Dangote Cement: Facts behind the rebound

Dangote Cement Plc staged a big rebound in the 2020 financial year and an impressive earnings story can be expected from the cement producer as the earnings reporting season approaches.

This is from a plunge in after profit by nearly one-half in 2019 to hit the lowest figure in three years, the company garnered a strong recovery momentum in 2020.

The company closed the third quarter operations with a profit of over N208 billion, which has already exceeded the company’s full year profit of about N200 billion at the end of the preceding financial year.

The facts behind the turnaround are an expansion in cement production capacity, increased sales volume and significant cost saving in key expenditure lines. The company’s cement production and bagging capacity went up by 3 million tonnes to 48.55 million tonnes at the end of the third quarter.

Sales volume grew by 1.2 million tonnes to 19.2 million tonnes over the same period.  With gains in both volume and selling price of products, sales revenue rose by 12 percent year-on-year to over N761 billion at the end of the third quarter. This represents an addition of about N82 billion to sales revenue over the review period.

The capacity expansion came along with economy of scale benefits that lowered costs generally relative to sales. Cost of sales grew at a slower pace of 9.5 percent than the 12 percent improvement in sales. At N317.5 billion, cost of sales claimed a reduced proportion of sales revenue at the end of September 2020 compared to the same period in 2019.

The moderated input cost enabled the company to raise gross profit ahead of sales revenue at 14 percent to N444 billion at the end of the third quarter. A major cost saving also came from selling and distribution expenses, which declined by 2 percent to N119 billion.

The operating advantage is that the company used a reduced cost to generate an increased naira of sales revenue over the nine months of the 2020 financial year. This underlies the performance boost the company experienced the year.

Cost saving extended beyond production and sales to the administrative function. Administrative cost increased moderately at 4 percent to close at less than N40 billion for the third quarter. This means the company paid less for administrative function to generate the naira of revenue during the period than recorded in the same period in the prior financial year.

The savings achieved from operating cost boosted operating profit — which grew by over 24 percent year-on-year to roughly N288 billion at the end of September 2020. That is twice the 12 percent increase in turnover and an addition of N57 billion to operating profit on year-on-year basis.

A further boost in the company’s profit performance came from a robust growth in finance income and a drop in finance expenses. The company raked in finance income of over N18 billion at the end of the third quarter, which is three times the corresponding figure it realised at the end of the third quarter of 2019.

At the same time, finance expenses dropped by 14 percent year-on-year to N34 billion, cutting net finance expenses from about N34 billion to less than N16 billion over the review period. The cost saving powered a growth of 37.6 percent in pre-tax profit to N272 billion at the end of the third quarter. This represents an increase of more than 74 billion in pre-tax profit.

The drop in the company’s finance expenses is despite increasing interest bearing debts in the balance sheet in the year. Its borrowings have grown from N368 billion at the end of 2019 to stand at N451 billion at the end of September 2020. The drop reflects the absence of foreign exchange loss in the year, which accounted for 39 percent of finance costs in the same period in 2019.

Dangote Cement closed the third quarter operations with an after tax profit of N208.7 billion, up from N154 billion in the same period in 2019. The company moved on a fast recovery track in 2020 after a profit drop of about 50 percent in 2019. Net profit margin that fell from 43.3 percent in 2018 to 22.5 percent in 2019, rallied to 27.4 percent at the end of the third quarter.

The company’s profit had dropped from the peak of over N390 billion in 2018 to N200.5 billion at the end of 2019. Despite the rapid recovery that happened in 2020, the full year profit expectation for the year isn’t likely to come anywhere close to the 2018 profit high.

The company earned N12.25 per share at the end of the third quarter, rising from N9.10 in the same period in 2019. It earned N11.79 per share at the end of 2019 and paid N16 per share to shareholders in cash dividend.