Dangote Cement Q3 22 Result: Earnings under pressure from rising energy costs and FX losses

Stock Rating: BUY
Price Target: N328.65
Price (28-Oct2022): N220.50
Potential Upside / Downside: +49.1%
Dangote Cement (DANGCEM) released its Q3 22 unaudited results after trading hours on Friday (28 October). The group reported an EPS decline of 54.0% y/y in Q3 22. 

The earnings slump was mainly driven by cost pressures and foreign exchange losses. Consequently, when annualised, the achieved EPS is below our forecasts by 43.3% and below consensus forecasts by 63.2% for FY 22. 

Prior to the release of results, the market was bearish. We expect the bearish sentiment to extend after the results. Year-to-date, the stock is down 14.2%.

Price increases continue to cushion volume declines
The group’s revenue grew by 11.3% y/y in Q3 22, driven by growth in both Nigeria (+13.7% y/y) and Pan African operations (+4.1% y/y). The achieved revenue, when annualised, is below our forecasts for FY 22 by 6.0%.

Nigerian revenue was mainly driven by price increases (the average price per tonne rose by 17.4% y/y) which offset a decline in volumes (-3.2% y/y to 4.14Mt) in the period. According to management, its national consumer promotion “Bag of Goodies – Season 3” improved market share during the quarter and cushioned the impact of: (1 ) continued disruptions in energy supply as witnessed in Q2 22; (2) rising inflation, and; (3) the effects of unusually heavy rainfall and flooding on cement demand.

In the Pan-African region, price increases were also implemented (the average price per tonne rose by 12.0% y/y) which offset the substantial volume decline (-7.0% y/y to 2.51Mt). According to management, volumes declined becausee of disruptions of global supply chains, rising commodity prices, the extended shut down of its Congolese plant due to maintenance, and extended power plant maintenance in its Senegalese operation.

Overall, the group’s sales volume declined by 4.3% y/y to 6.59Mt in Q3 22, driving the overall 9M 22 volume down by 6.2% y/y to 20.8Mt.
Haulage and Advertising costs pressure the EBITDA margin
The Gross margin shrank by 533bps to 56.3% in Q3 22, a seven-quarter low, owing to rapid Cost of sales growth (+26.8% y/y). Growth in Cost of Sales was driven mainly by the surge in the cost of Fuel & Power consumed (+59.4% y/y), which reflects the increased price of Automotive Gas Oil (AGO). In addition, Material Consumed (+19.1% y/y) and Other Production expenses (+49.9% 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% y/y thanks to the above-mentioned price increases.
EBITDA declined by 12.6% y/y in Q3 22, driven by a 39.3% y/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% y/y), making up over 82% 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% y/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 1,056bps to 38.6%, 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% 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.
Foreign exchange losses cements earnings declineFurther down the P&L, the group recorded Net finance cost of N44.49bn, up 220.2% y/y in Q3 22. The company incurred a significant N31.73bn foreign exchange loss due in part to the FX crisis impacting imported input components and well as depreciation in some Pan-African currencies i.e. CFA and Ghanaian Cedi, severely eroding the group’s bottom line.

Consequently, Profits Before Tax declined by 42.8% y/y. Despite the decline in tax expense in Q3 22 (-20.2% y/y), Net Income fell by 52.7% y/y.
DANGCEM’s revenue performance in 9M 22 was in line with our expectations (-0.04% 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. SOURCE: Coronation Asset Management
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