Dangote Cement: Turnaround tempered by all-round cost increases

Dangote Cement Company experienced a profit rebound in 2015 though cost increases in all the main cost lines of the company prevented the cement makers from returning to previous profit peak. A new profit peak had been expected based on the strong growth attained in the interim reports. Profit growth however slowed down in the final quarter, as finance charges eroded profit margin. A drop of over 72% in tax liability is the critical factor in the profit recovery achieved.

The company achieved an accelerated growth in sales revenue in 2015 and attained a new revenue peak, pushing up from a flat growth in the preceding year.  Sales revenue grew by about 25.6% year-on-year in 2015 to N491.72 billion, virtually at par with our projected figure of N490 billion for the company. This will be a much accelerated growth compared with a marginal increase of 1.7% in 2014.

The cement manufacturing company has maintained a record of strong growth in profit until 2014 when after tax profit dropped by about 21% to N159.5 billion It was headed for a strong recovery and growth in profit as per the 2015 interim reports but with a loss of momentum in the final quarter, it closed the 2015 financial year with a mild profit recovery. After tax profit improved by 13.7% to N181.32 billion for Dangote Cement in 2015, still well below the company’s previous profit high of N201.2 billion attained in 2013.

The inability to grow profit as fast as revenue follows all-round cost increases that claimed increased shares of revenues in the year. Cost of sales rose by over 41% to N201.81 billion compared to the increase of 25.5% in sales revenue. That reduced gross profit margin from 63.5% at the end of 2014 to 59% in 2015.

Administrative cost also rose well ahead of sales revenue at over 35% to N32.55 billion and so did selling/distribution expenses, which rose by 30.5%. Operating profit improved by 11% to N207.82 billion, less than one half of the growth in sales revenue.

The biggest cost increase came from interest expenses, which advanced by about 65% to N54.35 billion. Finance income remained significant at N34.82 billion though it grew at a far lower pace of 13.9% in the year.  The company’s total interest bearing liabilities have increased from N249.20 billion in 2014 to N255.60 billion in 2015.

The cost-income relationship in the year left pre-tax profit flat at N188.29 billion for Dangote Cement. The improvement of 13.7% in after tax profit came from a drop of 72% in income tax expense to N6.97 billion.

The company therefore lost profit margin for the second year. Its profit drop in 2014 followed a loss of profit margin, which was caused by a slowdown in sales revenue and an increase in cost of sales. In 2015, the company regained strength in sales revenue growth but all-round cost increases prevented the increase in earnings from reaching the bottom line.

Net profit margin declined from 40.7% at the end of 2014 to 36.9% in 2015 – the lowest profit margin in the company’s operating history. The loss in profit margin happened in the final quarter, as the company closed third quarter operations with a net profit margin of 43.2%. This explains the loss of profit growth momentum in the final quarter. Of its N181.32 billion after tax profit, the company earned only N23.29 billion in the final quarter.

Dangote Cement closed the 2015 financial year with earnings per share of N10.86, improving from N9.42 in 2014. It has announced a cash dividend of N8 per share to shareholders in the company’s books by 11th April and payment is scheduled for 21st April 2016. It paid a dividend of N6 per share for the preceding year.