DANGCEM: Rising Energy, Material Costs Trigger Cement Price Hike

DANGCEM: Rising Energy, Material Costs Trigger Cement Price Hike

  • Dangcem 99.1% Payout Ratio Juicy
  • Price adjusted pushed Revenue above N1trn mark
  • Company face with rising energy, materials costs
  • Brand strong enough to react to price pressures
  • Strong dollar position help Earnings
  • Dangote Cement refinanced expensive debt instruments
  • Tax Expenses Grew by 95% in 2020
  • We have NOT increase our price since 2019 – Dangote’s Spokesman

Amidst covid-19 induced pressure in 2020, Dangote Cement Plc (Ticker: DANGCEM) hits N1 trillion revenue mark as the company battles rising energy and materials costs.

Equity analysts believe that rising energy, material costs propelled the management to increase price per bag of cement from N2,550 to N3,300 in the pandemic year.

Despite the price hike, it was however noted that volume did not adjusted negative as the company sales spike further, outperforming 2019 scorecard.

In its audited 2020 financial statement for submitted to the Nigerian Stock Exchange Tuesday, the company reported 44.7% earnings per share increase in the fourth quarter.

Commenting on the result, analysts at Chapel Hill Denham said in a report that the earnings per share (EPS) actually expanded on higher revenue and a significant reduction in finance charges.

To maintain balanced working capital, the company refinanced significant buckets of its expensive financing sources with cheap instruments due to lower interest rate environment.

For the full year, the company’s earnings per share came in at 36.9% year on year higher than 2019 earnings result.

Chapel Hill Denham said actual record beats its EPS forecast by 21.4%, surged above consensus estimate by 9.2%, which analysts considered as an impressive performance considering the fact that 2020 was a year hit by the double whammy of collapse in commodity prices, together with COVID-19 outbreak.

Based on EPS record of N16.14, the board has proposed a final dividend of N16.00/share, translating to a payout ratio of 99.1% and a dividend yield of 7.3% on yesterday’s closing price (N220.00/share).

“A juicy dividend yield in our view”, Chapel Hill Denham said..

Analysts think 2020 EPS growth is not surprising, considering that Q3-2020 results had already more than made up for the COVID-19 induced weaknesses witnessed in Q2-2020.

“DANGCEM ability to implement price increases in Nigeria, especially in a pandemic and an intensely competitive environment highlights its dominance.

“We believe that the company’s scale, superiority, and efficiency will allow it to respond quickly to any price pressure, without a significant negative impact on margins”, analysts posited.

Positive Side of the Result

Dangote Cement delivered aggregate revenue growth of 28.7% year on year in the latter part of the year (Q4-2020), driven by favourable volume and price mix.

For context, analysts noted that the cement company volumes were 15.0% year on year higher relative to record achieve in financial year 2019.

That, together with an 11.9% year on year growth in average realised price, supported revenue for the quarter.

“We like that DANGCEM revenue came in at N1.03 trillion, in line with MTN Nigeria and Airtel Africa that deliver over N1 trillion revenue among the companies listed on the Nigerian Stock Exchange (NSE).

“We, however, highlight that, unlike MTN Nigeria that generates all of its revenue from Nigeria, Dangcem’s and Airtel Africa’s revenues include revenues generated from outside Nigeria”, Chapel Hill Denham stated.

Instructively, DANGCEM financial year 2020 revenue grew by 16.0% year on year, outperforming Chapel Hill Denham’s forecast by 4.9%.

Analysts explained that most of the growth stemmed from the blend of higher volume which expanded +8.6% and realised prices that increased +6.8% year on year.

The company’s financial statement showed that regionally, revenue in Nigeria grew by 31.3% in Q4-2020, following a blend of strong volume outturn that expanded+21.7% and 7.7% higher average price.

“Management had previously hinted that the recovery in cement demand, following the COVID-19 downturn in Q2-20, was on the back of a stronger private consumption; with recovery in public demand still at a snail pace amid pressure on public finances.

“In our view, the unprecedented low yield environment witnessed in the period bolstered the appetite for real estate investment, with a positive connotation for cement demand.

“We understand that DANGCEM sustained its aggressive promotion, a strategy aimed at warding off competition.

“Management stated that the strong volume growth, witnessed in 2020, was necessitated by its “Bag of Goodies – Season 2” promotion”, analysts detailed.

For the rest of Africa, revenue actually grew by 27.8% year on year in Q4, supported by higher average prices rising +19.9% and 6.6% surge in volume year on year.

Across its different regions of operation, while higher infrastructure spending in Cameroun and Congo supported sales volumes, analysts expressed that weaknesses in Ethiopia, Ghana, and Zambia remained a key concern.

Furthermore, while OPEX expanded slightly by 4bps in Q4-2020, other income grew by 21.0%, thereby supporting earnings before interest tax depreciation and amortisation (EBITDA) growth of 33.5%.

Over 2020, the group’s EBITDA surged by 20.9%, with the positive impact cascading to a 1.9 percentage point expansion in EBITDA margin to 46.2%.

Overall, the group’s profit after tax margin was 13.4 percentage point higher, relative to Q4-2019.

DANGCEM’s balance sheet is robust.

