By CardinalStone Research,
Dangote Cement Plc (DANGCEM) Q2’18 results – revenue climbed by 17.5% YoY to N240.3 billion during the period. Conversely, bottom line declined by 23.8% YoY to settle at N41.0 billion. Despite the impressive growth recorded in top line, as well as the cost savings observed during the period, negative surprise relating to FX translation losses amounting to N15.4 billion dragged overall group’s earnings.
• DANGCEM posted another quarter of impressive topline performance. Relative to Q2’17, the company grew its topline by 17.5% YoY to N240.3 billion. Total revenue benefitted from a boost in volumes growth (+12.5% YoY) to 6.2Mt, accompanied by favourable pricing. Going by provided breakdown, Nigerian volumes were up 13.9% YoY to 7.8Mt, while volumes were down in the Pan-African segment by 3.9% to 4.57Mt (due to the production shut down in Tanzania). Notwithstanding, overall revenue from both segments improved, with sales growth in the Nigerian segment improving considerably by 22.4% YoY to N170.2 billion in Q2’18. Similarly, the Pan African segment grew its revenue by 6.7% YoY in Q2’18. However, we underscore that revenue declined on a quarterly basis, albeit marginally, by 0.7% QoQ, largely attributable to seasonality effect.
• In line with the impressive top line growth, improved production efficiency supported gross margins, as cost-of-sales grew at a slower pace (+11.7% YoY). Consequently, gross margin expanded 2.2ppts YoY to settle at 58.3%, although this was slightly lower (-1.5 ppts) on a QoQ basis.
• Further down the line, the company realized foreign exchange losses amounting to N15.4 billion during the period. According to management, the Dollar strengthened against the CFA during the quarter, which increased effective borrowing costs for some Pan-African countries in the period. On the flipside, finance costs came in lower (-37.0% YoY) to print at N8.1 billion. Nevertheless, net finance costs stood at N19.6 billion (+886.7% YoY) on the back of the significant FX losses in the period.
• Overall, net finance costs booked during the period dampened the impact of the otherwise impressive top line on profitability in Q2’18. This, in addition to a much higher effective tax rate of 46.8% (Q2’17 – 31.2%; Q1’18 – 33.5%), saw after-tax earnings decline by 23.8% YoY to settle at N41.0 billion.
Looking at DANGCEM’s results holistically, we are optimistic about the company’s ability to further drive top line growth. We are convinced that increased demand by the private sector, as well as public-private partnerships (PPP) should continue to spur demand in the Nigerian segment. Similarly, we expect resumption of operations in Tanzania to boost performance in the Pan-African segment. Also, we believe that input costs will remain modest going forward, as the more expensive LPFO (2.53x the price of gas) has been totally eradicated from use in its Obajana and Ibese plants. Thus, we see scope for further expansion for operating margin. However, we are worried about the potential impact of further FX losses on overall bottom line, as this poses a downside risk to our expectations. Based on our last review, our price target for DANGCEM is N291.69