Dangote Cement: Analysts See Strong Upside, Expect Earnings Growth
A slew of equity market analysts are seeing upside in Dangote Cement Plc.’s share amidst sell pressures in the local bourse where the company remains a top market mover despite earnings slowdown.
In its recent earnings release for the first half, tough operating environment negatively impacted the cement company’s operating performance as profit declined while revenue inched up as prices went up across Africa markets.
Analysis of the result shows there was a strong increase in price of diesel while unstable foreign exchange resulted in loss in the first half of the year. Rising energy cost and higher tax payments eclipsed increased revenue.
However, analysts remain undisturbed with higher target price setting. Though, analysts’ expectation appeared different but there is consensus around growth expectations. Its share price closed at N245 over the last seven trading sessions over reduced volatility that follows the company share buy back.
Equity analysts at Cardinalstone Limited sets the company’s 12-month share target price at N349.26. CSL Stockbrokers Limited keeps the Nigerian leader of the cement oligarch’s target price at N338.48. Meanwhile, Meristem Securities was a bit conservative with its expectation as its equity analysts set Dangote Cement target price N333.38. PAC Capital’s target price came a much lower at N310.60.
In the first half of 2022, the cement company recorded an improved revenue. The growth in topline was driven by price increment rather than volume growth. This signal that the cement company experienced weak macroeconomic conditions and of course slowdown in government capital spending ahead of 2023 election.
Its financial statement showed that sales volume was down by 7.01% to 14.21Mta from 15.27Mta reported in the first half of 2021. The drop, according to Meristem Securities followed weak market condition in Nigeria. In the first half of the year, Dangote Cement’s sales volume in Nigerian slowdown 5.34% to 9.34Mta. Meristem Securities analysts attributed the decline to base effect from first half of 2021.
In spite of this, revenue from the Nigerian operations increased by 26.1% year on year to N622.98 billion in H1 2022, supported by a 33.2% year on year increase in price per tonne, which compensated for the 5.3% decline in volume. These analysts noted that high inflationary pressures and energy supply disruptions which led to low gas generation and severe power outage impacted production in the period.
Similarly, sales volume from its Pan-African operations came in lower at 4.86Mta from 5.46Mta in the comparable period in 2021 due mainly to extended plant maintenance and repair activities in Congo and Senegal, investment firms stated in their respective report.
While volume declined, Dangote Cement reported a double-digit revenue growth of 17.0% y/y to N808.0 billion in H1 2022 from N690.5 billion in H1 2021. On quarterly basis, growth between Q2 and Q1 2022 moderated, as revenue was down by 4.4% q/q to N394.9 billion from N413.2 billion in Q1 2022.
Just as the global economic space was disturbed by geo-political tensions, worsened supply chain challenges, and heightened inflation in Q1 2022, Dangote Cement experienced gas supply challenges and group sales volume was down 7.0% year on year to 14.2m MT, CSL Stockbrokers said in a report. .
Analysts explained that these challenges were amplified on the back of an already low gas generation in its Nigerian operations. In the Pan African markets, the cement company’s revenue declined by 6.8% to N185.1 billion in H1 2022 owing to 11% decline in volume which outweighed 4.8% growth in price per tonne.
Dangote cement export from Nigeria surged 21.20% during the period. For financial year 2022, Meristem Securities analysts said they maintain expectation of growth in the firm’s topline, hinged on the completion of the 3Mta Okpella plant and the commencement of the National Consumer Promotion which is expected to drive demand higher.
On the costs side, the cement company gave up some basis points from its previous margin amidst uncertainties across its Africa markets. Its financial statement showed that cost-to-sales moderated to 39.91% from 39.99% in the comparable period last year. However, production cost surged 16.79% year on year to N322.46 billion.
Double-digit growth were seen in its production costs components as manufacturing cost increased more than 30%, energy costs jumped more than 40% year on year. Meristem analysts also see pressures emanated from 65.25% increase in haulage expense due to the increase in Automotive Gas Oil (AGO), alongside 62.82% uptick in general administrative expenses.
About 55% increase in selling and distribution expense added to the pressured. The cumulative effect resulted to a surge in operating expense growth to N169.41 billion in H1:2022. Amidst higher borrowings, the cement company’s finance costs worsened while the impacts of unstable foreign exchange bear upon its income.
Dangote Cement finance costs rose at about 148% to N75.23 billion while earnings before interest tax depreciation and amortisation margin dropped to 39.37% from 43.76% in H1:2021. At the end of the first half of 2022, Dangote Cement after-tax profit declined by 10.19% below the comparable period to N172.10 billion.
This happened to be the first time the cement company profit after tax drop in in five years. The decline pressured net margin downwards to 21.30% from 27.75% in the comparable period in 2021.
“We maintain a positive outlook for the firm in 2022 as it ramps up the usage of its alternative fuel sources to provide some respite to some of its cost lines. However, the continuous increase in effective tax and finance cost remains a risk to this outlook”, Meristem Securities stated.
The cement company tapped into the domestic debt market in pursuant of its export strategy and expansion of its operational capacity.
Specifically, during the period, the company issued a series 2 bond of N116.00 billion, increasing its total debt stock to N634.41 billion versus N577.95 billion in H1:2021. The fresh debt capital market visits lifted the financial leverage and debt to equity to 2.88x and 0.82x respectively from 2.43x and 0.59x in H1:2021.
“We note a decline in interest coverage to 4.23x from 9.96x in H1:2021. We opine that the firm is still in a good position to meet its debts obligation”, Meristem said in the equity report.
“In coming quarters, we do not expect significant increase in cement production volume in Pan-African operations as the global supply chain disruption still remains a major challenge.
“Although, the energy supply challenges has been resolved in Nigeria, the current raining season may result in slow cement demand.
“Nevertheless, we assume continuous improvement in revenue in coming quarters as we expect the company to benefit from the higher cement price in Nigeria”, PAC Capital said.
#Dangote Cement: Analysts See Strong Upside, Expect Earnings Growth#