Equity Research: Enjoying Economies of Scale Thursday, June 25, 2015 Table 1: HOLD Current Price N174.15 Fair Value N183.58 The turnover in FY 2014 increased marginally by 1.41% to N391.64bn. 1.0 FY 2014 Performance Analysis: The Full Year result of Dangote Cement for the period ended December 31, 2014 shows that its Turnover (T/O) increased marginally by 1.41% to N391.64bn in FY 2014, compared with N386.18bn recorded in the corresponding period of 2013. This was as a result of the interruptions in the company s production processes due to gas shortages and the weak demand during the year. The cost of sales increased by 9.66% to N143.06bn from N130.47bbn recorded in FY 2013, mainly driven by the increase in fuel and power consumed at its plants. The higher proportionate increase in the cost of sales compared with the increase in the T/O led to a decrease in the gross profit by 2.79% to N248.58bn in 2014. The company s operating expenses as a percentage of turnover increased marginally from 15.94% in FY 2013 to 16.62% in FY 2014. The operating income for FY 2014 decreased by 4.48% to N187.10bn, compared to N195.88bn recorded for the corresponding period of 2013, while the finance charges increased from N13.72bn to N32.98bn, representing an increase of 140.41% from the previous year. The increase in the finance charges was due to the exchange rate loss The finance charges increased from N13.72bn to N32.98bn. of N14.55bn in FY 2014. The company s 2014 Profit Before Tax (PBT) stood at N184.69bn down from N190.76bn in 2013. The tax provision increased to N25.19bn from a tax credit of N10.44bn in FY 2013. This led to a Profit After Tax of N159.50bn in 2014, down by 20.72% from N201.20bn recorded in 2013. Table 2: FY Result Highlights (N'bn) FY 2014 FY 2013 Change (%) Turnover 391.64 386.18 1.41% GP 248.58 255.71 (2.79%) EBIT 187.10 195.88 (4.48%) PBT 184.69 190.76 (3.18%) PAT 159.50 201.20 (20.72%)
N'bn Equity Research Report Table 3: Quarterly Result Highlights (N'bn) Q4 2014 Q3 2014 Q2 2014 Q1 2014 Q4 2013 Turnover 81.43 107.86 98.78 103.57 97.19 PBT 30.64 39.89 61.15 53.01 39.04 PAT 19.03 37.91 54.95 47.62 45.07 The company s profit margins decreased in FY 2014, compared with FY 2013. The company s profit margins decreased in 2014, compared with 2013. The gross profit margin decreased to 63.47% in FY 2014 compared with 66.21% in FY 2013. The PBT margin decreased to 47.16% in 2014 from 49.40% as at 2013. PAT margin currently stands at 40.73%, down from 52.10% in the corresponding period of 2013. Table 4: Profitability Margins FY 2014 FY 2013 GP* Margin 63.47% 66.21% EBIT Margin 47.77% 50.72% PBT Margin 47.16% 49.40% PAT Margin 40.73% 52.10% *GP Gross Profit 120.00 Q4 Revenue Trend 100.00 80.00 60.00 40.00 20.00 0.00 Q4 2011 Q4 2012 Q4 2013 Q4 2014 Revenue 67.57 73.96 97.19 81.42 2
The total assets were financed by a mix of equities and liabilities in the ratio of 60.14% and 39.86% respectively. A cursory look at the balance sheet position as at FY 2014 compared with the position as at FY 2013 shows that the company is undergoing capacity expansion to grow market share and to lower cost per unit. The total fixed assets increased by 28.61% to N747.79bn in 2014 from N581.47bn in FY 2013. The stock increased by 54.29% to N42.69bn in 2014 from N27.67bn in FY 2013. The cash and bank balances recorded a decrease by 70.79% from N70.50bn in FY 2013, to N20.59bn in 2014. The trade debtors decreased in 2014 by 41.13% to N5.53bn from N9.39bn in the FY 2013, while trade creditors increased by 47.38% to N34.54bn from N23.43bn as at FY 2013. Working capital stood at a negative N95.84bn from a negative N15.46bn in FY 2013, while net assets for the period decreased by 7.60% to stand at N591.89bn from N550.09bn in the FY 2013. The total assets of the company which stood at N984.72bn as at FY 2014 were financed by a mix of equities and liabilities in the ratio of 60.14% and 39.86% respectively. Our analysis of the liabilities shows that the short-term liabilities stood at N232.95bn, accounting for 59.30% of the total liabilities, while the long-term liabilities which constituted mainly of long term debts and deferred taxation stood at N159.89bn, accounting for 40.70% of the total liabilities. The debt in the long term liabilities stood at N131.94bn. The foreign portion in the total debt is estimated at N66.14bn, made up of a N36.51bn Rand loan and a N29.63bn USD loan. Liabilities 39.86% Financing Mix Equities 60.14% 300.00 250.00 200.00 150.00 100.00 Dangote Cement VS NSE Rebased (Jun'14-Jun'15) Dangote Cement NSE ASI Rebased 3
