Dangote Cement: Thriving in a challenging environment

Dangote Cement Plc (DangCem) is a fully integrated cement company and has projects and operations in Nigeria and 14 other African countries. It is the cement division of the highly diversified Dangote Group.

The group owns six cement import terminals in Lagos and in Port Harcourt in Nigeria and one in Ghana, through which it imports and bags bulk cement.

DangCem is the most capitalised stock on the Nigerian Stock Exchange, with market capitalisation of about N3.9 trillion.

DangCem’s current total production capacity in Nigeria from its three existing cement plants, namely Obajana (10.25MMTPA), Ibese (6.0MMTPA) and Gboko (4.0MMTPA) is 20.25MMTPA. The 42.5-grade cement, which is used for building houses, accounted for 100 per cent of their sales.

It has single largest cement plant in Africa with a capacity of 5.2 million Metric Tonnes per annum (MTpa) (additional capacity of over 5 million MTpa planned). The company recently presented its half-year 2014 (1H14) result to the Nigerian Stock Exchange.

Financial Highlights

A review of the cement giant’s half year 2014(1H14) result showed it had a struggled outing compared with 2013, which analysts said reflected the impact of costly operating environment for manufacturing companies in Nigeria.

The result shows that its gross earnings for 2014 half year of N208.5 billion was 5.3 per cent higher than N198.5 billion recorded at the same period in 2013. But experts are convinced that though increased earnings are good, it does not mean that the profit margin of a company is improving. The company attributed the weak growth in revenues to a partial shutdown in one of their plants, and they expect this to come back upstream sometime in the next 12 months.

Looking at the earnings of a company often doesn’t tell the entire story. For instance, if a company has costs that have increased at a greater rate than sales, it leads to a lower profit margin. This is an indication that costs need to be under better control.

Dangote Cement’s cost of Sales rose 13.6 per cent to N75.4 billion for the second quarter of 2014 compared to N66.3 billion of 2013. In the same vein, its operating expenses (OPEX) increased 7.4 per cent to N 23.5 billion from N21.9 billion in 2013.

The company’s profit before tax (PBT) came down -0.6 per cent to N107.1 billion for the six-month period to June 2014, from N107.7 billion of 2013, while profit after tax shrank to N95.4 billion, representing -11.4 per cent decrease from N107.7 billion recorded same period of last year.

Profitability ratios

Profitability ratios are in some sense the “bottom line” ratios. Since, profitability is a result of many factors – such as asset management, sales generation, and expense control, among others, these ratios, in some ways, sum up the total level of success or failure of the organisation. There are many different profitability ratios. Each one focuses on a slightly different measure of profit or return depending on the industry.

DangCem recorded a 63.9 per cent Gross Profit Margin for 1H14. The gross profit margin is used to analyse how efficiently a company is using its raw materials, labour and manufacturing-related fixed assets to generate profits.

A company’s cost of sales or cost of goods sold represents the expense related to labour, raw materials and manufacturing overhead involved in its production process. This expense is deducted from the company’s net sales/revenue, which results in a company’s first level of profit, or gross profit. A higher margin percentage is a favorable profit indicator. For the cement giant, though impressive, stakeholders expect a much higher GP margin given the company’s pedigree in the cement industry.

Net Profit Margin (Net margin) is another ratio of profitability calculated as net income divided by revenues, or net profits divided by sales. It measures how much out of every dollar of sales a company actually keeps in earnings. It is very useful when comparing companies in similar industries. A higher profit margin indicates a more profitable company that has better control over its costs compared to its competitors. Dangote Cement’s Net Profit margin of 45.7 per cent means the company has a net income of N0.46 for each naira of sales.

The Return on Average Equity (RoAE), annualized, was 35.1 per cent, while Return on Average Assets (RoAA) stood at 21.7 per cent in the review period.

The return on average equity is a financial ratio that measures the profitability of a company in relation to the average shareholders’ equity. This financial metric is expressed in the form of a percentage which is equal to net income after tax divided by the average shareholders’ equity for a specific period of time.

The 35.1 per cent RoAE implies that DangCem has N0.35kobo of net income for every naira of invested shareholders’ money.

Also, the 21.7 per cent RoAA, which gives an idea as to how efficiently the management used assets to generate profit implies that the DangCem realised N0.22 (or 22 kobo) gain from every naira of invested assets. This asset turnover represented a drop of 0.56 to 0.48, which means that DangCem’s efficiency has reduced. The company is not sweating its asset well enough. Analysts believe the partial shutdown could not have contributed to this, but it is not an encouraging sign.

DangCem 1H14 Price to Book value (P/BV) ratio stood at 7.5x, which most analysts view as being better than what obtains among peers.

This formula, sometimes, referred to as the market to book ratio, is used to compare a company’s net assets available to common shareholders relative to the sale price of its stock.

This relatively high P/BV ratio in the view of a herd of analysts could mean DangCem is generating a lot of revenue, keeping its cost down, or is doing both simultaneously, meaning that its risk is relatively low.

Further more, the number of days of sales outstanding dropped from 12 days to eight days; this means that if customers buy goods from DangCem, they have to pay for them in about eight days. Analysts believe this is not bad for a company that is already cash cow.

With the fact that account receivables accounted for only 4.0 per cent of revenues generated in six months, analysts strongly recommend that DangCem try to relax its credit policies a little bit.

This will invariably help the company boost sales. At the other end of the cash management spectrum, the number of days of payables outstanding rose from 198 days to 239 days. This simply means that if DangCem owes a customer, such a customer will get paid in about eight months.

“We will also recommend that DangCem relax this policy and pay their suppliers a little earlier,” a stakeholder advised.

Source: Tribune

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