Dangote Cement retains BUY status despite weak revenue

Based on the recently released FY 2019 results published by Dangote Cement, revenue declined albeit marginally by 1.1% y/y to N891.7 billion. The weak topline performance coupled with an increase in Operating Expenses (+17% y/y to N184.6 billion) and Finance Cost (+16% y/y to N57.7 billion) led to a decline in Pre-tax Profit (down 16.7% y/y to N250.5 billion) in FY 2019.

The reported Revenue for FY 2019 (N891.7 billion) missed our estimate by 3% (CSL FY 2019 forecast; N922.3 billion).

Similarly, the Pre-tax Profit of N250.5 billion underperformed our FY 2019e of N276.9 billion. Although, Revenue performance was unimpressive in Q4 (down 0.1% q/q), the strong growth of 23.6% in Pre-tax Profit during the quarter was driven by lower cost of sales (down 8.5% q/q) as well as a reduction in Net Finance Cost (down 13.5% q/q).

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The decline in Group Revenue (down 1.1% y/y) was due to weak Revenue from its Nigerian operations (-1.3% y/y to N610.2bn) amidst the subdued performance from Pan African operations (down 0.2% y/y to N282.7bn).

We, however, note that the sales promotional activities embarked by the firm (which kicked off in Q2 2019) continued to provide support for volume growth, as Revenue from Nigerian operations grew albeit marginally in Q4 (up 2% q/q).

Notwithstanding, we think the uninspiring performance in the Nigerian Operations during 2019 reflects the weak growth in the Cement sub-sector, which grew slower by 3.1% in 2019 compared to 4.5% in 2018 based on the latest GDP numbers released by National Bureau of Statistics.

On the other hand, Revenue from its Pan African operations fell in Q4 (down 5% q/q). Overall, Group sales volumes was flat y/y, coming in at 23.5 million tonnes in FY 2019.

Despite the moderation in Cost of Sales (adjusted for depreciation), which declined by 1.3% y/y in FY 2019, EBITDA was pressured as it declined 9.1% y/y to N395.4 billion owing largely to the rise in Selling and Distribution Expenses (+22.8% y/y to N136.8 billion).

Accordingly, EBITDA margin declined 3.9ppts to 44.3% in FY 2019 (vs 48.3% in FY 2018). The increase in Selling & Distribution expenses (adjusted for depreciation) was driven by the increase in Haulage costs (+22% y/y to N107.2 billion) as well as Advertisement and promotion cost (+115% y/y to N8.6 billion).

Based on our last communication, the management noted that the increase in both cost items was due to their efforts in strengthening consumer loyalty and improving route to market.

Meanwhile, management kept a lid on Administrative Expenses, as it grew marginally (+2.9% y/y). The increase in OPEX (up 17% y/y) further drove the rise in OPEX/sales ratio to 0.21x in 2019 from 0.18x in 2018, indicating more was spent in generating N1 of Revenue.

Net Finance Cost also grew 30.2% y/y t0 N50.1 billion in FY 2019, owing to the increase in Finance Cost (up 16% y/y to N57.7 billion) amidst the decline in Finance Income (down 33% y/y to N7.6 billion). We highlight that the rise in Finance Cost was due to a Foreign exchange loss of N13.5 billion arising from its Pan African Operations.

Pre-tax Profit declined by 16.7% y/y to N250.5 billion in FY 2019. Profit after tax, however, declined sharply, down 48.5% y/y to N201.2 billion in FY 2019 vs N390.9bn in FY 2018- the steep decline was due to a tax charge of N49.9 billion in FY 2019 compared to the tax credit of N89.5 billion in FY 2019.  Consequently, Earnings per share settled at N11.79/s in FY 2019 compared to N22.83/s in FY 2018.

The firm declared a final dividend of N16.0/s, translating to a dividend yield of 9.4% based on today’s closing price of N170.0/s.

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