CFA Institute Research Challenge
Hosted by
CFA Society Nigeria
Covenant University
Stock Exchange: Nigerian Stock Exchange (NSE)
Ticker: DangCem
Industry: Industrials
Cement Industry, Nigeria
Valuation Date: 30th November, 2018
Dangote Cement is a subsidiary of Dangote Industries founded by Aliko Dangote in 1981. The Recommendation
company went public in November, 2011 and joined the Premium Board of the Nigerian Stock
Exchange in September, 2015.
BUY
Share Current Price
Target Price
Upside
INVESTMENT SUMMARY
NGN 187
250
34%
We recommend a BUY rating on Dangote Cement (DangCem) and a target price (TP) of
NGN250. The market price of NGN187 as at 30th November 2018 implies a 34% upside to our
Key Figures
12-month TP and we see this as a good entry point. Our company valuation is based on a
Annual Dividend (NGN)
sum-of-the-parts approach where we value the Nigeria business using the Discounted Cash
52w Low (NGN)
Flow (DCF) model and the Pan African businesses using trading comparable (EV/EBITDA 52w High (NGN)
multiples) method. We think DangCem’s consistency, scale and efficiency set it apart from its 30-day Avg. Volume
Number of Shares (bn)
peers. DangCem has produced strong quarter after quarter results and we find it attractive
for growth investors. Our investment drivers are: 1) its Pan-Africa diversification; 2) its EV (bn NGN)
Free float (%)
superior margins and scale; and 3) DangCem is trading at a 2019E P/E of 10.2x, a 39% discount
Levered Beta
to its peers in frontier markets.
10.5
185
290
1,180,876
17.04
4,472,039
14.7
1.0
Source: Bloomberg, Team Assessment
Pan-Africa diversification: We envisage strong growth for DangCem supported by
Valuation Summary
increased demand for cement in the coming years and believe its diverse Pan African
exposure positions it well to capture long-term growth in sub-Saharan Africa (SSA). In its core Nigeria (NGN mn)
Nigerian market, DangCem’s low cash cost of NGN14, 886/t and strong margins of 66% set it Africa (NGN mn)
apart from peers. Both are very attractive features, in our view. We estimate a five-year Less: Net Debt (NGN mn)
Equity Value (NGN mn)
group EBITDA CAGR of 11% and a five-year average FCFY of 10%. DangCem’s Pan African
operations are yet to reach a sustainable level, perhaps unsurprising given that they have Number of shares (mn)
only been in operations for 1-3 years. In due course, the Pan Africa business will begin Target Price
contributing more significantly to group profits and valuations especially with increased
Price Performance – 52 weeks, NGN
company efforts at increasing capacity utilization in those regions.
Superior margins and scale: DangCem is the largest cement manufacturer in Nigeria
having about 65% volume market share as at 2018, as well as a dominant cement player in
Africa with the highest ROE of 35% in 2019. We like that it has the lowest cash costs in the
sector, strongest ROE, and largest market share which brings pricing power. The major driving
factors for stronger margins in 2019 are 1) the impact of the gas turbine on Tanzanian
margins; 2) the tax reversal from gaining pioneer status, which will happen in 4Q18 according
to management guidance; 3) the start of clinker exports by sea to other West African
countries and 4) the potential listing on the London stock exchange. These drivers provide
the firm the opportunity to enjoy increasing economies of scale, furthering its potential for
increased market share.
Trading at a discount to peers: DangCem trades at 10.2x and 7.3x 2019E P/E and
EV/EBITDA, respectively, 39% and 20% discount to peers. Two-year and four-year historical
average forward P/E’s are 14.8x and 16.7x, respectively; 45% and 64% premiums to current
levels. This implies that the company is significantly cheaper to purchase than its peers
despite its exceptional prospects for increased profitability. Therefore, we are convinced
valuations are attractive at these levels and we reinforce our BUY rating.
Key Financial Ratios
F17
F18F
F19F
F20F
F21F
F22F
EBITDA Margin
Revenue Growth
Return on Equity
EPS (NGN)
DPS (NGN)
Debt/Total Capital
P/Ex
EV/EBITDAx
48%
31.0%
26%
11.65
10.50
21%
16.7
9.2
49%
12.3%
29%
13.93
12.71
23%
13.8
8.2
48%
10.6%
35%
19.20
17.30
15%
10.2
7.3
47%
17.8%
38%
23.43
21.11
2%
8.3
6.0
48%
6.0%
40%
26.54
19.90
-7%
7.3
5.3
48%
6.4%
39%
29.41
22.06
-24%
6.7
5.0
3,877,840
594,199
(216,272)
4,255,767
17,041
250
DANGCEM NL
NGN
350
300
250
200
150
Dec
Feb
Apr
Jun
Aug
Oct
Dec
Recent News
 Dangote Cement eyes IPO on the LSE in September
2019 -November 6, 2018.
 Dangote Cement, 12 others lift stock market value by
over N80bn-October 18, 2018
.
 Dangote cement to expand market share with
“BlocMaster”- October 15, 2018.
 Market rebounds from 13 month low on Dangote
Cement 9% gain- August 17, 2018.
