Goddy Egene writes that while its production output dropped in Nigeria, Dangote Cement still performed remarkable in 2017 due to the contributions from its subsidiaries in other African countries
The audited results for the year ended December 31, 2017 released last week by Dangote Cement Plc showed that its decision to expand to other African countries have started to yield more fruits. The company, which is the most capitalised on the Nigerian Stock Exchange (NSE), has continued to invest beyond the shores of Nigeria in its bid to remain a leading cement producer on the continent.
In 2016 when foreign exchange (forex) was a challenge for many manufacturing companies, Dangote Cement Plc succeeded due to its subsidiaries in other countries.
The Chairman of Dangote Cement, Alhaji Aliko Dangote said last year that its Pan-African diversification programme has provided the essential foreign currency and streams of cash to operate the company despite the challenges that characterised 2016.
"Our Pan-African diversification has provided cash streams from countries such as Senegal, Cameroon and Zambia, which have provided us with essential foreign currency as foreign exchange controls made it difficult for us to obtain dollars for operations. Furthermore, we were able to borrow money in these countries' local currencies, thus reducing our exposure to foreign currency shortages in Nigeria. In addition, we began to generate foreign currency sales from exports of cement from Nigeria to Ghana," Dangote had said.
Again, the cement firm enjoyed another benefit of the expansion last year going by the financial results for 2017. While volume of sales declined in Nigeria, growth in other African countries grew and made the company to close 2017 with better performance.
The Full Financial Results
Dangote Cement reported revenue of N805.6 billion in 2017, up from N615.1 billion in 2016. A breakdown of the performance indicated that while sales from the three plants in Nigeria contributed N552.36 billion to the group's revenue, the balance of N258.44 billion was accounted for by plants in other African countries. Revenue attributable to Nigeria grew by 29.6 percent while that from Pan-African operations rose by 32.5percent.
Gross profit rose from N291.3 billion in 2016 to N454.3 billion in 2017. Operations expenses rose from N119.3 billion to N155.3 billion, while finance cost soared from N1.6 billion to N16 billion in 2017.
However, profit before tax rose by 60.1 per cent from N180.9 billion to N298.6 billion, while profit after tax grew by43 per cent to N204.2 billion, from N142.9 billion in 2016. The board has recommended a dividend of N10.50 per share, which translate to N178.9 billion as against a dividend of N8.70 kobo per share that was paid the previous year.
Though group sales volumes were lower by seven percent due to depressed Nigerian market, Pan-African sales volumes went up by 8.4 percent to 9.4Mt with strong volume increases in Senegal, Ethiopia and Cameroon and new capacities of 1.5Mta in Congo, 0.5Mta in Sierra Leone.
Company Explains Performance
Speaking on the results, Acting Group Chief Executive Officer, Dangote Cement Plc, Joseph Makoju, said: "Dangote Cement turned in a record year with revenues up 31.0 percent to N805.6 billion and EBITDA up by 50.9 percent to N388.1 billion. Although Nigerian volumes were lower in 2017, our Pan-African operations increased volumes by 8.4 per cent and now make up 42 per cent of the Group's total cement sales, demonstrating the robust diversification of our business.
"We expanded our footprint from eight countries to ten with the opening of new facilities in the Republic of Congo and Sierra Leone, while our operations in Cameroon, Senegal and Ethiopia achieved strong sales growth during the year. With total sales volumes of nearly 22 million tonnes, we are by far the leading manufacturer of cement in Sub-Saharan Africa."
Commenting on the results, analysts at FBN Quest said the dividend is in line with their forecast of N10.10. "Management has proposed a dividend of N10.35 per share, which is up 24 per cent and broadly in line with our and consensus dividend per share (DPS) forecasts of N10.10 and N10.70 respectively. The DPS imply a yield and pay-out ratio of 3.9 per cent and 90.4 per cent respectively," they said.
According to them, although unit volumes for Nigeria are still under some pressure, it appears that demand is starting to pick up slowly.
Analysts at Afrinvest West Africa attributed the lower sales volume in Nigeria to weak economic growth and feedback effect of price hikes, while the traction in Pan-African volume growth reflects stronger sales in Cameroon, Ethiopia, Senegal, Tanzania, Zambia as well as new volumes from recently commissioned operations in Congo and Sierra Leone in fourth quarter(Q4) of 2017.
