Thursday, November 18, 2021 / 12:50PM / Adaeze Nwachukwu, Proshare Research / Header Image Credit: Dangote Cement Plc

Dangote Cement Plc isthe second listed company on the Nigerian Exchange Limited (NGX) to record arevenue of N1trn on the heels of MTN, the leading stock with over one trillionNaira (SWOOT) in turnover. Dangote's 9month 2021 result shows double-digit revenuegrowth, despite a difficult macroeconomic environment. The Group has demonstratedresilience in its operations which has translated to significant improvement inits earnings.

A DuPont review of the company, showed that gross profit margin wasa major driver of the Company's rising equity return (ROE). With the limestonecrusher's share buyback programme (in other words, repurchase), leading to areduction in its market free float, the company's earningsper share (EPS) is expected to rise notably  by the year-end December 31, 2021.

Key Highlights

• Revenue was up Y-o-Y by +34.24% toN1.02trn from N761.44bn in 9months 2020.
• Sales volume was up by +15.40% to22.16 MMT in 9months 2021 from 19.21 MMT
• Cost of sales was up by +27.04% toN403.39bn from N317.54bn in 9months 2020
•  Gross profit rose Y-o-Y by +39.40% toN618.79bn from N443.90bn in 9months 2020
• EBITDA edged up by +45% toN514.79bn from N355.02bn in 9months 2020
• EBITDA margin increased to 50.40%from 46.60%
• Finance income fell Y-o-Y by -24.44% toN13.85bn from N18.33bn
• Finance cost increased by +41.96% toN48.69bn in 9months 2021
• Profit before tax (PBT)increased Y-o-Y by +49.10% to N405.49bn from N271.96bn in 9months2020
• Total asset inched up +27.71% toN2.25trn from N1.85trn in 9months 2020
• The group's earnings per share(EPS) increased by +32.49% to N16.23 from N12.25 in H1 2020.
• Return on equity rose from 33.24%in 9months 2020 to 44.79% in 9months 2021.

Revenue-A Rising Kite

DANGCEM's revenue rose by +34.24%Y-on-Y to N1.02trn from N761.44bn in 9months 2020. The rise was supported by anincrease in volumes from the Nigerian market and the Pan African segment of theGroup. The Group's production capacity rose Y-on-Y by +6.59%to 48.55m tonnes, production volume also grew by +14.61%to 21.08m in 9months 2021.

Quarterly (Q-on-Q), revenue fell by -7.34%to N331.64bn in the third quarter (Q3) 2021 from N357.89bn in the secondquarter (Q2) 2021, reflecting macroeconomic difficulties and falling demand.

9months 2017 recorded the highest revenue growth of +36.53%, while in 9months 2019, revenue fell by -0.80% (see chart 1 below).

Revenue of DANGCEM also felt the adverse impact of the devaluation ofthe domestic currency. In US dollar terms, revenue had a slower growth rate of +24.18% to US$2.49bn from US$2.00bn in 9months2020. The I & E FX window rates were used for the conversion at thedifferent periods.

Chart 1: DANGCEM's Revenue 9M 2017 - 9M 2021 (N'bn)

Source: DANGCEM'sFinancial Statement, Proshare Research

The performance of different segments of the Group improved over thenine months, both sales volume and revenues went up. Revenue from the Nigerianbusiness grew Y-on-Y by +36.25% toN729.603bn, accounting for 71.38% of total revenue. The Pan African segment'srevenue increased by +28.05% to N297.86bn,contributing 29.14% to the total revenue of the Group.

As expected, the Nigerian segment of the Group's business accounts for amore significant portion of its total sales which grew Y-on-Y by +18.71%. In comparison, the Pan African salesvolume went up by +9.35% (see table 1below).

Profit Before Tax- the Upside of aBottomline

Bottom-line earnings also saw double-digit growth. Profit before tax wentup Y-on-Y by +49.10% to N405.49bn fromN271.96bn in 9months 2020. PBT grew in 9month 2021 despite a decline in financeincome and a rise in finance cost; finance income dipped by -24.44% while finance cost rose by +41.96% in the period (see chart 2 below).

On a Q-on-Q basis, PBT fell by -15.01% toN86.62bn in Q3 2021 from N101.92bn in Q2 2021.

In US dollar terms, PBT grew slower, earnings before tax rose by +37.92% to US$987.07m from US$715.68m in 9months2021.