 Dangote Cement issues N50bn Series 3 & 4 CPs at
13.2%- August 14, 2018.
 FMDQ admits DangCem’s N50bn Commercial Paper
on its platform-July 20, 2018.
Source: Business Day Newspaper, Nigeria
BUSINESS DESCRIPTION
Figure 1: Geographic Location
Dangote Cement Plc is the largest cement producer in Sub-Saharan Africa with its headquarters in
Lagos, Nigeria. The company, a subsidiary of Dangote industries limited, is the largest company by
market capitalisation on the Nigerian Stock Exchange. It accounts for almost 30% of the bourse’s market
capitalisation. Dangote Cement Plc is engaged in the manufacturing, packaging and distribution of
cement related products. Since its inception in May 1981, DangCem has created a presence in 10
African countries with 13 operational facilities, having a total installed capacity of over 45 million tons
(figure 3). It has employed over 24,000 people with prospects of creating more jobs through ongoing
investments (figure 6).
Geographic and company segments
The company is segmented into two strategic regions: Nigeria and Pan-Africa. Nigeria is Sub-Saharan
Africa’s largest market for cement with Dangote cement occupying 65% of the market share. In the
coming years, the company plans to expand into other regions in Western, Eastern and Southern Africa
with the aim to gain substantial market share. Notably, Nigeria is the largest geographical market of
DangCem accounting for (68%) of its sales revenue in FY 2017and 32% shared among the Pan-Africa.
Source: Company Data
Figure 2: Revenue by Segment
DangCem products
Dangote Cement Plc has a variety of high-quality products which has enabled it gain large market shares
across Africa. The company manufactures 32.5R, 42.5R and 52.5R grade cement (appendix) based on
the market demand. These products are packaged in 50kg polysacks. The 32.5R is a general-purpose
cement suitable for mortar and plastering while the 42.5R is a quality assured blended cement apt for
columns casting, beams, slabs and for mounding blocks and the 52.5R is a high-performance Portland
cement manufactured for building bridges and other purposes.
Company strategy
Increasing cost effectiveness through technological improvements
The company strategy includes becoming a leader in costs, quality and service in the industry. The
company has invested in building large, modern, highly efficient plants with the latest equipment from
Europe and China, which enables higher-quality cement at lower cost, hence improving the company’s
competitive advantage. This also enables the company to sell higher-grade cement at a competitive
price with the lower-grade products by the competitors. Starting from the Nigerian operations, the firm
has begun to cut down significant manufacturing costs by substituting the expensive gas/Low Pour Fuel
Oil (LPFO) mix with the interchangeable use of coal and gas thereby avoiding LPFO price shocks as a
result of the volatility of the oil industry and militant action in the region. What make the adoption of
coal as kiln fuel even more practical is the fact that it is sourced from the parent company’s mining
operations.
Source: Company Data
Figure 3: Production Capacity by Location
High level of business integration
The firm is making efforts towards overcoming the common operational challenges that plagues African
manufacturing companies by adopting a high level of business integration. Its key focus is on attaining
a high level of self-sufficiency in the provision of raw materials and fuel hence minimizing any loss of
value by way of outsourcing. It has invested resources into enabling it to internally generate power,
especially in markets with poorly developed power grids. It has invested in on-site power plants in its
facilities in Nigeria, Senegal, Tanzania and Zambia. In terms in the cheapest possible means with respect
to powering major Plants with Coal to heat the kiln has been a major form of cutting cost from the
expensive, which is occasionally subject to shocks from the oil industry and domestic violence.
Increased capacity utilization
With the forecast of population growth rate in Sub-Sahara Africa by the United Nations estimates, the
demand for cements tends to increase significantly. The company is building plants and fully utilizing
the installed capacity to meet the rising demands. An increase in the company’s capacity utilization
over all plants could have a buffer effect on the company’s profitability.
Expansion plans
DangCem is building export terminals in Lagos and Port-Harcourt thereby enabling more cost effective
and efficient exportation of the abundant and cheaply sourced limestone in the form of clinkers from
Nigeria to neighboring countries within the trade bloc (ECOWAS region). We believe the sea-based
export strategy is positive and expect to see strong rise in Nigeria’s cement/clinker production to 22mn
tpa in FY19, from c. 20mn tpa.
Source: Company Data
Figure 4: Strategy
Cost Effectiveness
through
Technology
Increased
Capacity
Utilization
High Level of
Business
Integration
Strategic
Expansion Plans
FX Hedging
Investment
Incentives
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2
At present, players in Ghana import clinker from Togo, while in Cameroon Dangote imports clinker from
Asia. We expect limited bureaucratic obstructions thanks to ECOWAS (Economic Community of West
African States), which allow free trade between countries in West Africa.
Figure 5: Estimated Population
Foreign exchange risk mitigation
By tapping into export markets with high cement prices and increasing sales, particularly in foreign
currency, the company plans on mitigating for foreign exchange risk in the form of scarcity and
volatility.
Investment incentives
Dangote Cement looks out for areas where there are incentives which could take the form of tax
holidays e.g. pioneer tax status, or trading in regional blocs, all in a bid to protect their margin and
hence charge competitive prices.
