Dangote Cement: Industry

THE COMPANY: Dangote Cement is a fully integrated cement company with projects and operations in Nigeria, Benin and Ghana. Cement was the initial focus of the Dangote Group’s trading operations in 1981. Since that time, the larger conglomerate has made strides to transition from a trader of cement to a manufacturer. Dangote Cement was incorporated in 1992 and has a total production and import capacity of 14m tonnes per annum. The company also has new production projects in development, which promise to add another 11.1m tonnes per annum.

The company operates the Obajana cement plant, the largest cement plant in sub-Saharan Africa, which was commissioned in 2003 and is located in Kogi State. In Nigeria the company also operates the Ibese plant in Ogun State and the Gboko plant in Benue State. It has aggressive growth plans, with the goal of building a strong pan-African presence as it evolves to become a truly multinational corporation.

As part of this expansionary drive, Dangote Cement is committed to making Nigeria a net exporter of cement. The company owns four terminals – two in Lagos and two in Port Harcourt – through which it currently imports cement. These operations will progressively be replaced and converted into export terminals as new production capacity is brought on-line in Nigeria and as the company furthers its backward integration ambitions. The company was listed on the Nigerian Stock Exchange in 2010 in the industrial goods sector and the building materials sub-sector.

2013 RESULTS: Dangote Cement produced a robust result in Q1 2013. Total demand for its cement rose approximately 16% to 5.4m tonnes, while sales volume in Nigeria was up 38% to 3.3m tonnes compared to Q1 2012. Volumes at the Obajana and Ibese plants rose by 68% and 82%, respectively, in the quarter relative to the same period last year. Improvements in gas supplies played a role in the higher volumes produced. The abovementioned plants were also able to clear stockpiles on the back of strong market demand.

The company’s financials also saw marked improvement relative to Q1 2012. Consolidated revenue was up 39.5% to N95.4bn ($601.02m), while gross profit rose 64.7% to N66bn ($415.8m). Profit after tax increased 80.7% to N53.7bn ($338.3m) and earnings per share rose by 79.5% to N3.16 ($0.019). Net assets grew from N420bn ($2.65bn) in fiscal year (FY) 2012 to N473.1bn ($2.98bn) in Q1 2013. Return on equity (ROE) in FY2012 stood at 36.17%, while ROE for Q1 2013 was 11.35%. If returns remain on this trajectory, we expect an annualised ROE of 45.40%. With a price to book value of 6.81x and strong potential for future growth, Dangote Cement is competitively priced.

DEVELOPMENT STRATEGY: Dangote Cement is well positioned to grow substantially and sustainably going forward. Investment projects in Nigeria, Tanzania, South Africa, Ethiopia and Zambia worth just over $2bn will be coming on-stream over the next few years and this should boost the profitability profile of the company. An analysis of the balance sheet shows a fall in net debt from N119.7bn ($754.1m) in FY2012 to N76.4bn ($481.3m) in Q1 2013. Cash reported on the balance sheet more than doubled from N44bn ($277.2m) in FY2012 to N90.3bn ($568.9m).

The strong demand for cement and its positive impact on margins and cashflow makes Dangote Cement well positioned to reduce net debt or invest further in infrastructure. This should boost productivity as well as profitability. An improvement in gas supplies is also expected to boost future results as its impact on margins recedes. Developments in the Nigerian import market for cement bode well for Dangote Cement going forward. Imports of cement fell to 300,000 tonnes in Q1 2013 from 800,000 tonnes in Q1 2012. This downward trend in cement importation, which gathered momentum in 2009, suggests that substitution away from foreign-produced cement towards the domestic brand should boost Dangote Cement’s market share and financial results. These findings are a strong case for acquiring the stock.