Dangote Cement: Resilient Q1 earnings in ‘virus infected’ economy
Analysts at WSTC Securities Limited downgrade Dangote Cement Plc to hold, cite weak earnings outlook in financial year 2020.
In the second quarter, sales volume and value are expected to come weak due to raining season and effects of coronavirus on the economy.
For the company, this would result to lower revenues, then profits are expected to be slashed.
In the first quarter (Q1), the group grew revenue by 4%, gross profit then rose by 3% on account of faster growth in production cost.
Analysis of the financial statement revealed that the group recorded increase in operating expenses despite lower business activities.
Operating profit increased by 4% due to marginal savings in administrative expenses.
However, profit before tax (PBT) grew double-digit by 12% owing to a reduction in finance cost and gains from foreign exchange adjustment.
But due to the surge in income tax, profit after tax (PAT) grew mildly by 1%.
This left earnings per share for the period stood at ₦3.60k compare to ₦3.54k in the comparable period in 2019.
WSTC Securities stated that volume growth and higher pricing in Nigeria anchor the company’s revenue growth.
From the numbers, the group revenue expanded from ₦240.16 billion to ₦249.18 billion in Q1 2020 anchored by Nigeria’s performance.
Specifically noted was the fact that income from Nigeria increased by 6% from ₦169.89 billion to ₦179.34 billion.
This was driven by both growth recorded in volume and price.
Though, volume grew mildly by 1%, while the average realized prices rose by 5% from ₦42,567 per metric ton (MT) to ₦44,633/MT in Q1 2020.
Overall, WSTC stated that revenue from Nigeria accounted for 72% of the group’s revenue in Q1 2020.
On Pan Africa front, analysts explained that aggregate revenue declined by 1% from ₦70.27 billion to ₦69.85 billion in Q1 2020 on account of lower volumes.
In the segment, volume decreased by 3% from 2.35MT to 2.28MT in Q1 2020 due to technical issues in Tanzania, as well as lockdown in South Africa at the end of March.
Though the average realised prices for the period increased by 2% from ₦29,941/MT to ₦30,634/MT in Q1 2020, it was not enough to offset the decline in output.
Consequently, the group’s volume declined by 60 bps from 6.34MT to 6.30MT in Q1 2020.
The decline was due to higher realised prices in Nigeria, as the group’s revenue advanced by 4%.
WSTC stated that cost of sales rose by 5% from ₦99.48 billion to ₦104.33 billion in Q1 2020 driven by personnel cost and other production expenses.
Then, salaries and related staff costs increased by 13% from ₦7.89 billion to ₦8.94 billion in Q1 2020.
Analysts stated that other production costs grew from ₦1.45 billion to ₦4.04 billion in Q1 2020.
As a result, gross profit increased by 3% from ₦140.68 billion to ₦144.86 billion in Q1 2020 and gross profit margin weakened by 50 bps to 58% from 59% in Q1 2019.
Meanwhile, the group’s operating expense increased by 3% from ₦52.83 billion to ₦54.20 billion in Q1 2020.
The growth was driven by selling and distribution expenses.
Selling and distribution expenses grew from ₦40.70 billion to ₦41.36 billion due to a 96% spike in advertisement and promotion cost.
Analysts stated that though administrative cost decreased by 3% for the period, the 4% growth in selling and distribution expenses jerked up operating costs.
Notwithstanding, operating income increased by 4% from ₦88.38 billion to ₦91.78 billion in Q1 2020 due to a 109% surge in other revenue.
In the review, analysts positioned that FX gains amid lower finance cost lifted the group pretax profit, but gains eroded by a higher effective tax rate
PBT grew double-digit by 12% from ₦78.96 billion to ₦88.06 billion in Q1 2020 on the back of foreign exchange adjustment by the CBN and lower finance cost for the period.
Thus, it recorded an FX gains of ₦3.75 billion in Q1 2020.
Also, finance cost decreased by 23% to ₦9.01 billion in Q1 2020 due to the lower yield environment and reduction in the group’s borrowings.
Nevertheless, PAT grew mildly by 1% to ₦60.59 billion in Q1 2020 as against ₦60.25 billion in the comparable period.
This was attributed to a higher effective tax of 31%, though it was 24% in Q1 2019.
Analysts at WSTC Securities noted the group’s resilience in growing revenue in Q1 2020 despite the early impact of the coronavirus (COVID-19) pandemic.
The firm recalled that lockdown in South Africa, Ghana, Congo and in Nigeria began late March.
Thus, sales in Q1 2020 were least impacted. Even at that, sales volume declined, but for a higher pricing in Nigeria, revenue grew.
Looking forward, however, analysts at WSTC said they expect to see the full impact of the pandemic from Q2 2020 result.
“Historically, though, Q2 and Q3 sales are usually the weakest due to raining season.
“We expect a profound decline in these periods given the pandemic.
“That said, we expect the group to leverage its market leadership status, advertisement, and promotional activities to cushion the impact”, WSTC stated.
Analysts at WSTC then explained that they have a revised EPS of ₦12.16k, informed by lower sales and a higher effective tax rate.
The firm recommends hold ratings to its customers.
This was based on the current market price of ₦137.30k, as analysts stated that the stock is trading at 1% discount to fair value estimate of ₦138.71k.
