Dangote Cement Plc (DCP) is a clear leader in the cement industry, with huge production capacity. Also, the company’s stock is the most capitalised at the equities market, accounting for over 20 per cent of the market worth. In terms of rewarding shareholders, DCP has not also disappointed as it has been declaring dividends for shareholders. For the 2013 for instance, the company paid a dividend of N7 per share, up from N3 paid the previous year.
Although the Chairman of DCP, AlhajiAlikoDangote had assured shareholders of higher returns going forward, the nine months results of the company indicate that the board and management need to work to be able to declare higher profit and consequently reward the shareholders with higher dividend at the end of 2014.
DCP posted an increase in revenue in 2014 but the company’s bottom-line declined due to higher cost of finance and income tax expenses. DCP posted a revenue of N310 billion in 2014, up from N289 billion in the corresponding period of 2013. Gross profit rose from N197 billion to N198 billion. Administrative expenses rose from N15.8 billion to N16.3 billion. However, financing cost rose by 40 per cent from N9.2 billion to N12.9 billion. Income tax soared by 208 per cent from N4.4 billion to N13.4 billion in 2014 following the expiry of the tax holiday the company hitherto enjoyed.
The high tax and financing charges impacted on the profit after tax (PAT) of DCP as the company closed the nine months with N140 billion, a reduction of 10 per cent compared to N156 billion in 2013.
In their analysis of the results, analysts at Dunn Loren Merrifield (DLM) an investment bank, said although results is in line with current industry trends “but disappointing given the expected increase in sales volume largely due to recent reduction in the price of 52.5 Grade cement (a strategy designed to increase its market share) and the implementation of the new cement grade by Standard Organisation of Nigeria, which has limited DCP’s competitors ability to deepen market share as a results of the embedded products restriction that come with the new law.”
Nigeria boosts revenue
The analysts said while the devaluation of the Ghanaian Cedi is making it unappealing to import cement into Ghana market, they had expected stronger contribution from other Africa subsidiaries following the commencement of full cement production in Sephaku.
“However, by our estimate, the Nigerian operations contributed about 96 per cent to the group’s revenue. Though, this is lower than 97 per cent in half year (H1) 2014. Management highlighted that Sephaku Cement has entered the market with a strategy of focusing on a geographic area containing around 65 per cent of the total South Africa cement market, which is away from the ports through which imports arrive from the far East. Given this and in addition to management’s strategies for other Africa subsidiaries, we expect a fairly stable moderate growth in revenue in medium to long term,” they said.
Profit affected by increase in cost of sales
The analysts said as key elements of fixed cost of production continue to rise, they are worried about the impact on the company’s profitability
“In nine months of 2014, DCP posted a massive growth of 20 per cent in cost of sales to N110.50billion from N92.07billion in the corresponding period of 2013. The double-digit growth in cost of sales is a reflection of increase in energy costs as the company sometimes power it plants with Low Pour Fuel Oil, (LPFO) which is more expensive than other energy sources as gas supply which is the cheaper energy sources for the company remains very weak during the period. The strong growth in cost of sales relative to revenues led to an increase in DCP’s cost of sales/revenue ratio and reduced its gross profit margin,” DLM analysts said.
They added that although gross profit rose marginally by 1.42 per cent from N2.8 billion to N199.7 billion from N196.91billion in the corresponding period of 2013. This development affected the gross profit margin which fell to 64.38 per cent from 68.14 per cent in 2013.
“In relation to sales, this indicates that the company was unable to convert a better part of it revenue to sales. Therefore, as the future of gas supply in Nigeria remains unclear, it is our belief that cost of sales will continue to pressure the company’s gross profit.
On annual basis, in the past five years for instance, DCP has maintained an average cost of sales to revenues ratio of 40.97 per cent and we see no reason why it should exceed 43 per cent in the medium term regardless of the fluctuation in gas supply. We therefore maintain that continuity in this trend will bode well for DCP’s profits and margins going forward,” they said.
Profitability pressured by financing costs and tax
The analysts noted that while PBT of DCP rose marginally by 1.53 per cent from N151.73 billion to N1354.1 billion, they had projected moderate growth in the company’s profit before tax as financial charges continue to be of a concern.
“As a result of the slow growth, we observed a slowdown to 49.66 per cent in PBT margin, which is relatively below 52.5 per cent recorded in the corresponding quarter of 2013. In the direction of debt, year to date, DCP’ gross debt has increase significantly as the company increases its borrowings to fund Pan Africa investments. Gross debt increased by 26.6 per cent to N229 billion, up from N181.1 billion in 2014. As a result, the DCP’s financial charges leaped by 41.16 per cent to N12.99 billion, thereby reducing pre-tax profit growth rate,” they said.
They noted that DCP’s profit after came slightly below expectations, falling by 10.02 per cent to |N140.48 billion, largely due to 8.81 per cent tax on profit before tax.
“With Obajana Lines 1&2 and Gboko now out of their five-year pioneer tax period, we expect pressure on the company’s margins and profit going forward. We expect DCP margins to be above 46 per cent in medium to long term due to its relatively new and efficient plant while other newly constructed plants and lines due to come on stream in Nigeria and other Africa countries may continue to enjoy some tax holiday,” they said.
Corporate governance issues
The analysts said although DCP has an audit committee as well as a remuneration committee, there is still corporate governance risk.
“This risk is carried on by the minority investors because governance might not always operate in their favour. The problem with such corporate governance is that it will scare away minority investors from heavily investing in DCP,” they said.
Increasing leverage structure
Total assets of the company increased by 9.94 per cent from N844 billion to N928.39 billion on the back of investment in non-current assets. Shareholders’ equity was N570.89 billion, 3.64 per cent above N570 billion as at the end of 2013.
“The marginal growth was largely due to an increase in the company’s current liabilities. Cash position remains relatively weak at N35.59 billion. However, gross indebtedness increased by 26.6 per cent to N229.32 billion from December 2013 to date.
This led to a debt-to-equity ratio of 40.17 per cent (compared to 32.93 per cent in December 2013). Although increasing but still at a comfortable level given that cement industry is highly capital intensive. Debt to asset ratio increased marginally to 24.7 per cent from 21.45 per cent,” they said.
According to them, this implies that a larger portion of the company’s assets is being financed through debt. Debt to EBIT ratio currently stands at 12.5x, which in our view fair as the company seems to be generating enough cash to pay its interest expenses. However, with cash position depleting significantly by 50 per cent and current liabilities rising too in the same direction, cash ratio remains relatively weak at 0.16x vs 0.43x in FY’13. This is alarming in our view. The weak cash position indicates the company’s inability to repay its current liabilities by relying on its cash position and nothing else. In addition, quick ratio decreased significantly to 0.48x from 0.74x in full year of 2013. This implies that the company has less than one naira of liquid assets available to cover each one naira of current liabilities.
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