Dangote Cement Records Healthy Margins Despite Slide In H1 2022 Profit

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Dangote Cement (DangCem) is the most valuable cement company and the second most valuable stock on the Nigerian Exchange (NGX) with a market capitalization of N4.17 trillion, twice the size of BUA Cement Plc and Lafarge Cement Plc combined.

The largest cement company in terms of production capacity of 51.6 million metric tonnes/pa compared to BUA Cement’s 11 million metric tonnes/pa and Lafarge Africa’s 10.5 million metric tonnes/pa, has recorded a 10% decrease in its half-year (H1) 2022 profit, due to higher foreign exchange pressures and energy costs incurred, which have become trending systematic risks.

The Industrial Goods Sector Company’s financial statement as released on the NGX shows that profit after tax dipped by 10.19% to N172.105 billion compared to N191.631 billion in HY 2021; revealing a dip in net profit margin by 23% to 21.31% from 28% in H1 2021.

Dangote Cement Records Healthy Margins Despite Slide In H1 2022 Profit

A further review of the H1 2022 financial statements reveals that the earnings slump was mainly driven by elevated cost pressures and increased interest expenses. For instance, DangCem reported a 16.8% increase in the cost of sales to N322.46 billion in H1 2022 from N276.12 billion in H1 2021, driven primarily by a 31.3% hike in fuel and power consumed (especially diesel and coal), that closed H1 2022 at N129.96 billion from N98.98 billion in H1 2021.

Going by the growth in production and selling/distribution costs, which are respectively 59% and 71% of the 2021FY figures and as inflation and energy costs continue to soar, expectedly, exerting more pressure, the company is most likely to exceed its respective 2021FY costs and that, might contract the healthy H1 2022 gross profit (+60%) and operating profit margin (+39%).

However, it is important to note that the company’s gross profit margin has not been volatile, which could have been a signal of poor management practices. Over the past two years, the margin has been about 60% on average per year. Also, DangCem’s gross profit margin is higher compared to its peers; BUA Cement (+48.3%, H1 2022) and Lafarge (51.5%, H1 2022), though the gross profit margin of the companies was bolstered by an upward product price adjustment and not due to increase in production volume, which led to, for example, the growth in DangCem’s revenue by 17.01% to N808 billion from N690.5 billion in the comparable periods, while production volume went down to 13.8 metric tonnes in the first half of 2022 from 14.5 metric tonnes in the same period last year due to the same disruptions in energy supply.

Another cost centre that affected DangCem’s profitability is finance costs. The cement maker’s profit before tax margin dipped due to higher finance costs on higher interest expenses and foreign exchange loss. The company suffered N40.66 billion foreign exchange losses in H1 2022 from N4.94billion reported in H1 2021, attributable to dwindling Naira in the foreign exchange market. This impacted the net finance cost, which surged, up 154.2% to N53.2bn in H1 2022 from N20.9 billion in H1 2021. The growth in net finance cost came from a 147.9% year-on-year increase in finance cost to N75.2 billion, which masked the 233.9% year-on-year increase in finance income to N22 billion.

Overall, in spite of the very challenging macroeconomic environment, DangCem recorded relatively decent earnings per share of N10.10 per share, which is higher than Lafarge’s N2.32 and BUA Cement’s N1.81 for the same period.