Dangote Cement H1 2020 Result; Paving A Difficult Path to Profitability


Friday, August 07, 2020, / 12:05 PM / By Proshare Research   /  Header Image Credit: Africa Uodate Newspaper

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The COVID-19 pandemic took a bite out of the operational growth of Dangote Cement in H1 2020 resulting in the company having to take fresh operationally strategic decisions such as forcing a reduction in its rebates and discounts. Cost of sales increased by +4.79% Y-o-Y while selling and distribution expenses declined by -3.32% Y-o-Y and -10.87% Q-on-Q, this was as a result of the lockdown and restrictions placed by the different government where the companies operate, in Nigeria the lockdown was majorly in April. The company also recorded an increase of +6.29% Y-on-Y in its finance cost.

The group also exported its first shipment of 27.8kt of clinker from Nigeria to Senegal in June 2020.

Key Takeaways

  • Revenues grew by +2% Y-o-Y. The company exported the first shipment of 27.8kt of clinker from Nigeria to Senegal. The shipment was to one of its plants in the West African neighbour and is perhaps indicative of growing market share in that country.
  • Group sales declined by -1.5% Y-o-Y. The drop in revenue was the result of total and partial lockdowns and restrictions of major operations both internationally and domestically.
  • EBITDA increased marginally by +0.06%, from N217.944bn to N218. 071bn Y-o-Y. The marginal growth in pre-tax earnings was a modest resistance to the macroeconomic implications of the COVID-19 pandemic.
  • Total assets grew by +8.98% from N1.7trn recorded for FYE 2019 to N1.8trn recorded for H1 2020. With profit shuffling only slightly forward, the company's return on assets (ROA) took a slight knock. 
  • Earnings per share (eps) went up by +6.3% Y-o-Y. The rise is a boon to investors as it may suggest a good dividend payout by year-end despite the coronavirus pandemic. Nevertheless, the broad business outlook is muted.


Profit and Sales: Modest Numbers, Stuttering Growth

Dangote Cement recorded an increase in gross revenue by +1.95% year-on-year (Y-o-Y). The growth in the company's profit was not represented by an organic improvement in operations but a tweak in sales policy which was driven by higher realized prices, meaning a reduction in rebates and discounts. Group sales declined by -1.5%, resulting from the impact of COVID-19-induced lockdowns on business.

Quarter-on-Quarter (Q-o-Q) gross revenue slumped by -8.63% to N227.670bn recorded in Q2 2020 from N249.182bn recorded in the previous quarter (see chart 1 below).  

Chart 1: Dangote Cement Gross Revenue 2019 - 2020 (N'm)

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Source: Dangote Cement Financial Statement, Proshare Research


Profit before tax went up by +4.74% year-on-year (Y-on-Y). Group gross profit declined marginally by +0.05% Y-on-Y, with the Pan-African region recording an increase of +31.6% in EBITDA Y-on-Y, the highest contribution to the group and Nigeria recording a -3.1% decline in EBITDA Y-on-Y.

Q-o-Q PBT for the group fell by -15.06%, this was as a result of the difficulties caused by restrictive intercity movement between March and June 2020, disrupting the company's logistics for most of the half-year (see chart 2 below).

Chart 2: Dangote Cement Profit before Tax 2019 - 2020 (N'm)

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Source: Dangote Cement Financial Statement, Proshare Research 


Liquidity: Increasing tightness as Liabilities Climb

The company recorded 0.55 in current ratio H1 2020; this is a decline from 0.75 recorded in the corresponding period of the previous year. The current ratio of the company shows that current liability is higher than the current asset, preferably analysts would want to see a current ratio of at least 2, indicating corporate liquidity, as things stand at the moment, the company appears to suffer liquidity tightness (see chart 3 below).


Chart 3: Dangote Cement Current Ratio 2019 - 2020

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Source: Dangote Cement Financial Statement, Proshare Research

Dangote Cement's acid-test ratio in H1 2020 stood at 0.41 as against 0.53 posted in H1 2019, the low acid test ratio reconfirms the liquidity challenge of the limestone crushers operations. Fairly high inventories would reflect the disruption to activities of the company mainly in Q2 2020, an easing of global economic lockdowns and a gradual restoration of economic activities may reduce the companies piling inventories from Q3 and improve liquidity (see chart 4 below).

