Dangote: Interest income helps wage dropping profit

The biggest event on the income statement of Dangote Cement at the end of the third quarter is a high rise in interest income by more than one and half times. Interest income at the end of September is already 60% above last year’s full year figure. That provided a wage that slowed down the force at which operating profit dived during the period.

The cement manufacturing company maintained stable growth in revenue at the end of the third quarter but rapid cost increases undermined profit capacity. All the company’s three main operating cost lines grew three times as fast as sales revenue on the average. That caused almost a 30% drop in operating profit. The strong growth in finance income moderated the impact of that on the bottom line, lowering the drop to 15.5% at the end of the period.

Dangote Cement closed the third quarter with sales revenue of N442.09 billion, a comfortable growth of 21% year-on-year. There was a slight gain in sales revenue growth momentum in the third quarter. Full year turnover is projected at N592.6 billion for Dangote Cement in 2016. This indicates that the current growth rate is expected to be maintained to full year. The company grew sales revenue by 25.6% to N491.73 billion in 2015.

Cost of sales however grew by 67% to N231.68 billion during the review period, more than three times the increase in sales revenue. That means the net increase in turnover was insufficient to meet the increase in cost of sales, which claimed 52.4% of sales revenue, rising from 38% in the same period last year. That caused a decline of 7.2% in gross profit, which amounted to N210.41 billion at the end of September. Cost of sales had already exceeded the 2015 full year figure at the end of the third quarter.

Selling and distribution expenses grew by 64% year-on-year to over N62 billion at the end of September, already ahead of the full year figure of N53.5 billion in 2015. It also made an incursion into sales revenue, indicating a significantly increased cost of producing a naira of sales revenue. Administrative expenses rose by over 58% year-on-year to more than N30 billion at the end of the third quarter and also claimed an increased proportion of sales revenue.

The cost increases resulted in a drop of 29.5% in operating profit, which amounted to N122.37 billion at the end of the third quarter. A big boost came from finance income, which advanced by 152.6% to N55.70 billion at the end of September. Finance cost was virtually flat at N29.35 billion, resulting in a strong growth in net finance income during the period. This moderated the impact of the cost increases thereby preventing their full impact on the bottom line.

Interest expenses look likely to decline at full year considering the end of year figure of over N54 billion in 2015. Yet an accelerated growth in the final quarter isn’t ruled out in view of a rapid growth in balance sheet borrowings so far this year. Short-term financial liabilities advanced by 141% to N114 billion at the end of the third quarter and long-term debts were up by 31% to N272.7 billion over the same period.

Dangote Cement closed the third quarter with an after tax profit of N133.52 billion, a drop of 15.5% year-on-year. Based on the performance at the end of the third quarter, after tax profit is projected at N180.2 billion for Dangote Cement at the end of 2016. This indicates that the drop registered at the end of the third quarter would thin down to a marginal slip at the end of the year.

The company closed third quarter operations with a net profit margin of 30.2%, down from 43.2% in the same period last year. The full year profit projection assumes that a further decline in profit margin isn’t going to happen in the final quarter. That may however be punctured by the effect of further exchange rate depreciation on cost of sales and reasonable prospects that rising debts could spur interest cost.

The company earned N8.13 per share at the end of the third quarter, a decline from N9.80 in the same period last year. Earnings per share is expected to come to N10.56 at full year. The company earned N10.86 per share at the end of 2015 and gave out N8.0 per share in cash dividend.