Dangote Cement: Reaping the fruits of diversification

At a recent interaction with stakeholders at the Nigerian Stock Exchange (NSE), the management of one of the Africa’s leading cement company, Dangote Cement plc, were bold to say that the company, after putting in place strategy to give investors continuous smiles, is on track to ensure sustainable long term benefits.

Almost a year ago, the company shocked the manufacturing sector with the announcement of a slash in the price of Dangote Cement, a strategy aimed at increasing the volume of the cement sold in the country, hence its dominance in the building sector of Nigeria. While market watchers were intrigued by the bold steps taken by the management of Dangote, caution were applied at the effect this might bring to the market value of the company.

Eleven years gone, the company had nothing to regret as the risk taken had yielded desired result despite unforeseen challenges that could have marred the huge decision.

For the Chief Executive Officer of Africa’s largest cement producer, Onne Van der Weijde, the price slash was a part of the derisking strategy, who explained that it was itself a consequence of certain risks being reduced as we went further in 2015.

“Our gas supply was really quite stable and our new capacity in Nigeria was up and running as we’re our coal facilities on key lines there. Further, we were already doing well in the new factories we had opened across Africa and they were making a good contribution to our business.

So in this new, more certain environment, we decided we could reduce the price to a level that was in our view, more sustainable in the longer term. When we looked at it from a longer term perspective we concluded that we’d get more volume. Clearly the final quarter of 2015 was very strong for us with volumes up 36 per cent on the last quarter of 2014, so there was an immediate impact on sales. We estimate that the whole Nigerian market as a whole rose by 20 per cent in the final quarter, which is very strong,” he said.

The company also had taken steps to go in line with its mission to help Nigeria and other African countries towards self reliance and self sufficiency in the production of the world’s most basic commodity by establishing efficient production facilities in strategic locations close to key market.

In line with this, to the delight of investors, Onne Van der Weijde, announced that the company’s diversification into other African regions was finally yielding results.

According to Onne these regions have contributed 26 per cent of the Cement giants revenue in the first six months of 2016, compared to 14 per cent contributed in the prior period.

Onne Van der Weijde, who presented the company’s fact behind the figures on noted that Dangote Cement increased its top line by 20.6 per cent to N292.2 billion from N242.2 billion. Where Nigeria grew by 4.2 per cent to N216.6 billion, West & Central Africa grew its revenue significantly by 192 per cent from N17.1 billion to N49.9 billion for the first half of 2016. South & East Africa grew its top line by 50.9 per cent to N26.1 billion from N17.3 billion recorded for the corresponding period of 2015.

Africa’s largest cement producer, Dangote Cement had earlier reported a decline of 15 per cent in its profit for the half-year period of 2016. The company reported a profit after tax of N103.4 billion compared to N121.8 billion declared in H1 2015, even as profit before tax fell three per cent to N124.9 billion from N128.7 billion, on account of increasing operating cost spurred by hike in fuel cost, pipeline disruptions, FX instability amongst others.

Recently, the company has taken another step to make use of coal to further improve profit margin. The company’s CEO noted that “Our investment in coal is enabling us to reduce our dependence on both oil and gas as fuel sources, thus protecting our production from disruption and improving margins. The devaluation of the Naira will obviously have an impact on costs and our priority will be to protect margins.”

Commenting on the year’s outlook, the cement company said “We are confident of delivering good growth this year despite the challenging economic conditions facing Nigeria and the rest of Africa. We have achieved strong sales growth in Nigeria and are readying more coal-burning facilities that will improve our fuel security, reduce our dependence on LPFO and even gas and help to restore our margins. As we have previously made clear, our focus will be to protect margins through cost controls and adjustment of prices.

“We have new capacity coming on-stream in Congo and Sierra Leone and expect Tanzania to increase its market share in the coming months. Foreign exchange constraints in Nigeria have made us reconsider the pace of our expansion and we now believe that a five-year building programme will enable a more optimal balance of funding and investment.

According to him, some of the company’s plants in Obajana in Kogi State and Ibese in Ogun State have already started using locally purchased coal for operation, blending with imported coal to assure optimal quality.

“Our investment in coal is enabling us to reduce our dependence on both oil and gas as fuel sources, thus protecting our production from disruption and improving margins. The devaluation of the naira will obviously have an impact on costs and our priority will be to protect margins,” he said.

Commenting on the year’s outlook, Weijde said they are confident of delivering good growth this year despite the challenging economic conditions facing Nigeria and the rest of Africa.

“We have achieved strong sales growth in Nigeria and are readying more coal-burning facilities that will improve our fuel security, reduce our dependence on LPFO and even gas and help to restore our margins. As we have previously made clear, our focus will be to protect margins through cost controls and adjustment of prices,” he said.

The company’s Group Chief Financial Officer, Brian Egan, was confident that the company’s balance sheet remained strong with non-current assets increasing from N847.6 billion at the end of 2014 to N945.0 billion at December 31, 2015.

According to him, “this was mainly as a result of increased capital expenditure, both within Nigeria and in other African countries.

“Total additions to property, plant and equipment amounted to N251.9 billion, of which N95.5 billion was spent in Nigeria, N34.5 billion in West & Central Africa and N121.9 billion in South & East Africa. The gross capital expenditure was partially offset by a depreciation charge of N54.2 billion. There was a deferred tax asset write down of N2.2 billion, and a N70.4 billion decrease in prepayments.

The final quarter of 2015 saw the full impact of the price reduction announced in September. Cement volumes Rose 31.8 per cent to nearly 4.0Mt, compared to the 3.0Mt sold in Q4 2014 with Q4 2015 revenues of N93.8 billion.

Operating profits in the Nigerian operations increased by 1.5 per cent to N193.7 billion although the operating margin fell slightly from 51.4 per cent in 2014 to 49.8 per cent 2015.

He however explained that the impact of the price reduction in September offset margin gains from a more favorable fuel mix during the year. “Manufacturing cost of goods sold in Nigeria  increased by 1.4 per cent, driven mainly by the increased depreciation charge associated with the opening of new factories, as well as by the increase in volume produced, and the fall in the value of the Naira against the Dollar, because a significant portion of manufacturing costs are dominated in US Dollars.”