INDUSTRY OVERVIEW AND COMPETITIVE POSITIONING
World macroeconomic outlook
According to IMF (October report), global economic growth is now forecasted to be at 3.7 percent for
2018–19 which is a 0.2 percentage point lower for both years than forecast in April. The downward
revision is largely driven by; shocks which reduced activities in early 2018 in some major advanced
economies, the adverse impacts of the trade policies implemented between April and September, as
well as a weaker outlook for some important emerging market and developing economies which can
be largely attributed to internal factors within a country, restrictive financial conditions, geopolitical
pressures, and higher oil import bills.
Source: United Nations
Figure 6: Employees
Regional perspective
Source: Company Data
Figure 7: Real GDP Growth Rate
Nigerian macroeconomic outlook
16
According to (Global Cement Report, 2016), the urbanization rate is gaining traction as it is constantly
growing, currently at 50 percent. The consumption of cement is also growing at 122kg/person (Figure
10) given the high level of road construction going on in the country and infrastructural deficit gap to
be bridged. The GDP growth rate is also expected to be on an increase from 1.9 percent in 2018 to
about 2.3 percent in 2019.
14
12
10
8
6
Recovering economy despite oil price glut
Infrastructural trap deficit
According to Global Infrastructure Outlook (2017), Nigeria has a significant infrastructure investment
gap which has been estimated at $878 billion out of $97 trillion global needs, to address economic
growth and existing shortfalls from now (2017) till 2040. The report posits that an annual average
growth rate of 4.1 per cent of Gross Domestic Product (GDP) and population increases at a yearly rate
of 2.4 per cent would be necessary to achieve the goal during the same period. Hence this would serve
as an opportunity for the manufacturing sector to contribute significantly to growth and firms like
DangCem to boost up sales and profit margin.
4
2
2022
2020
2018
2016
2014
2012
2010
2008
2006
2004
-2
2002
0
-4
Nigeria
Africa (Region)
Sub-Saharan Africa (Region)
Source: IMF Data Mapper
Figure 8: US Dollar/NGN
400
300
200
100
0
1960
1964
1968
1972
1976
1980
1984
1988
1992
1996
2000
2004
2008
2012
2016
In 2014, Nigeria emerged as the largest economy in Africa with a Gross Domestic Product (GDP) of $568
billion (World Bank). However, following the fall in global oil prices which led to a recession in the
country, the economy now has a GDP of $460 billion which still leaves her as Africa’s largest economy
according to World Bank GDP ranking. Nigeria’s resilience was evident through the swift exit from her
first recession in over twenty years by a real GDP growth rate of 1.5% in Q218. The transition was driven
by marginal sectorial growth in sectors such as Agriculture, Finance, Construction and Real Estate. The
recession adversely affected FX, as Naira fell quickly against the Dollar from just under $1/₦200 in June
to $1/₦320 in late August. Not only did the Nigerian currency value less in the money markets but the
scarcity of foreign currency in Nigeria made it difficult to convert our Naira into the Dollars. However,
DangCem reinvented themselves through the reliance on their Pan-African) diversification which
provided essential foreign currency as foreign exchange controls by the Central bank of Nigeria made
it difficult to obtain Dollars for operations.
2000
Sub-Saharan Africa has an estimated population of over a 1 billion persons with an estimated GDP of
about $1,573 as at 2016 and a per capita cement consumption of about 84kg (Cement Global Report
2016). The macroeconomic outlook for Sub-Saharan Africa is expected to further strengthen. Growth
is expected to increase from 2.7 percent in 2017 to 3.1 percent in 2018, over the medium term, and on
current policies, growth is expected to accelerate to about 4 percent.
Source: WDI
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3
2019 election and political din
Figure 9: Global Estimated Cement Prices
The 2019 election period is expected to have an effect on the demand and overall performance of
cement following historical trends. Prior to an election, Governments usually spend more on
developmental projects in a bid to be re-elected in the forthcoming election. This therefore implies that
during the election year, there will be an expected decline with respect to the cement market, which
would be followed by an increase in the demand for cement.
INDUSTRY OVERVIEW
The cement industry in Nigeria consists of three (3) major players in the market; Dangote Cement Plc,
Lafarge Africa Plc, BUA group (affiliated with CCNN). It is an oligopolistic market characterized also by;
Import banning, strong prices, aggressive competition amongst major players to control market, and
high profit margins though very volatile in time of economic shocks such as the depreciation of naira
and reduction of crude oil price. Over the past few years, the cement industry has been contributing
consistently to Nigeria’s Real GDP (Figure 10). As the trend analysis shows that since 2015, Cement has
contributed over N500 billion annually to Nigeria’s GDP.
Source: Global Cement Report
Growth drivers
Rising housing deficit
A report by Centre for Affordable Housing Finance in Africa (CAHF) averred Nigeria needs an average of
about 1,000,000 units of homes yearly in order to bridge the estimated 17 million housing deficit by
2033, with a cost estimated to be at nearly N6 Trillion. To bridge the housing gap, FGN has embarked
on several programmes such as the Family Home Fund (FHF) initiative which is expected to facilitate
the supply of 500,000 homes by 2023 especially for low income earners. The Federal Government of
Nigeria in conjunction with World Bank adopted a Housing Finance Development Program (HFDP) with
a total commitment of about $300 million necessitated to establish a mortgage refinance company to
help make funds readily accessible to low income earners for housing purposes. Going by this estimates,
we expect that the cement industry would greatly benefit from this given consumption of cement
required to accomplish this feet (Figure 12).