Chart 2: DANGCEM's Profit Before Tax 9M 2017 - 9M 2021 (N'bn)

Source: DANGCEM'sFinancial Statement, Proshare Research

Efficiency Ratio-Sweating the Assets

Asset Turnover Ratio

The cement manufacturer's asset turnover ratio was stable between 9month2017 to 9months 2020. The total asset turnover ratio for 9months 2021 was 0.50from 0.44, indicating an uptick in asset efficiency. The higher the assetturnover ratio, the higher the efficiency of the assets, which reflected thesteady rise in the revenue of DANGCEM (see chart 3 below).

Chart 3: DANGCEM's Total Assets Turnover Ratio 9M 2017 - 9M2021

Source: DANGCEM'sFinancial Statement, Proshare Research

Liquidity -Tight but manageable

Quick Ratio

The group's acid-test ratio (or quick ratio) rose to 0.56 in 9months2021 from 0.50 in 9months 2020; in contrast to the efficiency ratio, the quickratio has not been stable over time. A quick ratio of 1 would be preferred fora manufacturing company, which indicates that the company has ready assets tocover current liabilities after taking out inventories.

The group had the highest quick ratio of 0.61 in 9months 2018 while 9months2019 records the lowest quick ratio of the company in recent times (see chart 4below).

Chart 4: DANGCEM's Quick Ratio 9M 2017 - 9M 2021

Source: DANGCEM'sFinancial Statement, Proshare Research

Interest Coverage Ratio

DANGCEM has always had a high-interest coverage ratio, indicating that despiteits high debt profile, its earnings cover its finance cost significantly.

An interest coverage ratio of 3 would indicate that the company couldmeet its debt obligations and still have some liquidity left. For DangoteCement, in 9months 2021, the interest coverage ratio rose from 10.35 to 10.57, indicatingthat the company's earnings can pay interest on its debt over 10 times (see chart 5below).

This could also mean that the company did not use its debt properly or itdecided to invest in new products and technology even though Dangote Cement is amarket leader.

Chart 5: DANGCEM's Interest Coverage Ratio 9M 2017 - 9M 2021

Source: DANGCEM'sFinancial Statement, Proshare Research

Working Capital

The limestone crusher's working capital continued in its negative trend,reflecting that the company's current liabilities have steadily been higherthan its current ratio.

The negative capital continues to grow even though growth in currentassets outpaced growth in current liabilities in 9months 2021 (see chart 6below).

Chart 6: DANGCEM's Working Capital 9M 2017 - 9M 2021 (N'm)

Source: DANGCEM'sFinancial Statement, Proshare Research

DuPont Analysis-Breaking Down Investor Returns

DANGCEM's return on capital employed (ROCE) moved in the shadow of itsreturn on equity. Return on capital employed rose from 26.36% to 35.36% in9months 2021. Amongst the components of the ROCE, operating profit had thehighest growth rate, +52.93%, while currentliabilities and total assets grew by +32.82%and +21.71%, respectively (see chart 7below).

ROE inched up to 44.79% from 33.24% in the corresponding period in theprevious year.

Chart 7: DANGCEM's Return on Capital Employed 9M 2017 - 9M2021

Source: DANGCEM'sFinancial Statement, Proshare Research

Competitor Analysis-A Three Way Combat

All three major players in the cement industry had gross profit marginshigher than 25%, with Dangote Cement leading the pack with 60.54%, BUA Cementcoming second with 46.64%, and Lafarge Africa trailing behind at 29.18%.

Dangote Cement recorded 10.57 behind BUA Cement's 83.30 interestcoverage ratio. An interest coverage ratio of 83.30 may suggest that thecompany was not using its borrowings efficiently. Lafarge Africa posted 8.55 ininterest coverage.

The average Asset turnover ratio for the cement industry was 0.40x forthe period; DANGCEM and Lafarge Africa recorded figures above industry average,while BUA Cement was below the industry average.

Lafarge Africa recorded the lowest leverage ratio; this does not come asa surprise as the company's total debt stock has been on a steady decline inrecent times. Dangote Cement's share buy-back program suggests that thecompany's cost of debt would be lower than its cost of equity. The higher costof equity explains the company's decision to resort to large unsecuredcommercial paper (CP) financing

Table 2: Ratio Analysis Among Peers

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