Q3 2022: Amid operational headwinds, Dangote Cement grows revenue by 15.2%

By Philemon Adedeji

Multinational Cement manufacturing company, Dangote Cement, in its unaudited financial statement ended September 30th, 2022, submitted to Nigerian Exchange Limited (NGX), the group revenue reported for the period moved stronger amid operational headwinds.

“Dangote Cement remains resolute in transforming Africa, while creating sustainable value for their stakeholders.”

Specifically, the analysis of the results revealed that the group revenue reported grew marginally to a decent 15.2 per cent year-on-year (Y-o-Y), to N1.177 trillion in nine months of 2022 from N1.022 trillion in nine months of 2021, largely driven by better price realisation to offset rising cost.

The cement manufacturing company declined in its Profit After Tax (PAT) by 23.41 per cent year- on- year to N213.1 billion in nine months of 2022 from N278.25 billion reported in third quarter 2021.

Foreign exchange losses cements earnings decline

Further down the P&L, the group recorded Net finance cost of N44.49 billion, up 220.2 per cent Year-on-Year in third quarter 2022. The company incurred a significant N31.73 billion foreign exchange loss due in part to the FX crisis impacting imported input components and well as depreciation in some Pan-African currencies that is, CFA and Ghanaian Cedi, severely eroding the group’s bottom line.

Consequently, Profits Before Tax declined by 42.8 per cent Year-on-Year to N71.010 billion in third quarter of 2022 from N124.233 in third quarter of 2021. Despite 20.2 per cent decline in tax expense in third quarter 2022, Net Income fell by 52.7 per cent year -on-year (Y-o-Y).

Earnings Per Share (EPS), recorded for the period under review declined by 23.5 per cent to N12.41 in nine months of 2022 from N16.23 in nine months of 2021, partly owing to N72.4B in unrealised foreign exchange losses from the depreciation in Pan-African countries

For the third quarter of 2022, the management of Dangote Cement has recorded a decline in the overall volume of sales of cement to 6.2 per cent to 20.8 metric tones in nine months of 2022

The interplay between revenue and Cost of sales caused gross profit to gained 12.1 per cent to 693.435 billion in third quarter of 2022 from 618.798 billion in third quarter of 2021.

As regarding, Operating Expenses, Dangote Cement reported stood at N262.917 billion in nine months of 2022 from N185.688 billion in nine months of 2021, representing an increase of 41.6 per cent.

The volume elevated by the high base of nine months 2022 was due to inflation and energy supply disruptions.

Pan-African volume down owning to extended plant maintenance in Senegal and Congo and volatility in cement or clinker landing cost in Cameroon, Ghana, and Sierra-leone.

The Gross margin shrank by 533 basis points to 56.3 per cent in third quarter 2022, a seven-quarter low, owing to rapid Cost of sales growth (+26.8 per cent y/y). Growth in Cost of Sales was driven mainly by the surge in the cost of Fuel & Power consumed (+59.4 per cent y/y), which reflects the increased price of Automotive Gas Oil (AGO).

In addition, Material Consumed (+19.1 per cent y/y) and Other Production expenses (+49.9 per cent y/y) contributed to pressure Cost of Sales as a result of FX rate deterioration inflating some imported input components. Gross Profits themselves managed to grow by 1.7 per cent year-on-year (Y-o-Y).

Earnings Before Income Tax Depreciation Ammortisation (EBITDA) declined by 12.6 per cent year -on-year Y-o-Y in third quarter Q3 of 2022, driven by a 39.3 per cent year-on-year Y-o-Y rise in Operating expenses. As is the case with production costs, the rise in AGO prices was the primary driver of elevated Haulage expenses (+61.2 per cent y/y), making up over 82 per cent of Selling and Distribution Costs.

Management also highlighted substantial freight costs in Cameroon, Ghana, and Sierra Leone, causing volatility in the landing cost of cement and clinker.

In addition, there was an unusual rise in Advertisement and Promotions, by 486.9 per cent year-on-year (Y-o-Y), owing to the 3rd season of the company’s National Consumer Promotion “Bag of Goodies 3” in efforts to drive consumer engagement.

Consequently, the EBITDA margin shrank 1,056 basis points to 38.6 per cent, the lowest level since Q319.

