Modupe Gbadeyanka
By Modupe Gbadeyanka
The long term and short term national scale issuer ratings of AA+(NG) and A1+(NG) respectively have been affirmed on Dangote Cement Plc by Global Credit Ratings (GCR).
In a statement issued by the rating agency last Monday, it further said the cement company’s outlook has been accorded as stable.
Explaining why it accorded the ratings on Dangote Cement, GCR said it took cognisance the firm’s strong position as one of the world’s top 20 cement companies by installed capacity.
Management plans to revise its expansion pipeline, in view of foreign currency restrictions and unutilised capacity in Nigeria.
Medium term commitments have been limited to grinding plants in Cote d’Ivoire and Ghana, while execution of the rest of the capex plan will depend on foreign currency availability.
Nigeria remains the dominant area of operations and accounted for 69% and 90% of revenue and EBITDA respectively in FY16 (FY15: 79% and 91%).
Dangote Cement Plc is Africa’s leading integrated cement group and subsidiary of Dangote Industries Limited (DIL), a diversified multinational corporate with operations spanning building materials, packaging, logistics, real estate, food and beverages, as well as real estate.
Rapid fixed capital accumulation increased the company’s installed capacity to c.46 million tonnes per annum (mtpa) across 10 countries by 1H FY17, from just 8mtpa in 2011.
The group has secured clinker sufficiency in Nigeria, and as a low-cost producer, is well positioned to absorb exogenous shocks without incurring material earnings variability.
Its strategic vision is to remain Africa’s leading producer of cement and aims to be the leader in quality, costs and services across all operations, with a market share of at least 30% and a first or second position in each market.
The group achieved 20% CAGR in revenue in the five years under review, registering turnover of N615.1bn in FY16.
Dangote Cement’s strong top line performance was underpinned by dominance of the domestic market, which enabled it to absorb sharp price compression to secure volume traction. Some regions within Pan-African operations also reported strong sales growth in 2016. Combined with marked energy and distribution cost escalation, challenges in Tanzania and Ghana, as well as a weaker Naira, the EBITDA margin shed c.12 percentage points to 41.7% (five-year average 53.8%). Nevertheless, EBITDA eased just 2% to N256.8 billion in FY16.
Repricing in the domestic market bolstered the EBITDA margin to 49.2% in 1H FY17, while increased productivity and the bedding down of additional international capacity are expected to see it average at a strong 55% in the medium term.
Operating profit reduced by 12% to N182 billion in FY16, before increasing 67% YoY to N162.8 billion in 1H FY17 at a wider 39.5% margin (FY16: 29.6%). Dangote Cement’s margins remain well above those of its peers.
Cash generation remains sound, albeit discretionary cash flow coverage of net debt has eased to new lows in FY16 and 1H FY17 (65%; 48%), and the short term debt exposure was high at 71% of total debt at 1H FY17 (FY16: 59%). Net interest cover remains adequate (FY16: 4.3x; 1H FY17: 8.5x), and is expected to trend within range for the current ratings in the medium term.
Despite an aggressive cumulative outlay of N813.6 billion on capex in the five and a half years under review, Dangote Cement also paid out N573.2 billion in distributions, which represented 63% of cumulative net income.
This has seen total borrowings more than double from N181.2 billion at FYE13 to N432.6 billion at 1H FY17, of which 47% represented DIL (Naira denominated) loans.
In addition to proven shareholder support, note is also taken of established relationships with strong funders, N120 billion in trade finance credit lines, as well as plans to access debt capital markets to reduce reliance on shareholder loans and enhance funding flexibility and improve the debt maturity profile. International operations do provide a natural currency hedge, albeit constrained by the erratic performance trajectory in some regions.
Although net gearing and net debt to EBITDA have risen from very conservative levels reported prior to FY14, they remain aligned to the ratings, at 39% and 79% respectively as of 1H FY17 (FY16: 32%; 100%). Stressed scenarios indicate that metrics are expected to remain within range over the rating horizon, assuming a tapered capex plan (amongst other considerations).
An upgrade will be dependent on the proven ability to sustain high capacity utilisation domestically in the medium term and the successful bedding down of international capacity enhancements translating to strong Pan-African free cash flows and sustained conservative gearing metrics for the Group.
Conversely, slower than anticipated economic growth in key territories, delays in rolling out public infrastructure projects, foreign currency scarcity, the adverse movement in foreign exchange rates, punitive regulatory changes and competitive pressures may constrain demand and/or pricing flexibility. This could adversely affect earnings and result in liquidity strain, increased gearing metrics and impede debt service, placing downward pressure on the ratings.