Chapel Hill Denham maintains that the group balance sheet is robust. In the financials, cash balance grew by 17.7% year on year to N145 billion, still better than BUA with cash balance of N125 billion.

“We like that the group’s net operating cash flow rose by 20.1% in 2020, following its better working capital management. Overall, adjusted free cash flow improved by 7 basis points in the period”, analysts said.

Concerns

Analysts explained that the company’s capacity utilisation in Nigeria normalised at 50% in Q4-2020, after rising to its highest level in, at least, six straight quarters in Q3-2020.

Read Also: Airtel Africa Rated Buy as Chapel Hill Denham Initiates Coverage

Coming from Q3-2020, which has historically been its weakest, analysts at Chapel Hill Denham said they found the 10.7% quarter on quarter decline in volume in Nigeria disappointing.

“While we do not rule out the negative impact of the high base of the previous quarter, we will engage management to understand the driver of the decline”, the report stated.

However, it was noted that the group’s gross margin deteriorated by 169 basis points in Q4-2020, as cost of goods sold grew by 33.8% year on year, well ahead of revenue growth.

“Based on our attribution analysis, most of the weakness came from Nigeria (-5.8ppts), as the rest of Africa (+5.5ppts) improved.

“We understand that energy cost remains a challenge in Nigeria with energy cost per tonne rising sharply by 11.4% year on year”, analysts explained.

Against that backdrop, energy cost as a percentage of the total cost is now at 12.8%, from 12.4% in Q4-2019, the highest level since Q4-2018.

Beyond energy, the company also reported a significant expansion in material cost, increased by +40.7% year on year per tonne basis.

“We retain our HOLD rating on DANGCEM with a 12-month target price of N224.25”, Chapel Hill Denham stated.

In an equity research report, analysts at CSL Stockbrokers Limited also said the company beats its revenue expectation for financial year 2020 by 0.6%.

There was a strong demand for cement in the local market (Nigeria), as domestic sales jerked up 14.3% year on year to 15.6 million tonnes in 2020.

The domestic volume growth comes on the back of increased sales promotional activities (Bag of Goodies- Season 2″), short rainy season, improved real estate investment amid a low interest rate environment and resumption in construction activities in Q3 following removal of covid-19 restrictions which impacted construction projects across the company’s markets negatively.

Overall, Cement & Clinker volume grew by 8.6% year on year to 25.7 million tonnes in 2020 from 23.7m tonnes in 2019.

“During the year, we saw an appreciable increase in the price of a bag of cement based on our channel checks which showed a bag of cement was priced at about N3300/bag from about N2550/bag-N2700/bag”, CSL Stockbrokers said.

It also noted growth in cost of sales (adjusted for depreciation) tracked higher than revenue growth, up 18.5% to N373.02 billion in 2020 from N314.74 billion in 2019.

In the same vein, on a quarter on quarter basis, Q4-2020 cost of sales (adjusted for depreciation) growth tracked higher than revenue growth, up 4.3% against revenue growth of -4.2% to N103.71 billion.

Analysts said the growth in cost of sales (adjusted for depreciation) was driven by double-digit upticks in material consumed (+15.1%) and fuel & power consumed (+19.1%) both of which grew stronger than volume growth (+8.6%).

For the company, this implies increased cost pressures which necessitated the recent price hikes.

The company tightly controlled its operating expenses reflected in the sub-inflationary -0.2% growth in to N214.25 billion in 2020 from N214.77 billion in 2019.

CSL Stockbrokers said the controlled operating expenses fed into a modest 20.6% year on year growth in EBITDA to N476.46 billion in 2020 from N395.17 billion in 2019.

The company’s financing strategy led to 71.7% drop in net finance cost to N14.17 billion in 2020 from N50.06 billion in 2019.

This was because finance income surged 291.8% year on year while finance cost declined 23.7%.

Analysts explained that the surge in finance income was primarily due to the FX gain of N16.63 billion booked by the company in 2020 compared with nothing in 2019.

“Nevertheless, we note that excluding the FX gain, finance income still grew 73.2% which reflects strong cash generation which muted the impact of lower yields on investment assets”, CSL Stockbrokers added.

Furthermore, finance cost declined despite the 28.5% year on year uptick in total financial liabilities, reflective of the company’s debt refinancing activities.

“We note the company refinanced some of its expensive debt instruments with lower priced instruments following the crash in interest rates leading to 1.2 percentage points decline in average effective interest rate for the company”.

Overall, Dangote Cement Company’s pre-tax profit swelled up 49.3% year on year to N372.75 billion in 2020 from N249.64 billion in 2019.

In Q4-2020, pre-tax profit actually went down 7.6% quarter on quarter to N100.79 billion from N109.12 billion in Q3 2020. Analysts noted that the company’s effective tax rate grew to 26.0% 2020 from 19.9% in 2019.

Thus, tax expense grew significantly by 94.6% year on year to N97.24 billion in 2020 from N49.96 billion in 2019.

Nevertheless, CSL Stockbrokers said net income still grew 38.0% to N275.51 billion from N199.68 billion in 2019, while full year earnings per share settled at N16.14/s compared with N11.79/s in 2019.

The company’s management proposed a dividend of N16.00/s for 2020 still in line with the N16.00/s given in 2019.

DANGCEM: Rising Energy, Material Costs Trigger Cement Price Hike