1.1 Q1 2015 Performance Analysis: Equity Research Report As at Q1 2015, turnover increased by 10.78% to N114.74bn, compared with N103.57bn recorded in the corresponding period of 2014. The administrative, selling and distribution expenses increased by 20.56% to N17.60bn in Q1 2015. The company also recorded a significant increase of 863.19% in its net finance income of N11.73bn from a net finance cost of N1.54bn in 2014. The Profit Before Tax (PBT) rose to N70.17bn, an increase of 32.36% from N53.01bn recorded in the corresponding period of 2014. The tax provision decreased by 71.29% to N1.55bn from N5.39bn, leading to a Profit After Tax (PAT) of N68.62bn in Q1 2015 from N47.62bn in the corresponding period of 2014, representing an increase of 44.10%. This increase in profit was as a result of Dangote Cement s strategic decision to increase the ex-factory price of its 42.4R grade cement 50kg bags to N1,645 in December 2014 to combat rising input costs. Given the run rate, the company would meet and surpass its previous year s performance. As at Q1 2015, the PBT Margin increased over the Q1 2014, and the Financial Year ended December (FY), 2014 figure. The PBT margin increased to 61.16% in Q1 2015 from 51.19% as at Q1 2014, and from 47.16% as at the end of FY 2014. Also, the PAT margin currently stands at 59.81%, up from 45.98% in the corresponding period of 2014, and also up from 40.73% as at FY 2014. The result also indicates that the percentage of T/O, PBT, and PAT in the Q1 2015 to the Audited T/O, PBT and PAT for the period ended December 2014 are: 29.30%, 37.99% and 43.02%, respectively. Given the run rate, the company would meet and surpass its previous year s performance. We also expect the cement industry growth rate to return to its historical growth rate given the success of the general election. Table 5: Financial Performance (N bn) Q1 2015 Q1 2014 Change T/O 114.74 103.57 10.78% EBIT 58.44 54.55 7.13% PBT 70.17 53.01 32.35% PAT 68.62 47.62 44.10% 4
Table 6: Profitability Margins (%) Q1 2015 Q1 2014 Q1 2013 Q1 2012 GP* Margin 65.14% 65.30% 69.20% 58.61% EBIT Margin 50.63% 52.67% 58.08% 45.58% PBT Margin 61.16% 51.19% 56.25% 43.46% PAT Margin 59.81% 45.98% 56.31% 43.48% 140.00 Q1 Revenue Trend 120.00 100.00 80.00 60.00 40.00 20.00 0.00 Q1 2012 Q1 2013 Q1 2014 Q1 2015 Revenue 68.40 95.43 103.57 114.74 2.0 Drivers of Performance: The company s performance was affected by the following factors: Positive Factors: The devaluation in the foreign exchange market adversely impacted the company s earnings. The improvement in its corporate governance structure. Low cost of production achieved by economies of scale. The significant increase in production capacity. Negative Factors: The devaluation in the foreign exchange market which affected operating and finance costs. The fall in disposable income and the purchasing power in the economy. The constraints on gas supply shortages to its plants. Adverse weather conditions that caused suspension or delay of civil and engineering works in the country. 5
2.1 Strategic Focus: Switching energy sources (LPFO to coal) to lower costs to achieve higher margins. Exporting cement to Niger, Ghana and Cameroon. The company enjoys economies of scale. Improve efficiencies in the new operations in Senegal, South Africa and other African countries. Completion of new production lines in Nigeria. Expansion into Sierra Leone, Tanzania, Congo, Liberia and Cote D ívoire. The company looks to mitigate some of the impact of the high cost of production by reducing its costs, through the substitution of Low Pour Fuel Oil (LPFO) for coal. This was implemented by making adjustments to the company s equipment at its Gboko plant. The company s cost of production at Gboko is high as a result of the high cost of fuel Low Pour Fuel Oil (LPFO), compared with Obajana and Ibese which primarily operate on gas. Also, all the other facilities in Nigeria are being converted to run entirely on coal should the primary fuel of gas fail entirely or become more expensive than coal. Dangote cement is substituting LPFO for coal. The annual production of the group s cement subsidiary across