase in FX losses was as a result of currency depreciation in Pan African countries where the company has its operations”, analysts remarked.

DANGCEM: How competition, expired pioneer tax credit affect 2019 result

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