Figure 10:Real GDP/Cement GDP
Increasing CAPEX
In a bid to bridge the infrastructure gap, we expect that the Nigerian government allocates a
significantly higher amount to capital expenditure for the 2019 budget, as consistent with historical
trends as CAPEX has been on the increase over the past two annual budgets. Take for instance the 2016
appropriation bill allocates N1.6 trillion to capital projects, however this increased in the subsequent
2017 appropriation bill which allocated over N2.2 trillion to capital project, which is slightly less than
the N2.8 trillion allocated to capital projects for the 2018 appropriation bill. We expect that DangCem
continually plays its cards well, taking advantage of the increasing appropriation bill by increasing its
volume of production to meet the need of the government (Figure 12).
Extension of pioneer tax holiday
Over our forecast period, we factored in the likelihood of the approval of the historical pioneer adjusted
effective cash tax applied to all industry players, on the consideration that every related documentation
had been filed and inspection done by NIPC, subject to a final confirmation. We expect further tax
incentive to attract more investment into the industry (Figure 12).
Source: IMF Data Mapper
Figure 11: Cement Consumption
Ethiopia
Sierra Leone
Tanzania
Zambia
Cameroun
Bangladesh
Nigeria
Kenya
Mauritania
Ghana
Senegal
South Africa
Congo
Cement per capita
(Kg)
Per capita
income (US$)
CPC/PCI
Multiplier
82
82
88
101
111
120
122
124
134
202
222
234
349
873
491
1,034
1,480
1,401
1,602
1,994
1,702
1,318
1,663
1,038
6,180
1,958
0.09
0.17
0.09
0.07
0.08
0.07
0.06
0.07
0.1
0.12
0.21
0.04
0.18
Source: Global Cement Report
Diversification of asset holding (Arbitrage)
We expect that the increased participation of the private investment through the real estate and
construction sector to increase the demand for cement (Cement Consumption) despite the contraction
witnessed over the past two years (FY 16: 6.6% and FY 17: 2.5%), hence we expect a reversal in 2018
and 2019. This would therefore lead to increase holdings in real estate, other than holding equities in
the declining stock market.
Figure 12: Growth Drivers
The expected post-election effect
The historical trend of the market cement picking up after the February 2019 elections is also a key
driver, as there is a large level of certainty restored in the market which can therefore boost investors’
confidence (Figure 12).
COMPETITIVE POSITIONING
DangCem ahead of Competitors: Higher Market Share
Dangote Cement has maintained its dominance in the Nigeria domestic cement market accounting for
65 per cent of the Nigerian market volume, which arguably supersedes that of its closest rival Lafarge
4
Source: Team Assessment
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34
4
with a market share of about 25 percent, and fast paced BUA group with a market share of 10 percent.
We further expect the market share of DangCem to increase in the next few years through the
establishment of export facilities, successful construction of new factories at Okpella and Itori.
Interdependence of value Chain
DangCem compared to its rivals has been able to achieve a status in the market that is almost next to
none in the industry going by its vast experience in the Nigerian cement industry. They have gained
control over their entire value chain right from their quarry site to distribution agents. In their major
plants (Obajana and Ibese), they have also ensured protected margins by the increased use of coal, now
sourced from mines operated by the parent company, Dangote Industries. The raw materials are
transported by their large fleet of trucks (more than 9,000 trucks) to their processing plant, and then
also packaged by their bagging facility before being transported to the consumer. The company also
has depots across the nation, securing a good grip of the distribution process (Figure 14).
Price leadership
DangCem has a superior price power over its rivals in the cement market, through the bagging of high
quality cement at lower prices than its competitors. A price strategic move was seen in Q418 through
the introduction of Falcon cement to better position for competition with Lafarge Classic 32.5 grade.
On the other side of the competition was the price cut by BUA, where prices were lowered in the North
Central by N100 in August, effectively bringing the price N50 lower than DANGCEM 3X and closer to
Lafarge Supaset. This therefore confirms the price leadership of DANGCEM in the market as potential
changes in the prices of its products result in a retaliatory price cut/increase by rivals (Figure 14).
Figure 13: Market shares
120%
100%
80%
8%
30%
8%
29%
10%
23%
10%
61%
62%
67%
65%
F15
F16
25%
60%
40%
20%
0%
F14
DangCem
Lafarge
F17
BUA Group
Source: Company Data
Figure 14: Competitive Positioning
Reliable export strategy
Dangote Cements export strategy gives it a competitive advantage, and this should see its utilization
rates improve. Dangote plans to export clinkers through the ports in Port Harcourt and Apapa in Nigeria
from 4Q18. We believe the sea-based export strategy is positive and expect to see a strong rise in
Nigeria’s cement/clinker production (Figure 14).