"The Group, however, continues to face challenges in Ghana and South Africa. The impact of lower Group volume on revenue was muted due to a series of price actions taken in Nigeria (price per tonne up 54.1per cent ) as well as key Pan-African markets such as Ghana and South Africa. Management guided in the conference call held last week that sales are gradually strengthening in Nigeria after a slow January and expect a single digit volume growth in FY:2018 supported by an improving economy and anticipated cautious cement price increase. Furthermore, two export terminals are being constructed in Nigeria (Apapa and Onne) to export clinker and cement to regional markets. We also expect Pan-Africa sales to increase due to ramp up in capacity utilisation of newly commissioned plants (Congo and Sierra Leone) as well as reopening of production lines in Tanzania which was temporarily mothballed due to high energy cost," they said.
Efficient Fuel Mix in Nigeria Drives Margin
Group cost of sales ratio improved from 52.6 per cent in 2016 to 43.6 per cent, driven by increased utilisation of less expensive kiln fuel mix in Nigeria comprising mainly of Gas (60 per cent in 2017 vs. 43 per cent in 2016) and Coal (38 per cent in 2017 vs. 34.5 per cent in 2016) instead of the more expensive LPFO (1.5 per cent in 2017 vs. 22.5 per cent in 2016).
"This drove the recovery in Nigerian EBITDA margin in the period (up 8.5ppt to 65.3 per cent) from the relatively low base of 2016 when margin was pressured by gas supply constraint and increased LPFO usage. Pan-Africa EBITDA margin also improved marginally by 1.2points to 14.8 per cent due to return to profitability of South African operation while Cameroon, Ethiopia, Senegal and Zambia also broke-even at EBITDA level. Consequently, Group EBITDA margin printed at 48.2 per cent from 41.8 per cent," they said.
Afrinvest said Dangote Cement's tax treatment has come under increased focus recently, often overshadowing otherwise solid operating performance.
According to them, pioneer applications made to the Nigerian Investment Promotion (NIPC) Council for a tw-year tax-relief extension on Obajana Line 2 (2016 - 2017) and Ibese Lines 1 & 2 (2016 - 2017) as well as original three-year application for Obajana Line 4 and Ibese 3 & 4 (2015 - 2017) are yet to granted by the agency.
"Whilst management stated it is confident of getting necessary approvals, the group nonetheless prudently took a tax provision (N28.1billion in 2015, N3.8 billion in 2016 and N62.2billion in 2017) on the production lines on the three production lines it is seeking original 3-year tax relief for (Obajana Line 4 and Ibese 3 & 4). Consequently, 2015 and 2016 accounts were restated while effective tax rate rose to 29.5 per cent in 2017. The group, however, took tax credit associated with pioneer tax relief for the two-year extension on Ibese Lines 1 &2 and Obajana Line 2. Management, however, stated it is confident of getting approval for all the pending applications having complied with all requirements; implying the provisions taken will be reversed subsequent to getting approvals," they said.
Outlook and Valuation
Afrinvest forecast group sales volume to rise by 7.9 per cent from a low base on the back of recovering output in Nigeria and capacity ramp up in key Pan-Africa markets (Congo, Sierra Leone and Tanzania).
According to them, against flattish near term price outlook for Nigeria, they expect revenue to grow by a modest 11.8 per cent in 2018 and a five-year compound annual growth rate (CAGR) of 12.4 per cent to 2022.
"Earnings Before Interest, Taxes, Depreciation and Amortisation (EBITDA) outlook remains broadly positive due to increased usage of locally produced coal in Nigeria (coal import stopped in H1:2017 according to management) and investment in gas/coal fired plant in Tanzania set to on-stream in Q2:2018; hence, we forecast Group EBITDA to rise 12.7 per cent to N437.6 billion.
We are inclined to give management benefit on doubt on tax guidance in 2018 given advanced stage of fruitful negotiations with government. Thus, we estimate 2018 PAT at N300.7 billion, translating into a normalised PAT growth (adjusted for reversal of tax provisions) of 12.9 per cent. We value Dangote Cement using a blend of Discounted Cash Flow and Relative Valuation models; having revised estimates, we raise our 12-month target price from N264.00 to N269.90. Due to the limited upside potential, we maintain a "Hold" rating on the stock.