Africa is now 30 million metric tonnes. Dangote Cement began 2014 with about 20 million tonnes of production and according to the Chairman; the group s cement production had surpassed Nigeria s average total consumption of 20 million metric tonnes. The annual production of the group s cement subsidiary across Africa is now 30 million metric tonnes, with the commencement of cement production in some African countries such as Senegal, Cameroon and South Africa. By 2018, the company plans to build at least 44 million tonnes of capacity and also operate in Sierra Leone, Tanzania, Kenya, Congo, Liberia and Cote D ívoire. The company intends to take advantage of being able to compete within trading blocks that enable it to export cement from one country and import it into its own facilities elsewhere. It believes such an export-to-import strategy makes great sense in West Africa, where many countries do not have limestone. 6
The company s operational advantage in Africa is the ability to build modern, energyefficient factories that will provide strong competition for many of Africa s ageing cement plants, producing higher quality, stronger and quicker setting cement at lower cost. The company also intends to support these facilities with strong logistical capabilities and the ability to procure equipment and supplies in bulk across the Dangote Cement Group, thereby reducing cost. Dangote Cement exports cement to Niger, Ghana and Cameroon which has boosted its revenue streams substantially. The company operates efficiently, both in operations and logistics. For example, the company converted most of its truck fleet to operate on Compressed Natural Gas and has an efficient tracking system that enables it to monitor the trucks. It has also implemented SAP software across the other companies in the Group thereby achieving cost advantage. 3.0 Business: Dangote has a total 29.30 mmtpa production capacity in Nigeria. Dangote Cement is a fully integrated cement company and has projects and operations in Nigeria and 14 other African countries Dangote Cement was established to operate plants for the operation, manufacture, control, research and distribution of cement. Its main production activities are undertaken at Obajana in Kogi State; Gboko in Benue State; and Ibese in Ogun State. Dangote Cement is a fully integrated cement company and has projects and operations in Nigeria and 14 other African countries. Its current total production capacity in Nigeria from its three existing cement plants is 29.30MMTPA. The Obajana Cement Plant (OCP) located in Kogi State is reputed to be one of the single largest cement plants in the world and the largest in Sub-Sahara Africa. A fourth line which has been opened added 3.0MMTPA to the existing capacity, bringing the total capacity of Obajana to 13.25MMTPA. Cameroon: The 1.5mmtpa clinker import and grinding facility in the port of Douala is expected to benefit from a recent ban on importation of bulk cement. A jetty for offloading clinker directly into the plant will be built later this year. Although Cameroon has little limestone for cement production, it has ample supplies of the pozzolana additives which can be grinded with clinker to make cement. 7
Senegal: The 1.5mmtpa plant in Pout began cement production in December 2014 to serve local and export markets such as Mali, as well as Sierra Leone and Liberia, where Dangote Cement plans to open bulk cement import and bagging facilities. With good limestone reserves of 300 million tonnes, Senegal is a long-term strategic resource, given the general lack of limestone along the coast of West Africa. The plant is near Pout, 29km from Dakar, and will benefit from tax exemptions for seven years after opening. South Africa: Sephaku Cement Delmas plant of 1.5mmtpa capacity is situated in Mpumalanga, around 60km east of Johannesburg. A grinding plant only, it grinds clinker supplied by Aganang with fly ash produced at Sephaku's fly ash classification plant, located at Eskom's Kendal Power Station approximately 35km to the east of Delmas. The plant can produce both bagged and bulk cement at all grades for the key inland market around Johannesburg. The company also have operations in Ghana, Cote d Ívoire, Republic of Congo, Liberia, Sierra Leone, Zambia, Ethiopia, Kenya and Tanzania. 8