Efficient transportation system
Dangote Cement has fleets trucks (over 9000) to transport its cement while its rivals Lafarge and BUA
incur large transport cost as a result of their heavy reliance on third-party trucks. Lafarge for instance
uses third-party trucks and pays on an hourly base, while BUA uses third-party trucks, but from a
subsidiary of its business which results in favourable transport rates. This therefore implies that
Dangote could be avoiding a large sum of transportation cost by using its own trucks (Figure 14).
Figure 15: Company Value Chain
Dangote cement value chain
The value chain (Figure15) of Dangote Cement PLC generally involves the search for limestone depot
that could be mined in commercial quantity, then follows quarrying of limestone; which is transported
to the cement factory where it is ground and supplemented with additives namely; laterite and shale.
The mixture is subjected to intense heat in a kiln (which is powered either by LPFO, Gas or Coal), to
form clinker. The clinker obtained can be exported to other countries where grinding facilities exist.
However in integrated plants, the clinker is further ground and supplemented with uncooked limestone
and gypsum (Imported additive) to form cement, which is sent for bagging, then storage before
transportation to wholesale and retail Distributors. Note: Dangote Cement PLC has all of its plants
(Gboko, Obajana and Ibese) operating on Coal to replace the Low Poor Fuel Oil (LPFO), which is more
costly and exposed to economic shocks. This has helped Dangote Cement to considerably protect its
margins over recent years.
Source: WBCD Cement
Figure 16: Revenue Growth
1,400,000
FINANCIAL ANALYSIS
Historical revenue growth and positive outlook
Dangote Cement PLC has historically achieved a significant growth rate of 31% in its revenue for FY17
(total revenue of NGN 805,582m), despite the recent economic recession. The company divides its sales
into Nigeria and Pan-African. Nigeria’s company contributed 68% to the total sales, mainly due to the
competitive advantage and large endowment of raw materials in Nigeria. We have projected sales for
the next 5 years based on the economic indicators (projected GDP and inflation rates) and market
expectations (figure 16) with a relatively flat price. The projected sales have been estimated separately
for each region of the company based on their capacity utilizations. With the clinker export terminal
launched in Q42018 by the company, we remain optimistic for growth in volume for the next five years
on average 22%. The Pan-African volumes in the years ahead are expected to exhibit stronger
performance. Therefore, our projected estimate resulted into 5-year CAGR of 12%.
35%
1,200,000
1,000,000
30%
31.0%
25%
800,000 25%
20%
600,000
400,000
200,000
17.8%
12.3%
10.6%
0
15%
10%
5%
6.0%
6.4% 0%
F16 F17 F18FF19FF20FF21FF22F
Sales (NGNm)
Growth (%)
Source: Team Assessment
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5
Figure 17: EBITDA Margin
In 2017, COGS retained the largest proportion (44%) of sales, followed by selling & distribution (14%),
depreciation (10%) and administrative expenses (6%) (Figure 18). Fuel and power contributed
significantly to the COGS and the conversion from LPFO to coal and gas led to decline of COGS in 2017
(Appendix). We expect the company to maintain the cost of sales for the next five years constant
despite the expansion plans.
80%
Higher EBITDA margin
20%
25%
10%
F16
F17
0%
F13
F14
F15
DangCem
Lafarge
CCNN
Source: Company Data
Figure 18: Cost Bridge
120%
100%
80%
60%
40%
20%
0%
44%
6%
14%
10%
EBIT
Depreciation
Selling &
Distribution
27%
Source: Company Data
Figure 19: Cost of Goods
4.2%
7.6%
Upward FCF and modest CAPEX
-0.2%
0.3%
The firm has maintained a consistent free cash flow and high FCF margin, except for F17 where
DangCem tends towards achieving its expansion plans (figure 21). Considering the FCF margin, we
expect gradual increase on average of 30% over next five years as the company maintain tight working
capital. Regarding Capex, the company’s capital expenditure rose from 19% in F16 to 22% in F17.
Looking ahead, we expect the firm to relax its aggressive expansion plans for the next five years in which
we expect average of 10% capex efficiency. Therefore, instead of expanding through increased capital
expenditure, the firm is expected to increase its capacity utilization overtime taking the advantage of
export terminals in Port-Harcourt and Apapa, Lagos.
7.6%
Capital structure
Raw materials
Deprecation
Other Overheads
31.8%
17.0%
31.8%
Fuel & power
Royalties
Change in WIP
Salaries
Plant maintenance
Source: Company Data
Figure 20: Tax Rate
40%
30%
30%
F22F
F21F
-5%
-7% -7%
F20F
-10%
15% 15%
15%
4%
F15
0%
15%
10%
F14
10%
F13
We recommend a BUY rating on Dangote Cement (DangCem) and a target price (TP) of NGN250. The
market price of NGN187 as at 30th November 2018 implies as 34% upside to our 12-month TP, and
thus we see this as a good entry point. Our company valuation is based on a sum-of-the-parts
approach, where we value the Nigerian business using the Discounted Cash Flow (DCF) model and
the Pan African businesses using trading comparable (EV/EBITDA multiples) method. It is the complex
structure of DangCem operational structure that warrants an equally complex valuation methodology.
We valued the various arms of the business individually because we believe that an across board
valuation will not accurately represent the financial performance and growth prospects of the separate
arms.
