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DANGCEM Q3'20: Robust Q3 earnings provides a springboard for a strong 9M 2020 perform
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Dangote Cement Plc Q3'20: Robust Q3 earnings provides a springboard for a strong 9M 2020 performance

Dangote Cement Plc reported robust earnings growth in its recently released 9M'2020 result. Revenue grew YoY by 12% to N761.44bn in 9M'2020. Due to a 9% slower growth in production cost, gross profit grew YoY by 14% to N443.90bn in 9M'2020. Operating profit increased by 24% YoY to N287.93bn in 9M'2020 due to efficient cost management by the group. Profit before tax rose by 38% YoY to N271.96bn in 9M'2020 while profit after tax surged to N261.82bn in 9M'2020. EPS for the period stood at N12.25k (9M'2020: N9.10k).

Robust Q3 2020 performance delivers impressive year-on-year revenue growth.
Following a resilient H1'2020 performance amid COVID-19 challenges, the group delivered an impressive 9M'2020 result driven by an impressive Q3'2020 outing. The group grew topline by 12% YoY from N679.79bn to N761.44bn in 9M'2020. The impressive growth was driven by a double-digit sales growth in the Nigerian market. Volume sales in Nigeria increased YoY from 10.82Mta in 9M'2019 to 11.92Mta in 9M'2020. The volume growth in the Nigerian market was driven by a strong 40% YoY increase from 3.22Mta in Q3'2019 to 4.51Mta in Q3'2020. According to management, the strong volume growth in Q3'2020 (up by 40%) was on the back of the group's promotional activities, reduced rain and increasing real-estate activities. Also, the catch-up effect from suspended projects in Q2'2020 contributed to the volume growth. The group's average realised price per tonne also grew YoY by 4% from N43,258 per tonne in 9M'2019 to N44,944 per tonne in 9M'2020, contributing to the overall revenue growth.

In the Pan African market, revenue rose YoY by 9% from N213.20bn to N232.61bn in 9M'2020 on account of price and volume increases. Volume sales increased by 4% from 7.20Mta in 9M'2019 to 7.47Mta in 9M'2020. Also, the average realised price per tonne grew by 4% from N29,843 per tonne to N31,160 per tonne in 9M'2020.

Higher realised prices amid limited slower growth in production cost lift gross profit
Production cost grew YoY by 9% from N290.02bn to N317.54bn in 9M'2020 driven primarily by an increase in material and energy cost. The cost of raw materials grew YoY by 10% from N88.93bn to N97.95bn in 9M'2020. Energy cost also increased YoY by 13% from N92.50bn to N104.53bn in 9M'2020. We believe that the increased factory activities to meet higher demand, as well as FX adjustments, resulted in the high cost. On the back of the increased revenue (rising faster than cost), gross profit increased YoY by 14% from N389.78bn to N443.90bn in 9M'2020. Gross profit margin also strengthened by 100bps from 57% in 9M'2019 to 58% in 9M'2020.

Recommendation
Q3'2020 performance came as a positive surprise to us. The group beat our expectation across the board. Historically, Q3 has been the weakest quarter due to the rain season. But this year has proven to be different. The group recorded its highest sales in the third quarter, both in volume and price terms. The higher sales in Q3'2020 were due to the national consumer promotion, reduced rain, and pent-up demand from Q2'2020. The group also resumed its exporting activities in Q3'2020, contributing to the sales growth in the period. Looking forward, however, we believe that the group will sustain the current momentum in Q4'2020 on the back of the ongoing national consumer promotion. Beyond Q4'2020, we expect a sustained revenue growth given the increasing real-estate activities due to the lowyield environment. We also expect an increase in the group's export revenue given the gradual reopening of the land border and the group's exploration of the seaports.

Overall, we have a revised EPS of N16.53k and a fair value estimate of N239.53k on the stock. At the current market price of N185.00k, the stock is trading at a 29% discount to our reasonable estimate. Thus, we rate the stock as market outperform and revise our recommendation to a BUY


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