Dangote Cement Plc’s (‘The Group’) margins came under pressure in FY 2022 amid sales volume decline. But effective price increases offset the negative volume performance. Revenue grew by 17% year-on-year to N1.62trn – composed of a 5% volume decline and a 23% average price increase.
Dull Sales Across Two Broad Markets
In the Nigerian market, sales volume declined by 4% YoY, attributed to energy disruptions that affected production, evidenced by a 200-basis points reduction in the Nigerian production capacity to 51% in FY 2022 (FY 2021: 53%). However, average price per tonne increased by 27% YoY and that helped to deliver a 21% YoY revenue growth in the Nigerian market.
In the Pan-American, the trend was similar as sales volume declined by 8% YoY, catalysed by lower production due to extended plant maintenance and repair activities. Meanwhile, revenue grew by 4% YoY. The Group also raised prices across its Pan-African markets. On the average, product prices increased by 14% YoY.
Margins Shrink on the Back of Inflationary Pressures
Occasioned by higher distribution costs, the Group’s EBITDA margin dipped. In the Nigerian market, EBTIDA margin declined by c.600 basis points to 55% in FY 2022 (FY 2021: 61%). The reason was because of higher diesel costs incurred in powering delivery trucks during the fiscal year. In the Pan-African market, EBITDA margin also declined by c.600 basis points to 16% (FY 2021: 22%). Higher coal and diesel prices were the reasons for the margin decline.
Overall, the Group’s EBITDA grew by 3% YoY to N706.04bn from N683.59bn in FY 2021. Meanwhile, the Group’s EBITDA margin declined by 500 basis points to 44% in FY 2022 (FY 2021: 49%). Besides the higher distribution costs incurred, we also link the EBITDA margin decline to the impact of operating leverage in the business. Fixed costs remained constant while volume declined. Therefore, in our view, the less absorption of fixed costs impacted margins.
Operating profit remained flat at N585.65bn in FY 2022 from N582.83bn in FY 2021; but operating profit margin declined to 36% in FY 2022 (FY 2021: 42%).
Macroeconomic Headwinds Induce Significant FX Losses
On the back of monetary policy normalisation by the United States Federal Reserve, the US Dollar appreciated significantly against emerging market currencies. As a result, the Group recorded significant foreign exchange losses – particularly in its Pan-African market. FX losses increased by 515% YoY, shaving off N53.93bn from operating profit. Also, net finance cost increased by 3% YoY to N36.53bn – the finance cost increase of 34% YoY to N75.24bn was partly offset by an 86% YoY increase in finance income of N38.72bn.
RoE Weakens, But Remains Strong
The combined impact of higher operating costs (distribution expenses) and non-operating costs (FX losses and finance costs) dampened profitability, as profit before tax declined by 3% year-on-year to N524.00bn. However, a lower effective tax rate in FY 2022 (27% versus 32% in FY 2021) ensured a more optically pleasing bottomline, as profit after tax grew by 5% year-on-year to N382.31bn.
Return on equity (RoE) stood relatively strong at 37% in FY 2022. Although 200 basis points decline from a 39% RoE in FY 2021, the figure was comfortably above our estimated cost of equity of 23%.
Supply Chain Disruptions Weigh Negatively on Cash Flows
Net operating cash flow declined by 35% YoY to N387.84bn, resulting from increased working capital funding. For instance, inventory and prepayments grew by 43% respectively.
Free Cash Flow (FCFF) stood at N321.90bn in FY 2022, a decline of 22% YoY from N410.90bn in FY 2021. In the same trend, Free Cash Flow to Equity (FCFE) declined by 11% YoY to N321.00bn from N360.51bn in FY 2021.
We expect the energy disruptions that negatively affected volumes in FY 2022 to normalise in FY 2023. We also expect the Group to conclude its plant maintenance in the Pan-African market and resume production in the affected plants. Hence, we project a 4% volume growth in the Nigerian market while we project a 7% volume growth in the Pan-African market. Overall, we are estimating a total volume growth of 5% in FY 2023 for the Group.
Despite a low single-digit volume growth that we are projecting, we estimate a 19% revenue growth for FY 2023. This is due to our projection of a 14% price increase. Our opinion is that the Group will make additional price increases to protect margins.
In the medium term, we expect the Group to leverage its market leadership status to grow volumes and prices. In February 2023, the management signed an agreement with China Sinoma Engineering to construct a green field plant (Itori cement plant) with an expected completion date in 2025. The new plant will add 6mn tonnes and take the Nigerian capacity to 41.25mn tonnes.
We forecast an earnings per share (EPS) forecast of N28.42 in FY 2023, which effectively implies a forward price-to-earnings (P/E) multiple of 10.13x – a 22% price discount to our justified P/E multiple of 12.31x. The implied forward P/E multiple is also a 31% discount to its historical average P/E multiple of 13.26x. Thus, we recommend a BUY.
Please follow the link “Dangote Cement Plc FY 2022 – A Difficult Year But Long Term Prospects Remain Strong” to view the whole report.
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