Dangote cement grows PAT by 51.9% in H1 2021
Dangote cement Plc has released Half Year 2021 financials which showed remarkable double-digit increase of 44.8 percent year on year in Revenue to N690.5bn.
The largest cement manufacturer posted a 72.7 percent year on year growth in Profit Before Tax and 51.9 percent y/y growth in Profit After Tax to N281.3bn and N191.6bn respectively.
According to the report released by United Capital research, the performance was largely driven by higher sales volumes, as well as improved cost management during the period which drove margin expansion.
Other key highlights
Sustained demand drives surge in Revenue
During the H1-2021 period, DANGCEM group Revenue increased by 44.8% y/y to N690.5bn, supported by a 26.1% surge in volumes sold to 15.3mmt and higher Revenue-per-tonne (+14.5% y/y to N45,133.66) which was attributed to lower rebates and price increment during the period. The impressive growth was reflected in both the Nigerian and Pan-African market segments, as sales volumes were up by 33.2% and 15.5%, respectively. The substantial growth in H1-2021 reflects sustained strength in construction activities post-Covid pandemic in Nigeria and Sub-Saharan Africa which continues to spur cement demand across DANGCEM’s markets. This is reflected in the group-wide volume growth recorded across all business regions, except Senegal. Notably, DANGCEM resumed clinker exports from the Apapa and Onne terminals in Q2-2021 with volumes up 103.6% to 57.0Kt. Additionally, volume growth was supported by the new 3mmt Obajana line.
Energy costs remain a nuisance
DANGCEM saw a 36.4% surge increase in Cost of Sales during the half year. As expected, the pressure on Cost of Sales mostly emanated from Raw material (+46.7% y/y) and Fuel costs (+53.5% y/y). This was a consequence of Naira weakness, persistent price pressure on energy sources and production inputs. As revenue growth outpaced growth in Cost of Sales, Gross Profit grew by 51.0% y/y to N414.4bn as Gross Margin expanded by 2.4ppts to 60.0% in H1-2021. We note that DANGCEM’s Gross Margin came under more pressure from energy costs in Q2-2021 (58.6% compared with 61.5% in Q1-2021), which was attributed to global supply chain bottlenecks which impacted freight costs of imported energy (coal) and material (gypsum) inputs.
Controlled cost growth underpins margin expansion
Over H1-2021, OPEX grew by 14.1% y/y to N118.3bn owing to a 17.9% y/y increase in Admin expenses, and a 12.8% y/y rise in Selling and distribution costs. However, as Gross Profit growth printed ahead of OPEX growth, DANGCEM proved operationally efficient with OPEX/Sales ratio contracting from 21.7% to 17.1%, This supported a 5.1% expansion in group EBITDA margin to 50.8%, as EBITDA expanded 61.0% y/y to N351.1bn.
Rising debt burden, absence of tax credits suppresses net margin growth
In H1-2021, DANGCEM successfully raised a N50.0bn bond in 3 tranches with a maturity profile of 2024-2028, under the NGN300.0bn bond purchase programme. The new issuance, alongside an increase in bank loans, drove net interest bearing debt to N582.2bn (compared with N501.7bn by FY-2020). The increase in Net debt coupled with a N10.6bn FX loss in Q1-2021 led to a 32.1% spike in Net finance cost to N20.4bn in H1-2021. Also, absence of pioneer tax credits during the half year fed a 144.2% spike in Tax expense to N89.6bn, suppressing Net Margin expansion (27.8% vs 26.5% in H1-2020). Overall, PAT nestled at N191.6bn, a solid 51.9% y/y expansion.
Outlook: Demand, price increments to sustain double-digit growth
Going into H2-2021, we remain optimistic on DANGCEM and expect the company to sustain double-digit growth, albeit at a slower pace relative to H2-2020, given the relatively high base from the period. On a macro-scale, we are optimistic about economic recovery in Nigeria and Sub-Saharan Africa, as well as sustained cement demand, which has driven capacity expansion plans. Additionally, price increases actioned in the first half of the year will help sustain topline growth and margins, as costs remain pressured.
Furthermore, we see further room for price increments during H2-2021 as demand remains strong and inflationary pressures persist. However, risks to a more robust H2-2021 performance include disruptive rains in Q3-2021, an intensified third wave of Covid-19 in SSA and attendant lockdowns, persistent disruptions in global supply chains, higher freight prices, further naira devaluation and elevated inflationary pressures. However, we observe that DANGCEM has done particularly well in the face of rising expenses and this bolsters our optimistic outlook. Specifically, we project FY-2021 Revenue growth of 28.7% to N1,330.9bn (prev. N1,168.3bn) and expect EPS to grow by 31.9% y/y to N21.4/s in FY-2021.
HOLD recommendation with upgraded target price
We updated our forecasts for DANGCEM in light of the H1-2021 numbers which exceeded our expectations, as well as our optimistic prognosis for cement demand in H2-2021. Accordingly, we raise our target price on DANGCEM to N270.28 (previous: N253.70). This revision reflects our expectation of upbeat sales volumes, further price increases and sustained cost management, as well as favourable adjustments in computing the cost of equity. Our target price implies a HOLD rating and an upside potential of 11.9%.