Table 7: Directors Shareholding as at March 19, 2015 Director Position Holdings Alhaji Aliko Dangote GCON Chairman 27,642,637 Onne van der Weijde Chief Executive Officer Nil Olakunle Marcus Alake Non Ex-Director 3,906,702 Abdu Dantata Non Ex-Director 2,500,000 Emmanuel Ikazoboh Independent Non Ex-Director 40,000 Olusegun Olusanya Non Ex-Director 16,313 Joseph O Makoju OFR GCSO Non Ex-Director 11,000 Devakumar Edmin Non Ex-Director Nil Sani Dangote Non Ex-Director Nil Ernest Ebi Independent Non Ex-Director Nil Fidelis Madavo Non Ex-Director Nil Khalid Al Bakhit Non Ex-Director Nil 9
Table 8: Shareholding Structure as at March 19, 2015 Shareholders No of Shares Held % of Shareholding Dangote Industries Limited 15,494,247,300 90.93 Aliko Dangote (GCON) 27,642,637 0.16 Others 1,518,617,467 8.91 Total 17,040,507,404 100.00 Table 9: Company Summary Ticker Sector Sub-sector DANGCEM Industrial Goods Building Materials Date of Incorporation January 04, 1992 Date of Listing October 26, 2010 Financial Year End December Number of Fully Paid Share 17,040,507,404 Current Capitalization(NGN) 2,967,604,364,580.75 NSE Capitalization (NGN) 11,395,082,542,884.10 % of NSE Capitalisation 26.04% 52 Week high NGN 250.00 52 Week low NGN 141.90 YTD Return (%) (9.93%) 52 Weeks Average Volume Traded 3,365,571.26 Trailing EPS NGN 10.59 Trailing P/E Ratio (X) 16.44 *As at June 23,2015 10
Dangote Cement produces the 32.5, 42.5R and the 52.5 grade cement. 4.0 Product Analysis: Dangote Cement currently produces the 32.5, 42.5R and the 52.5 grade cement. The 32.5 grade was launched in November 2014 in order to serve the market needs, following the introduction of clear standards in the industry across Nigeria. The government released a new set of guidelines on construction, promoting the sole use of 42.5R for building and public structures construction, whilst limiting the use of 32.5 cement to wall plastering and other superficial amendments. The 42.5R is deem suitable for most buildings applications except in heavy load-bearing, flyovers, bridges and dams for which the 52.5 grade becomes handy. Dangote Cement products are distributed via a number of channels depending on the consumers demands. Then cement can be transported in Bulk or Bag either within or to outside the country, based on the consumer s use for the product. Bulk cement is mostly used for companies that already have storage facilities for cement, such as silos or barns and require it in large quantities for their operations, while bagged cement is primarily targeted at retailers or co-distributors. The company also uses vessels to transport clinker as well as bulk and bagged cement across the continent to neighbouring countries such as Ghana, Togo and Sierra Leone, as supplements to its overseas (grinding or cement production) plants in order to meet overriding regional demand. The company s major competitors, Lafarge Africa, has a wider range of product lines ranging from extra strength brands to quick drying products namely; Atlas Cement, Elephant Cement, Supaset Cement, Power Max Cement and Ashaka Cement. Despite the variation in its production base, the Dangote Cement seems to have a significantly greater market share and seems to have penetrated the market more successfully. 4.1 Facility Services: The company also engages in facility service products such as Project Inspection, Real Estate and Plant Maintenance, Operation Refurbishment and Building and Structure Renovations. 11
5.0: SWOT Analysis 5.1 Strengths: Enjoys economies of scale Has planned operation and presence in numerous African countries Strong and competent management team Implementation of state of the art and efficient technology Generates own power supply Strong profitability margins 5.2 Weaknesses: Build-up in inventory High foreign debt Key man risk Rising finance cost 5.3 Opportunities: Abundance of raw materials (Limestone) Rapid urbanisation and housing deficit Ban on cement importation High barrier to entry (initial investment cost) 5.4 Threats: Foreign exchange rate instability. Weak consumer revenue Declining government income Shortage of gas supply High cost of LPFO fuel 12
