Quick take: Higher OPEX, FX loss weigh on earnings

Dangote Cement reported a mild decline in Revenue (down 0.8% y/y to N679.8 billion) in 9M 2019. The weak topline performance coupled with an increase in Operating Expenses (+22% y/y to N137.5 billion) and Finance Cost (+32% y/y to N39.8 billion) led to a decline in Pre-tax Profit (down 20.1% y/y to N197.7 billion) in 9M 2019.

The annualised Revenue for 9M 2019 (N903.4 billion) missed our estimate by 3% (CSL FY 2019 forecast; N933.1 billion). Similarly, the annualised Pre-tax Profit (N263.6 billion) missed our FY 2019e (N295.0 billion) by 11%. Similarly, on a quarter on quarter basis, Revenue declined 6.8% q/q to N212.1 billion in Q3 while Pre-tax Profit fell 44.9% q/q to N42.2 billion.

The decline in Group Revenue was due to weak Revenue from both its Nigerian operations (-0.7% y/y to N467.9 billion) and Pan African operations (-0.5% y/y to N213.2 billion). We observed that Revenue from Nigerian operations fell significantly in Q3 (down 12% q/q) – this came as a surprise to us as we expected the impact of sales promotion which kicked off in Q2 to provide support for volume growth.

Given the stability in the price of cement in Q3, we believe the subdued demand was affected by heavy downpour particularly in the month of September.  On the other hand, Revenue from its Pan African operations improved in Q3 (up 5%q/q). We believe the growth in Pan African sales supported the mild growth in Group sales volumes (up 1% y/y to 17.9 million tonnes).

Cost of Sales (adjusted for depreciation) increased marginally, up 0.6% y/y and 3.9% q/q.  Despite the muted growth in Cost of Sales, a surge in Selling and Distribution Expenses (+30.9% y/y to N103.9 billion) pressured EBITDA (declined 10.1% y/y to N302.3 billion). Similarly, EBITDA margin declined 4.6ppts to 44.6% in 9M 2019 (vs 49.2% in 9M 2018 and 46.6% in H1 2019). The surge in Selling & Distribution expenses (adjusted for depreciation) was driven by the increase in Haulage costs (+26% y/y to N80.6 billion in 9M 2019) as well as Advertisement and promotion cost (+215% y/y to N7.9 billion).

We recall that Management attributed the increase in both cost items to their efforts at strengthening consumer loyalty and improving route to market. However, management kept a lid on Administrative Expenses, as it remained stable (+0.5% y/y). Overall, OPEX grew 22% y/y to N137.5 billion in 9M 2019.

EBIT margin was also pressured by the increase in OPEX as it moderated to 34.1% in 9M 2019 from 38.9% in 9M 2018.  Net Finance Cost grew 73.4% y/y t0 N33.8 billion in 9M 2019, owing largely to a surge in Finance Cost (up 32% y/y to N39.8bn) amidst a decline in Finance Income (down 30% y/y to N5.9 billion in 9M 2019). The rise in Finance Cost was due to a Foreign exchange loss of N11 billion – we await clarification from management on this.

Pre-tax Profit declined by 20.1% y/y to N197.7 billion in 9M 2019. Supported by the lower effective tax rate of 22% in 9M 2019 (vs 36% in 9M 2018), Profit after tax declined 2.5% y/y to N154.4 billion in 9M 2019.  Consequently, Earnings per share settled at N9.10/s in 9M 2019 compared to N9.25/s in 9M 2018.



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