The storm that is the COVID-19 pandemic expectedly had its impact on Dangote Cement.
If there is one thing Dangote Cement – and the entire Dangote Group has in abundance, it is foresight. This is, no doubt, a major reason the Group is the largest in the game, making up about a fifth of the market capitalisation of the Nigerian Stock Exchange (NSE). Its cement business alone is one of the largest businesses on the Nigerian bourse in terms of its total assets and revenue.
The company’s H1 financials
Just last week, the cement conglomerate reported its H1 and Q2 2020 results, revealing a 1.95% increase in revenue to N476.85 billion, up from N467.73 billion recorded during the comparable period last year. Isolating its Q2 results, we can see an even smaller growth in revenue of 0.04% in the quarter, attaining N227.7 billion from N227.6 billion in Q2 last year. The profitability of the company was, however, bolstered by a 47.3% decrease in income tax expense.
The storm that is the COVID-19 pandemic expectedly had its impact on Dangote Cement. Chief on the list is the devaluation of the naira from N366 to N388 at the NAFEX window, a development that cost the company more in repaying its foreign debt. In addition to this, Dangote Cement recorded lower sales volumes due to restrictions on construction activities during the lockdown period.
But then again, the company’s low revenue growth has more to do with its Pan-African operations dragging it down, more than any of the aforementioned. And while the company, forward-thinking as ever, has made plans to further expand its operations with the addition of four new plants in (at least) five countries including Cameroon and Ghana, many of its operations across Africa have proven to be more liabilities than assets.
Pan African Operations and its Growing Pains
Dangote Cement has a production capacity of 45.6 million tonnes per year across countries in Sub-Saharan Africa. Specifically, there are factories in more than seven countries, including a clinker-grinding plant in Cameroon, as well as import and distribution facilities for bulk cement in Ghana and Sierra Leone. Together, these operations make Dangote Cement the largest cement producer in Sub-Saharan Africa.
Over the years, however, the Group has had challenges in Tanzania, Zambia, Senegal, and Ethiopia. A number of the challenges are attributable to the macroeconomic conditions of the specific locations, including the controversial law insisting that the government must own half of the company in Zambia as well as the killing of the company’s CEO in Ethiopia in 2018. Others point only to the limited market share the company possesses in these other locations, as well as the existence of competing goods. Also, the excessive borrowings placed on the Pan-African business has done more harm than good as they are masking its strong domestic feats.
The N85 billion loss Dangote Cement reported from its Pan African businesses in FY 2019 was the fourth consecutive year since the economic recession of 2016. In just Q2 2019, the company recorded N17 billion in losses. While there was a significant reduction in losses in the second quarter of 2020 of about 75% as it made losses of N4.3 billion in 2020, a juxtaposition of the overall performance of the Nigerian company which made profits of N74 billion in the same period, reveals a relationship that is almost parasitic.
Domestic sales of cement in Nigeria increased by 2.2% to 13.7Mt in 2019, including exports coming to 14.1Mt. The Group noted in its financial statements that its Pan African operations, including clinker, contributed 9.6Mt in volumes. The total Pan-African volume represents 40.1% of Group volumes with the majority of its gains coming from Nigeria alone. Pan-African revenues of N282.7 billion were 0.2% lower than FY 2018 and represented 31.7% of total Group revenues. Strong performances in Senegal, Tanzania, and Sierra Leone were able to help offset temporary challenges in Congo, Ethiopia, and a depressed economic environment in South Africa. Yet, its headwinds still lurk.
The company’s expansions plan also requires significant funding, which is why the company’s debt profile has been on the rise. Net finance cost has gone from N1.5 billion in 2016 to over N50 billion in 2019. Finance cost is likely to increase once the full effect of devaluation sets in. To keep its expansion plans going, it will need to explore sourcing funds in the functional currency in the country of operation.
So far, the company has only noted its desire to further deploy its clinker and cement export strategy across West and Central Africa. For one, the completion of its 1.5Mta grinding plant in Cote d’Ivoire is expected by the end of 2020. Yet, its expansionary objectives are not enough to redirect its overall strategic intent. As opposed to further dissipating limited resources into expansion of its operations, the group needs to brainstorm effective ways to reduce its cost in these African countries whilst also enhancing revenue enough to sustainably strengthen its overall business.