6.0 Forecast: Our Forecast Drivers We considered the following factors in arriving at our 5-year forecasts: Positive Factors: The recent expansion drive of the company across Africa. Equity Research Report Huge infrastructure and housing deficit in Nigeria creating strong demand for cement. Ban on cement importation. Abundance of raw materials (Limestone). Switch to lower energy cost. Expected increase in the production capacity. Economies of scale. Implementation of efficient and newer technology. Negative Factors: Foreign exchange exposure and risk. The weak consumers spending power. Our forecast final dividend for the FY 2015 is N6.90 per share. Looking at the medium to long term outlook of the company and the impact of the aforementioned factors, we are of the opinion that the impact of the positive factors would be higher on both the revenue and the profitability of the company than the negative factors. We therefore estimate a Turnover of N482.11bn, N605.53bn, N772.65bn, N978.18bn and N1,230.55bn for the periods ending December 2015, 2016, 2017, 2018 and 2019. We estimate EBIT of N235.05bn, N295.22bn, N376.70bn, N496.47bn and N624.56bn, and EBITDA of N283.68bn, N354.96bn, N450.80bn, N588.91bn and N740.24bn for the same period using EBIT margins of 48.75%, 48.75%, 48.75%, 50.75% and 50.75% respectively. Our PBT forecasts for the periods are: N226.65bn, N287.59bn, N369.46bn, N489.59bn and N618.36bn. Adjusting for tax, our PAT forecasts are N181.32bn, N230.07bn, N295.56bn, N391.67bn and N494.69bn. PAT Margin for the period are 37.61%, 38.00%, 38.25%, 40.04% and 40.20%. Our forecast final dividend for the FY 2015 is N6.90 per share. 13
Table 10: Income Forecast for (2015-2019) Profit and Loss =N='bn Dec-15 Dec-16 Dec-17 Dec-18 Dec-19 Turnover (Net Sales) 482.11 605.53 772.65 978.18 1,230.55 Cost of Sales (176.70) (221.93) (283.18) (338.95) (426.40) Gross Profit 305.41 383.60 489.47 639.23 804.15 Admin, Selling & Distribution Expenses (73.66) (92.51) (118.05) (149.45) (188.01) Depreciation (48.63) (59.74) (74.09) (92.44) (115.67) Other Operating Income 3.298 4.142 5.285 6.691 8.417 EBIT 235.05 295.22 376.70 496.47 624.56 EBITDA 283.68 354.96 450.80 588.91 740.24 Net Finance Cost (8.40) (7.63) (7.25) (6.89) (6.20) PBT 226.65 287.59 369.46 489.59 618.36 Taxation (45.33) (57.52) (73.89) (97.92) (123.67) PAT 181.32 230.07 295.56 391.67 494.69 Table 11: Earnings Forecast for (2015-2019) Dec-15 Dec-16 Dec-17 Dec-18 Dec-19 EBITDA Margin 58.84% 58.62% 58.34% 60.20% 60.15% EBIT Margin 48.75% 48.75% 48.75% 50.75% 50.75% PBT Margin 47.01% 47.49% 47.82% 50.05% 50.25% PAT Margin 37.61% 38.00% 38.25% 40.04% 40.20% EPS(N) 10.64 13.50 17.34 22.98 29.03 DPS(N) 6.90 8.76 11.25 14.91 18.83 Dividend Payout 64.88% 64.88% 64.88% 64.88% 64.88% Earnings Yield * 5.80% 7.35% 9.45% 12.52% 15.81% Dividend Yield * 3.76% 4.77% 6.13% 8.12% 10.26% P/E Ratio* 17.25 13.60 10.58 7.99 6.32 Number of Shares ( bn) 17.04 17.04 17.04 17.04 17.04 ROE 27.00% 32.63% 39.98% 49.38% 59.30% Collection Days 5.88 5.88 5.88 5.88 5.88 Payment Days 76.83 76.83 76.83 76.83 76.83 Inventory Turnover 4.07 4.07 4.07 4.07 4.07 Interest Cover 5.94 7.31 9.82 13.63 19.05 *At Our Fair Value of N183.58 14
Table 12 : Comparable Analysis (Nbn) Company Dangote Cement Lafarge Africa Turnover (Net Sales) 391.64 205.84 Gross Profit 248.58 68.48 EBIT 187.10 44.18 PBT 184.69 41.2 PAT 159.50 34.66 GP Margin 63.47% 33.27% EBIT Margin 47.77% 21.46% PBT Margin 47.16% 20.01% PAT Margin 40.73% 16.84% ROE 26.95% 18.09% Net Assets 591.89 191.64 Net Assets Per Share 34.73 43.51 PE Ratio 16.44x 14.14x Earnings Yield 6.08% 7.07% 15
7.0 Valuation: We employed relative valuation method using Enterprise Value (EV) to Earnings Before Interest Tax Depreciation and Amortization (EBITDA) multiple. The assumptions and results of the valuation are: Assumptions: EV/EBITDA Multiple: 11.81x Debt: N242.58bn Cash: N20.59bn Number of shares in issue: 17.04bn The fair value for Dangote Cement Plc is N183.58. Applying the EV/EBITDA multiple of 11.81x, we arrived at N183.58 which is our fair value. The current market value of Dangote Cement share is N174.15, the highest and the lowest closing prices in the last 52 weeks are N250 and N141.90 respectively. The forward earnings yield and dividend yield of the company at our fair value are 5.80% and 3.76% respectively. The total return, a combination of the capital appreciation and the dividend, generates 9.38%. This is lower than the current yield on the FGN Bond of 13.98%. We therefore place a HOLD on the shares of at the price of N174.15 as of June 24, 2015. 16
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