14%
F12
20%
F11
VALUATION
21%
F19F
The Debt-to-Capital ratio for the closing previous fiscal year amounted 37.8%, considerably below the
Nigerian industry average of 56.8%. This implies that in the event of plans for expansion, the firm is
allowed enough room for leverage. Historically we have seen majority of the firm’s debt channeled
towards capital expenditure. Our forecast projects that the company’s long-term borrowing will remain
relatively constant for the next three years while the firm continues expansion efforts. However, after
the period, we forecast significant reductions in the firm’s long-term borrowings.
17%
13%
F18F
Over the years, DangCem has maintained a disciplined operating and liquidity position. The firm
debtor’s days are 16 days in 2017. This reveals the rigorous collection discipline of DangCem towards
the customers. Notably, the firm’s payable days are 160 days for 2017, which implies diffident behavior
of the creditors. The company has benefited from generating revenue from customers before paying
its suppliers for inventory (figure 22). We then anticipated the aggressive business model to be
sustained over the next five year on average of 25 days as there is no expected pressure from the
suppliers. Due to the high demand for cement in Africa, we anticipated 43 inventory days for the next
five years.
20%
18%
F17
Efficient use of working capital
24%
22%
19%
Administrative
Expenses
In previous years, DangCem PLC has benefited from the full five-year Pioneer Tax Incentive, which has
applied to Obajana and Ibese plants in Nigeria (figure 20). Specifically, Ibese lines 1&2 and Obajana Line
3 have received the initial three-year tax holiday from the Nigerian Investment Promotion Commission
(NIPC), while await approval for additional two-year period. Due to the delay in approval, we expect
DangCem to make provision for full tax payment of 30% for 2018 and next five-year to be reduced to
15% following the approval for the incentives of other new plants in Nigeria.
48%
42%
37%
40%
53%
F16
Pioneer tax status benefit
57%
Revenue 2017
DangCem PLC has higher EBITDA for last five years between its peers. This can be characterized by the
peers operating older factories that are smaller-scale and less efficient to meet large market demand
compared to DangCem (Figure17). We understand the level of Dangote Cement PLC competitive
advantage and expect the business model to be consistent and profitable. Therefore, we estimate a 5year CAGR of 11% for the following years.
59%
60%
Cost of Sales
Cost efficiency through conversion of fuel and power
Source: Company Data
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6
We made use of the DCF model, a more comprehensive method of assessment, in valuing the Nigerian
business due to the fact that it accounts for almost 90% of the group enterprise value (EV) whereas we
valued the non-Nigerian businesses using the average EV/EBITDA multiples for the regions.
Figure 21: Cash Flows
50%
40%
The Nigerian business- 5-year DCF model
We value the Nigerian business using the 5-Year Discounted Cash Flow to Firm Model and arrived at an
EV of NGN3.878 trillion about 87% of the group’s total EV. The DCF model is based on our forecasted
earnings, our evaluations of business outlook, the competitive positioning of the Nigerian arm, as well
as management guidance. We used the historical financial and operational data of this division to
forecast future revenue and EBITDA margin growth and hence value the Nigerian division as a
combination of the present values of its free cash flows for the next five years and its terminal value.
Therefore, we forecasted the trend of the Nigerian business using a two-phase growth model. The first
phase contains a comprehensive year-to-year forecast up until 2022, while we assume a constant
growth rate for the terminal phase. The free cash flow to the firm is expected to increase overtime. We
decided upon this approach because it allows for a thorough financial forecasts and analysis of the firm’s
Nigerian operation, hence providing a clear picture of the effect of the projected sales and margin
growth on the firm’s free cash flows and terminal value. The reliability of the DCF valuation for the
Nigerian division of the business dependent on the following model inputs:
30%
31%
600000
38%
400000
22%
16%
18%
200000
19%
12%
10%
7% 7% 7%
20%
20%
10%
0%
0
F16 F17 F18FF19FF20FF21FF22F
FCF margin
FCF
Source: Team Assessment
Figure 22: Working Capital Movement
160
200
Weighted Average Cost of Capital (WACC)
123
123
123
123
123
43
43
43
43
43
95
We discounted the firm’s free cash flows using a WACC of 15.3%. The WACC consists of the weighted
cost of equity and after-tax cost of debt. The cost of equity of 18.5% was gotten in line with the Capital
Asset Pricing Model (CAPM). This model requires the following inputs: i) the risk-free rate proxied by
the 10-year Nigerian treasury bill yield of 13.5% ii) the Nigerian market risk premium of 5% iii)
DangCem’s levered beta of 1.0. We arrived at an after tax cost of debt of 8.8% by applying the average
industry tax rate to the interest expense over interest bearing liability on the Nigerian division’s balance
sheet. Applying the Nigerian business’ debt to equity ratio of 0.33:0.67 in weighting the cost of debt
and equity, we arrived at the WACC.
