Dangote Cement Plc

DANGOTE CEMENT PLC

Company Overview
DANGCEM was established as Obajana Cement Plc on November 4, 1992. However, the company did not start operations until January 2007. The present name, Dangote Cement Plc, was adopted in July 2010. DANGCEM, listed in October 2010, is the most capitalised company on the Nigerian Stock Exchange.

DANGCEM produces cement and related products in facilities situated in ten African countries. It operates three plants in Nigeria, where it is headquartered.

Dangote Industries Limited (DIL) is the holding company of DANGCEM. DIL began in 1981 as a trading company importing commodities such as cement, flour, rice and sugar. The group has been transformed into a manufacturing conglomerate with interests in building materials, food products, refinery, petrochemicals, agriculture, fertilizers, infrastructure and property management.

Aliko Dangote, the founder of DIL, is the chairman of the group while Engineer Joseph Makoju is the group chief executive officer (CEO). Engineer Makoju was named Acting Group CEO in January 2018, about eight years after joining the companyꞌs board of directors as a non-executive director.

Investment Thesis
DANGCEM is an integrated multinational company with substantial limestone reserves.  The company stands to benefit from the housing and infrastructural deficit in Africa. It operates the largest cement plants in the two most populous countries in Africa of Nigeria and Ethiopia. Though they contribute positively to revenue (about 30%), profitability of the operations outside Nigeria has been unstable.

DANGCEM has plants in Benue, Kogi and Ogun States in Nigeria. Nigeria is responsible for about 70% of revenue and over 90% of Earnings Before Interest, Tax, Depreciation and Amortisation (EBITDA). Profit margins from its Nigerian operations are appealing; EBITDA margin has averaged 62.5% in the past four years. The cement plant in Obajana, Kogi State in Nigeria is the largest cement plant in Sub-Saharan Africa. DANCEMꞌs distribution network gives it an edge in the marketplace. We believe that the Nigerian governmentꞌs resolve to continuously increase capital expenditure is a boon to cement manufacturers, including DANGCEM.Earnings chart of Dangote Cement Plc

DANGCEM has grown revenue consistently; it has grown revenue by 20.7% over the past seven years. Besides, the company offers investors attractive returns. It pays dividend to shareholders regularly. In 2018, Return on Equity (RoE) increased from 26.1% to 39.6% and surpassed the eight-year average by 7.3 percentage points. Likewise, Return on Assets (RoA) exceeded the eight-year average of 18.7% by 4.4%.

DANGCEM has been increasing its assets. Total assets were NGN1.7 trillion at end of 2018 financial year. Free cash flow of NGN244.3 billion translates to NGN14.3 per share and a year-on-year increase of 2.9%.

Valuation
Average Price/Earnings ratio (P/E) of 15.7 multiplied by average Earnings Per Share (EPS) of NGN11.8 gives a price of NGN185.3. Adjusted Earnings Power Value (EPV) is NGN94.3 while Forward P/E is put at 12 times. Our Discounted Cash flow (DCF) model produced a fair value ranging from NGN197.2 to NGN209 per share while our 2-Stage Dividend Discount Model (DDM) generated   an estimate between NGN190.1 and NGN206 for a share of the company.

Therefore, at the current market price of NGN170, the shares of the current appear undervalued.

Financial Overview
In 2018 revenue had an 11.9% boost to NGN901.2 billion from NGN805.6 billion compared to 31% of the previous period. Operating profit moved up 11.3% from NGN304.2 billion to NGN338.7 billion. Though Profit Before Tax (PBT) gained only 3.9%, Profit After Tax (PAT) jumped 91.1% from NGN204.2 billion to NGN390.3% owing to income tax credit of NGN89.5 billion. DANGCEM produced EBITDA of NGN435.3 billion, 12.1% up from the previous yearꞌs figure.   EBITDA margin was more or less flat at 48.3%.  Operating profit margin dropped 0.2%; PBT margin was down by 2.6 percentage points while PAT margin leapt 18%.Graph of returns of Dangote Cement Plc

Nigeria produced 68.6% of revenue; besides, it accounted for 91.3% of EBITDA. Nigeriaꞌs EBITDA margin stood 64.3% while rest of Africa had EBITDA margin of 17.3%. The operations outside Nigeria have been having difficulty contributing positively to profitability. They recorded a Loss After Tax of NGN87.9 billion (2017: -NGN12.8 billion).

Current liabilities have been exceeding current assets for the past eight years. In other words, DANGCEM has been having negative working capital. It was indebted to the tune of NGN345.9 billion at 2018 year end. Over 60% of debts are expected to be repaid within a year, nevertheless it generates enough operating profit and cash flow to pay interest on loans. Profit and cash flow from operations covered interest payments 6.8 and 7.5 times respectively. The company is not highly geared as total debts formed 20.4% and 35.1% of total assets and shareholdersꞌ fund respectively. Shareholdersꞌ fund climbed 26.3% compared to a 2% drop of the prior year. Total assets witnessed a marginal improvement of 1.7% to NGN1.7 trillion.

Business Risk
Demand for building materials, including cement, could change due to varying economic circumstances. When the economy takes a downswing, buyers (corporate and individuals) delay capital investment; consequently demand for cement plunges. In addition, energy and raw material costs have considerable effect on profit margin. DANGCEM incurred NGN256.1 billion or 66.8% of production cost of sales on energy and materials in 2018 (2017: NGN223.1 billion). Non-compliance with regulatory requirements may lead to shutdown of plants and loss of revenue.

Recommendation: Buy

Vital statistics of Dangote Cement Plc