Dangote Cement Plc: An excellent year

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Introduction

The 2016 financial year was quite a profitable one for Dangote Cement Plc. It was able to increase the tempo of its revenue generation and made more sales during the course of the year. While the cement giant was not able to sustain the growth rate to the pre tax profit level, its profit levels were substantially higher than those of its competitors.

Profitability ratios were still very high that they surpassed industry standards, and it paid a slightly higher dividend to shareholders.

All in all, it was an excellent year for the company.

 

Core operations

For the 2016 review year, the cement company earned more revenue in 2016 than it did in 2015, at about the same growth rate it did in 2015. It was however unable to sustain the momentum of its growth to the profit level, primarily due to a huge increase in production costs. It had spent significantly more on cost of sales in 2016 to achieve the level of sales that it did. Revenue for the year was N615.1 billion, 25.1 per cent more than the N491.7 billion recorded in 2015.

Dangote Cement was also not as able to curtail its finance costs during the course of the year. These increases in cost of sales and finance costs ate into the cement company’s profit. Thus, it had a pretax profit of N180.9 billion, 3.9 per cent less than the N188.3 billion recorded in 2015. It however recorded a 2.9 per cent growth in after tax profit during the course of the year, with the after tax profit growing to N186.6 billion from N181.3 billion before.

Earnings per share (EPS) as well as dividend per share (DPS) were higher than those of the prior year. At N11.34, the EPS was 4.4 per cent higher than the N10.86 recorded before. Meanwhile, DPS was N8.50, 6.3 per cent higher than the N8.00 recorded in 2015.

 

 

Profitability ratios

Profitability ratios generally dipped during the course of the year. For the year, the company recorded a profit margin of 29.4 per cent, lower than the 38.3 per cent recorded in 2015. Analysis shows that for every N100 earned by the company in the course of the year, it recorded a profit of 29.40, as compared to a profit of N38.30 in the preceding year.

As per return on assets (ROA) and return on equity (ROE), the company also did not perform as well in 2016 as it did in 2015, but the results it recorded are still high enough to be commended. ROA for the year was 11.8 per cent, down from 17.0 per cent in the prior year. ROE was 23.4 per cent in 2016, up from 28.1 per cent in 2015. Our analysis of the company’s ROA and ROE showed that assets and shareholders’ funds contributed N11.80 and N23.40 to pre and after tax profit respectively.

Earnings per employee improved to N37.8 million on the average, up from N34.4 million in 2015. This is indicative of employee productivity and company efficiency.

It is important to note that while the company’s profitability ratios were generally lower than those of the preceding year, they outperformed most of its competitors’ and peers’ results for the same review year. This is of itself commendable.

 

Other ratios

As was the case with most of its profitability ratios, Dangote Cement’s capital adequacy in 2016 was generally better than those of other companies. At78.6 percent, and higher than the 70.8 per cent result recorded in the prior year, the cement company’s result remains high and suggests that its financial strength in the future is solid.

The company however bucked the common trends of the manufacturing industry for the 2016 financial year in terms of current ratio. In a departure from the common rule of most companies having high current ratios, it had a low current ratio of 0.6 times and did not have the ability to meet short term liabilities with short term assets.

Having a debt to equity ratio of 0.92 shows that the company is using only 92 kobo of liabilities in addition to each N1.00 of stockholders equity. In other words, the company is using N1.92 of total capital for every N1.00 of equity capital, a little higher than the result Dangote Cement achieved in 2015.

 

Sustainable growth

Dangote Cement recorded a distributable profit of N186.6 billion in 2016, and retained 22 per cent of it, and this is as compared to the twenty five per cent it retained in 2015. With a profit margin of 29.4 per cent, a retention ratio of 0.22, an asset turnover of 0.40 times and an asset to equity ratio of 1.92, the company had a sustainable growth rate of 5.0 per cent. This means that using only the resources it generated, the company had the capacity to grow by only 5.0 per cent during the course of the year. It was however able to grow by a higher 25.1 per cent, which means it overshot its inherent capacity for growth. This is similar to what happened in 2015 with the company also overshooting its inherent capacity for growth.

 

Stock value

The Dangote Cement stock sold at N213.00 as at our analysis date of September 22 2017. This is clearly on of the higher priced stocks on the floor of the Nigerian Stock Exchange, and our analysis determines that it is overvalued at that value. First, nets assets per share is N93.76, lower than the current market price. Secondly, the book value to market value ratio is much less than one, another clear indication of overvaluation. While book value is N797 billion, the market value is N1.81 trillion. It is obvious that the company is worth less in reality than the price it is currently trading at. It is important to state that the seeming overvaluation of Dangote Cement’s stock is compensated for by the goodwill the company enjoys from the consuming public and investors alike. The stock also always pays a substantial dividend, so this is good news for the investor.

 

Unique strategies

Dangote Cement is Africa’s leading cement producer with 44 million tonnes per annum (Mta) of production or import capacity operational at the end of 2016 in Nigeria, Cameroon, Ethiopia, Ghana, Senegal, South Africa, Tanzania and Zambia.

Headquartered in Lagos, the Group is managed by an executive team led by the Group Chief Executive Officer (GCEO), who reports to the Chairman and the Board of Directors. Dangote Cement has two operating regions: Nigeria and Pan-Africa. Each has its own Chief Executive and Chief Financial Officer reporting to the Group Chief Executive Officer and Group Chief Financial Officer respectively.

The Company that became Dangote Cement was founded at a time when Nigeria was almost entirely dependent on imports. Indeed, importation of cement was the company’s main business for many years until the Federal Government launched its industrial policy of Backward Integration in 2002.

The company has invested billions of dollars building new capacity that has made Nigeria not just self-sufficient in cement but also an exporter.

 

Conclusion

Our analysis shows that the Dangote Cement stock in one that pays dividend, so it is an ideal stock for the investor who is interested in a regular dividend income.

*Source: Dangote Cement’s 2016 financial report

*The Nigerian Stock Exchange

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