Terminal growth
To calculate the terminal growth rate, we considered IMF long-term Nigerian GDP growth and inflation
forecasts. This approach results in a positive terminal growth rate of 9.1%. The decision to use these
variables as bases for our terminal growth forecasts is the fact that we believe that cement demand and
hence, production will grow at a multiplier of GDP growth. Also, we see cement price growth driven by
inflationary pressures. We believe that this rate also reflects declining costs as a result of increased
capacity utilisation and use of more cost-effective manufacturing technology. However, the terminal
value represents 75% of the Nigerian business’ enterprise value, so small changes to the perpetual
growth rate will have an important impact on valuation.
Pan-African business – Trading comparable approach
To value DangCem’s Pan African businesses, we used a relative valuation approach. We use a 2019E
average EV/EBITDA multiple of 9x to value DangCem’s Frontier businesses (Ghana, Senegal, Zambia,
Ethiopia, Tanzania, Congo, Cameroon, Sierra Leone and Cote d’Ivoire) and a 2019E EV/EBITDA multiple
of 7x to value its South African operations. These multiple estimates were based on the average
multiples for the firm’s peers in frontier and emerging markets respectively.
Figure 24: DangCem Nigeria DCF (NGN mn)
Operating income
Depreciation
Taxation
Change in working
capital
Capex
Free cash flow
% ch
FCF margin
Period
Discount factor
Discounted FCF
PV of FCF
Terminal Value
EV
37% 37%
2018
347,803
48,463
(101,706)
2019
360,027
50,425
(56,472)
2020
384,416
52,655
(68,094)
(7,103)
(81,355)
206,103
-7.0%
33%
1
0.87
178,735
957,756
2,920,084
3,877,840
13,032
(72,597)
294,414
42.8%
46%
2
0.75
221,416
21,663
(67,191)
323,450
9.9%
47%
3
0.65
210,951
2021
406,158
55,535
(76,887)
2022
431,260
58,810
(85,151)
8,540
9,593
(74,413)
(75,517)
318,932
338,994
-1.4%
6.3%
44%
45%
4
5
0.57
0.49
180,384
166,271
Source: Team Assessment
100
49
39
0
-100
9
16
14
14
14
14
14
F16 F17 F18F F19F F20F F21F F22F
-25 -25 -25 -25 -25
-20
-59
Days in inventory
Cash conversion cycle
Source: Team Assessment
Figure 23: FCF Bridge (NGN million FY19)
450,000 410,452
13,032
400,000
294,414
350,000
56,472
300,000
250,000
72,597
200,000
150,000
100,000
50,000
0
EBITDA Taxation Change Capex
in
working
capital
FCF
Source: Team Assessment
Figure 25: DangCem WACC Calculation
WACC Computation
Risk free rate
Equity premium
Levered Beta
Cost of Equity
Cost of Debt
Tax rate
After tax cost of debt
Leverage
WACC
13.5%
5.0%
1.0
18.5%
13.0%
32.0%
8.8%
33.0%
15.3%
Source:Bloombery company data Team Assessment
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7
By multiplying these multiples by the EBITDAs of the various businesses, we computed their enterprise
values. Based on our valuation, DangCem’s operations outside Nigeria have an enterprise value of
NGN594bn, 13% (Figure) of the group’s valuation. In Figure we show our Sum-of-The-Parts approach to
valuing the group to arrive at a target enterprise value and TP of NGN4.472 trillion and NGN250
respectively, for Dangote.
Figure 26: DangCem Sum-of-the-Parts, (NGN m)
Sum of the Parts
F19
EBITDA
Multiple
3,877,840
410,452
9.4
Africa
594,199
81,700
8.6
Risks to the Target Price
Ghana
31,590
3,510
9.0
Our growth assumptions may not hold if there is a sharp decline in Nigerian cement prices; continued
losses in Tanzanian, Congo and Ghana; weaker GDP growth in countries of operation, which will weaken
demand; Cheap Chinese imports flooding the markets; or if there is political or regulatory opposition
from any of the countries in which it operates. Simple adjustments of valuation assumptions could
significantly affect our target price and our BUY recommendation. To evaluate the impact of each major
assumption we performed a simulation, as well as, a sensitivity analysis to closely study the impact of
the WACC and terminal growth rates on the target price.
Senegal
106,808
13,186
9.0
South Africa
66,214
14,780
7.0
Zambia
46,474
6,885
9.0
Ethiopia
183,878
21,735
9.0
Tanzania
20,412
3,240
9.0
Congo Brazzaville
29,160
3,240
9.0
106,920
14,850
9.0
Sierra Leone
7,938
882
9.0
Cote d'Ivoire
-5,194
-608
9.0
Monte Carlo simulation
Using the Bloomberg terminal, we ran a Monte Carlo simulation making use of the stock performance
in the last twelve months as the basis for our simulation. The simulation output indicated only a 45%
probability of a share price higher than the current share price of NGN187 (Appendix 22). However, we
are of the opinion that this out is heavily biased by the weak performance that characterizes share
prices in the NSE prior to the presidential elections. Keeping in mind the fact that the pre-election jitters
are sure to wear off, we executed another more objective Monte Carlo simulation by varying the WACC
and terminal growth rate (Figure 29). Our output yielded a 100% probability of a BUY rating.