Chart 4: Dangote Cement Acid Test Ratio 2019 - 2020

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Source: Dangote Cement Financial Statement, Proshare Research


The company's liquidity ratio for H1 2020 was 14.80% as against 13.56% recorded in H1 2019. Dangote's liquidity numbers suggest that if a reversal is not achieved swiftly, the clinker producer would have to increase short-term borrowings, thereby, increasing its current liability and worsening its debt-to-equity ratio as a strategy of addressing the problem. Dangote Cement presently has Commercial Papers (CPs) worth a proposed N300bn to be issued in some series with series 1 already listed on the FMDQ worth N100bn  (see the Group's recent liquidity ratios chart 5 below).


Chart 5: Dangote Cement Liquidity Ratio 2019 - 2020 (%)

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Source: Dangote Cement Financial Statement, Proshare Research

Debt: The Shop and The Bull

One aspect of Dangote Cement's business that has made analysts squeamish is its leverage or debt-to-equity ratio. The group's leverage ratio stood at 64.30% in H1 2020 as against 24.85% recorded in the corresponding period of the previous year. In H1 2020, the financials showed a significant increase in Dangote cement's debt size. Debt continues to be a bull in the china shop as far as the cement giant’s financial performance for 2020 is concerned. But whether the bull will be tamed in the year remains to be seen. (see chart 6 below).


Chart 6: Dangote Cement Leverage Ratio 2019 - 2020 (%)

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Source: Dangote Cement Financial Statement, Proshare Research


Expansion -Pushing The Export Agenda

With the company exporting its first cargo of 27kt of clinker from Nigeria to Senegal in H1 2020, a larger quantity of clinker export is expected to take place in H2 2020. The move by the company is expected to foster larger foreign exchange earnings and improve the financial position of the company despite continuing macroeconomic challenges faced by the domestic Nigerian economy.

Illustration 1: Growth Strategy and The Export Agenda

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The Big Kahuna Going Forward

Dangote cement controls over 60% of Nigeria's cement market share but that dominance is being challenged by the likes of BUA Cement Plc, whose new Kalabaina plant has enabled the smaller competitor to improve economies of scale and take on its bigger rival in commodity pricing. The growth of BUA over the last three years has put pressure on Dangote's operating margins and prevented headroom for a product price increase, despite the supply chain disruptions and higher logistic expenses.

Going forward Dangote Cement's dominance of the domestic Nigerian cement business will remain unassailable for some time to come, but who says that the company's major competition is the likes of Lafarge or BUA, what would happen if disruptive technology creates opportunities for much cheaper building solutions using recycled waste?

The cement market is sturdy for now but with a slowdown in global economies and a particularly fragile federal government fiscal position, Dangote Cement may need to take on new strategic thinking ranging from the optimistic to the most bizarre. In a world with no assurances, business risks need to be prepared within a disaster recovery framework. The subject may not be palatable but even broccoli’s marvelous health benefits come with a horrible taste.


Dangote Cement: State of The Equity Play

H1 share price movement of Dangote Cement has been a bitter meal for investors as share price movement has trended with a bearish pennant. In other words, the group's share price has moved downwards with increasingly less volatility on the decline. The lack of choppiness in share price movement in Q2 is cold comfort for investors that bought at the top of the market in January 2020. The group's share price dropped from N142 in January 2020 to N141.80 at the beginning of August 2020 (see chart 7 below).

The cement makers share price appears to have bounced off a recent support price of N126 in June 2020, but whether the trend would be sustained will depend on the overall state of the economy and the measures the federal government takes in containing the spread of the coronavirus pandemic (COVID-19), if the government decides on a second total lockdown then the group's share price could tank again. A lot depends not on Dangote Cement's stars but on the  exigency of public policy.

Chart 7 Dangote's 2020 Equity Market Play

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Proshare Nigeria Pvt. Ltd.

Proshare Nigeria Pvt. Ltd.

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