Dangote Industries Revenue to Hit N6trn in 2023 – GCR Ratings
Aliko Dangote, Chairman, Dangote Group

Dangote Industries Revenue to Hit N6trn in 2023 – GCR Ratings

Dangote Industries Limited’s revenue has been projected to hit N6 trillion in the financial year 2023, according to GCR Ratings, on the expectation that the group refinery project will be commissioned for operation as planned.

In its recent rating note, GCR Ratings assigned national scale long-term and short-term Issuer ratings of AA+(NG) and A1+(NG) respectively to the company, with the outlook accorded as stable, according to a new rating note.

The emerging-market rating agency said the ratings of Dangote Industries Limited weigh its strong competitive position due to its size, and systemic importance of the ongoing projects, the leading market positions held by its major subsidiaries and relatively diversified business lines, which have translated into a sound earnings trajectory.

The rating note noted that this is somewhat offset by elevated debt and the currently high foreign currency exposure. In the note, GCR stated that the competitive position is a positive rating factor, underpinned by DIL’s position as one of the leading conglomerates in Africa, with operations concentrated in Nigeria but extending into 10 countries.

“The Group has 11 distinct business lines, but the cement business currently contributes 77.5% of group earnings, with sugar (16.1%) and salt (2.1%).

“These key subsidiaries are industry leading players with strong brand values, underpinned by long operational track record, diverse customer base, ongoing investments in capacity expansion, and control over their respective value chains”.

The remaining businesses are still relatively small, but GCR expects further earnings diversification from the ongoing refinery project and capacity ramp-up at the recently commissioned fertilizer plant over the outlook period.

The earnings profile assessment is positive to the ratings, according to the rating note, reflects the size and progression of earnings over the review period, with a 5-year average annual growth rate (CAGR) of 10.2% in FY20.

Although the top line declined slightly in FY19, DIL has since demonstrated resilience, with revenue increasing 10% in FY20 and 31.4% and 9M FY21, on the back of higher production volumes and price increases, the rating note stated.

GCR expects revenue growth of about 15% in FY22 on account of increased sales and additional inflow from the fertilizer plant.

Revenue is then projected to nearly treble to about N6tr in FY23, once the oil refining operations commence. Once fully operational, the refinery operations are expected to dominate group earnings.

“We anticipate this will lead to a sharp reduction in the earnings before interest tax depreciation and amortisation (EBITDA) margin to the 21% to 24% range – the historical average was 35% – but the overall earnings quantum will materially increase”.

Also, the rating indicates that the company’s leverage and capital structure are a constraint to the ratings, given the substantial debt used to fund the fertilizer and refinery projects.

It stated that gross debt -including shareholder loans and lease liabilities- was reported at N3.2 trillion at 9M FY21 compared to N2.2tr in FY 19 and N1.7tr in FY18, weakening net debt to EBITDA to 3.9x at 9M FY21 against 4.9x in FY 20 compared to the moderate levels pre-FY19.

GCR said following the escalation in debt service costs, net interest coverage has since narrowed to the 2.2x – 2.4x range (FY16-18 average: 9.8x), before widening slightly to 3.7x during 9M FY21.

In addition, the rating note revealed that operating cash flow coverage of debt weakened to 21.8% in FY20 and further to 13.8% during 9M FY21, mirroring the increase in debt.

However, GCR hinted that it expects the metrics to gradually improve over the outlook period, as earnings and cash flows from the fertilizer plant and refinery materialise, allowing DIL to materially reduce debt level.

GCR notes DIL’s access to diverse funding pool, including 29 local and foreign banks and development finance institutions.

Moreover, about 30% of DIL’s debt relates to shareholder loans. However, the benefits are counterbalanced by the Group’s high foreign currency exposure versus limited foreign currency earnings, accounting for less than 15% of group earnings.

Nevertheless, GCR anticipates that the foreign currency exposure will ease as earnings from the ongoing projects will be United States dollar denominated.

“The slightly positive liquidity assessment is predicated on DIL’s cash holdings of N811 billion at December 2021 and GCR’s projected operating cash flows of N650 billion and N915 billion in FY22 and FY23 respectively”.

According to the rating note, liquidity will be supported by the Group’s proposed bond issue of about N300 billion, N206.5 billion from the disposal of shares and unutilised committed credit lines of N12.5 billion with a foreign financier.

“We expect this to sufficiently cover the substantial remaining capital expenditure (capex) outlay, investment commitments, dividend payments and external debt redemption in FY22 and FY23”, GCR Ratings said.

The rating firm added that the liquidity sources versus uses coverage is estimated at 1.8x over the next 12 months and 1.6x over the 24-month to December 2023. Even if not all cash inflows materialise, DIL has adequate scope to manage its liquidity by reducing dividends or some non-essential investments.

“Notwithstanding the financial stress that may materialise if there are delays in the commencement of the ongoing refinery project, GCR has factored in a positive peer score in view of the economic importance of the project to Nigeria.

“This has ensured strong federal government support, including a 20% investment in the refinery and preferential access to foreign currency”, it explained. READ: InfraCredit Gets Highest Rating Score, Stable Outlook

Outlook Statement

The stable outlook reflects GCR’s expectation that DIL’s oil refinery project will be commissioned according to schedule, and that strong earnings and cash flow projections will materialise as forecasted.

This will allow for the debt balance to be reduced over the rating horizon and mitigate the foreign currency mismatch, according to the rating note. #Dangote Industries Revenue to Hit N6trn in 2023 – GCR Ratings