Nonetheless, in management’s efforts to combat the menace of ever-rising energy costs,  the company renewed its efforts to ramp up the usage of alternative fuels, co-processing 101,553 tonnes of waste representing a 77 per cent increase over 9M 2021.

Elsewhere, the company is also ramping up investment in Compressed Natural Gas (CNG) to offset AGO usage, having commissioned a power plant at its Okpella plant.

Reaction

The Vice President of Highcap Securities Limited, David Andori said, this is not an encouraging result because it is below expectation.

Operating expenses seriously dented the profitability of the business. The full year result that investors are expecting will show whether there was subsequent cost recovery or not.

Dangote cement outlook

“We remain very optimistic about the future of Dangote Cement. Our Board is considering all strategic and financial options for the Company. We strive to improve in all areas of our organisation and I thank all our staff for their commitment and effort toward achieving the vision of our Board and Executive Team.

“Our strategy remains steadfast focused on organic growth in Nigeria and Pan Africa, while ensuring that Africa’s regional integration becomes a reality. We will continue to contribute to improving regional trade within Africa by building plants across West and Central Africa, therefore eliminating the need for the importation of cement in addition, we aim to deliver superior profitability and value to our shareholders.

“Lastly, we remain focused on demonstrating our clear commitment to transparency around environmental impacts and strategies for action while taking coordinated steps on climate issues.

“I would like to thank our shareholders, host governments, communities, staff and stakeholders at large, for the support we have received over this transformative but fulfilling year We are grateful for your continuing faith in our Company and look forward to an exoting and productive 2022.”

According to Cordros Research Analyst, Dangote Cement’s revenue performance in 9M 22 was in line with our expectations (-0.04 per cent variance). We are encouraged that the group was able to take advantage of higher prices despite weak volumes across its Nigerian and Pan-African markets. There appear to be positive responses to the 3rd season of its National Consumer Promotion ‘Bag of Goodies 3.’

“On the flip side, we are concerned about the extended outage in the group’s Congolese and Senegalese plants as repair and maintenance activities continue.  In addition, we remain concerned about the rising operating expense profile. While management plans to intensify its efforts to ramp up the usage of alternative fuels and source materials locally, energy costs are likely to remain elevated, at least in the short term.

“Overall, we maintain our BUY recommendation on the stock. On our estimates, the stock is trading on 2022F P/E and EV/EBITDA multiples of 8.8x and 5.1x, discounts to emerging market peer multiples of 15.7x and 8.6x respectively.

“Notably, Dangote Cement, is a Africa’s leading cement producer with nearly 51.6Mta capacity across Africa.

“A fully integrated quarry-to-customer producer, it has a production capacity of 35.25Mta in its home market, Nigeria.

“Obajana plant in Kogi state, Nigeria, is the largest in Africa with 16.25Mta of capacity across five lines while the Ibese plant in Ogun State has four cement lines with a combined installed capacity of 12Mta.”

Conclusion

The Chief Executive Officer (CEO), Dangote Cement, Michel Puchercos, On his presenting the third quarter results to the Nigerian Stock Exchange, commented that, “To mitigate the impact of the significant increase in energy and AGO costs, we are strengthening our efforts to ramp up the usage of alternative fuels.

“So far this year, we have co-processed 101,553 tonnes of waste representing a 77 per cent increase over 9M 2021.  We are on track to commission our alternative fuel feed system at Obajana lines I and V, and Ibese line II in November. In addition, we are ramping up our investment in compressed natural gas, to reduce our AGO usage.

“Consequently, he explained that the company recorded an increase in revenue of N1,177.3 billion, up 15.2 per cent compared to last year, and Group EBITDA of N515.9 billion, up 0.2 per cent with an EBITDA margin of 43.8 per cent.”

He recalled that Dangote Cement is Africa’s leading cement producer with nearly 51.6Mta capacity across Africa. A fully integrated quarry-to-customer producer, it has a production capacity of 35.25Mta in its home market, Nigeria.

The statement described the Obajana plant in Kogi State, Nigeria, is the largest in Africa with 16.25Mta of capacity across five lines while the Ibese plant in Ogun State has four cement lines with a combined installed capacity of 12Mta.

The Gboko plant in Benue state has 4Mta while the Okpella plant in Edo state has 3Mta. Through recent investments, Dangote Cement has eliminated Nigeria’s dependence on imported cement and has transformed the nation into an exporter of cement serving neighbouring countries, the statement said.