Company Analysis

Exchange loss slows Dangote Cement in second quarter


Dangote Cement group lost the high growth speed in earnings it recorded in the first quarter as foreign exchange loss undermined profit growth in the second quarter. A foreign exchange gain of N12.5 billion in the first quarter was wiped off by a loss of N15.4 billion in the second quarter. That overturned the company’s position from a net finance income of N4.6 billion in the first quarter to a net finance expenses of N15 billion at the end of June, 2018.
An upsurge of 170% in finance income to N15 billion was the big event that lifted the company’s profit in the first quarter. Its reversal in correction of hitherto unrecognized interest expenses in subsidiaries is equally the main factor in the profit slowdown in the second quarter.
Sales revenue remains on target with sales volume up by 7.4% to 12.4 million tonnes year-on-year at the end of June. Sales revenue amounted to N482.44 billion for Dangote Cement at the end of half year trading, an increase of 17% year-on-year. Improving output, increasing sales volume and growing revenue indicate expanding market share for the group.
Sales revenue has been on the upbeat since the third quarter of last year and the company closed the year with turnover up by 31% to N806 billion. That was despite a 7% decline in sales volume. Improving sales volume, firm demand for building materials and growing sales revenue are the key strengths of the company this year. The full year outlook remains positive for Dangote Cement with turnover expected to approach the one trillion-naira mark in 2018.
After tax profit failed to keep pace with the 17% growth in sales revenue and edged up by 3% year-on-year to N113.16 billion at the end of half year operations. This is a loss of momentum from a growth of 29% in after tax profit to N72 billion at the end of the first quarter. The ability to convert revenue into profit was the company’s problem in the second quarter.
Loss of profit margin reflects chiefly a sudden shift from a net finance income position in the first quarter to a huge net finance cost figure at the end of the second quarter. Finance income dropped from over N15 billion in the first quarter to N3.6 billion at the end of June. The company explained that the difference of N11.5 billion was a reversed entry for incorrectly charged interest expenses of two foreign subsidiaries.
At the same time, a foreign exchange loss of N15.44 billion appeared at the end of half year against a gain of N11.21 billion in the same period last year. Despite that finance expenses dropped by over 24% to N18.56 billion, net finance cost grew from less than N8 billion to about N15 billion over the same period from a net finance income of N4.6 billion at the end of the first quarter.
Profit performance was also affected by a sharp growth of about 58% in tax expenses, which amounted to N72.4 billion at the end of June. That explains the difference between an increase of 19.3% growth in pre-tax profit to N185.5 billion and only 3% improvement in after tax profit during the review period.
Administrative and selling/distribution expenses also grew ahead of sales revenue and encroached upon margins during the review period. The only cost line that afforded the company some cost saving is cost of sales. It moderated relative to sales and therefore permitted gross profit to grow ahead of sales revenue at 21% to about N285 billion, raising gross profit margin from 57% to 59% over the review period.
Net profit margin is down from 26.6% in the same period last year and from 30% in the first quarter to 23.5% at the end of half year trading. The company is nevertheless expected to keep profit up for the second year from a 7% decline in 2016. It closed 2017 operations with an after tax profit of over N204 billion.
The company earned N6.60 per share at the end of half year, improving from N6.41 per share in the same period in 2017. It earned N11.65 per share at the end of 2017 operations and paid a final cash dividend of N10.50 per share last June.

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