Nigeria
Att. EV
Cameroon
Total EV
4,472,039
Less: Net debt F17
216,272
Equity value
Number of shares,
millions
4,255,767
Target Price (NGN)
Share price
Upside/downside
17,041
250
186.9
34%
Source: Company data, Team assessment
Sensitivity Analysis
Sensitivity Analysis: Changes in the WACC and terminal growth rate values will result in significant
changes in our target price and hence our valuation. Therefore, we forecasted possible target price
outcomes applying WACCs ranging frpm12.3%-18.3% and terminal growth rates ranging from 6%-12%.
We observed a maximum share price of NGN3, 721 and a minimum share price of NGN162. We
therefore observed that an increase in terminal growth rate assumptions holding the weighted average
cost of capital (WACC) constant will maintain a buy recommendation, a decrease however would
present a hold or sell recommendation. Holding terminal growth rate constant, increase in the weighted
average cost of capital (WACC) would lead to a hold or sell recommendation and a decrease would lead
to a buy recommendation.
WACC
Figure 28: Sensitivity Analysis
Source: Team Assessment
275
244
Terminal growth rate
8%
9%
10%
323
401
545
299
358
437
11%
912
596
3721
919
7%
12%
250
12.3%
13.3%
6%
242
236
14.3%
210
221
255
294
341
423
554
15.3%
190
204
223
250
281
330
410
16.3%
173
191
180
199
219
240
273
180
181
195
193
211
208
233
227
333
285
17.3%
170
18.3%
162
Source: Team Assessment
171
Figure 26: Percentage share of EV
Figure 30: Monte Carlo Simulation
Target Price of NGN 250
252
Figure 29: Effect of Assumption changes on a BUY or HOLD
WACC
250
12.3%
13.3%
6%
7%
Terminal growth rate
8%
9%
10%
BUY
BUY
14.3%
15.3%
11%
12%
BUY
BUY
BUY
HOLD
BUY
BUY
BUY
16.3%
BUY
17.3%
18.3%
Source: Team Assessment
HOLD
HOLD
BUY
192 208 224 240 256 272 288 304 320 336 352
Source: Team Assessment
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8
8
CORPORATE GOVERNANCE
Dangote Cement Plc believes that the success of its business operation is in direct relationship with
good corporate behavior, as it provides stability and growth to the enterprise. In line with this
objective, and the dire need to meet its responsibility to its shareholders, the company strives to meet
the expectations of both its internal and external environment, investors and stakeholders at large.
Shareholder base
Dangote Cement Plc has a single class of shares, which reflects the total value of the share capital. The
company has a total of 17,040,507,404 shares in which Dangote Industries Limited owns 85.1% (total
of 14,494,407,583) of the issued ordinary shares (Figure 33). Each ordinary share carries the right to
one vote at the Company’s Annual General Meeting. All shares excluding the shares held by Dangote
Industries Limited (85.1%), the chairman Aliko Dangote (0.16%) and other Directors of the company
(0.04%) are free float shares. The small size of the company’s free float has affected share liquidity, as
well as investor’s confidence in times past. However, the company has made preparations to carry out
a secondary listing on the London Stock Exchange and in compliance with the exchanges regulations, it
will sell over 10% of the company owned shares. This will significantly increase share liquidity as well
as the international shareholder base.
Board of directors
The Board consists of 16 individuals with collective proficiency in manufacturing, finance, engineering,
business and law. Their wealth of experience in relevant industries plays a pivotal role in providing
strategic direction for the Company (Figure 31). The Board has a non-executive chairman, thirteen nonexecutive directors of whom four are independent directors and two executive directors. Notably, the
positions of the Chairman and Group Chief Executive Officer are separate and held by different
individuals in compliance with Section 5.1 (b) of the SEC Code and A.2.1 of the UK Code of Corporate
Governance (UK Code). We believe that this separation will enhance transparency and board
independence. The conformity with UK Code will also promote the cross listing on the London stock
exchange market. The recent confirmation of Joseph Makoju as the substantive CEO of Dangote
Cement Plc will yield positive results as the CEO is grounded in years of experience in the manufacturing
sector. In addition, the induction of Brian Egan as the Group Chief Financial Officer in July, 2017 has
been yielding positive results, given the level of Brian’s experience in senior financial roles with
Associated British Foods PLC, Georgia-Pacific Ireland Limited and Coco-Cola HBC. The strong corporate
governance structure of Dangote Cement PLC reflects in its performance despite recent economic
recession and fluctuation in foreign exchange market. There is one woman on the company’s board
however, the company is armed with the motive to improve the gender diversity in coming years.
Figure 31
Board of Directors
Aliko Dangote
Joseph Makoju
Brian Egan
Olakunle Alake
Sani Dangote
Emmanuel Ikazoboh
Fidelis Madavo
Olusegun Olusanya
Viswanathan Shankar
Dorothy Ufot
Adbu Dantata
Devakumar Edwin
Ernest Ebi
Douraid Zaghouani
Cherie Blair
Mick Davis
Source: Company Data
Figure 32
Executive Team
Joseph Makoju
Brian Egan
Arvind Pathak
Anantharaman Vellore
Rao Kallepalli
Kashinath Bhairappa
Oare Ojeikere
Juan-Carlos Rincon
Knut Uivmoen
Mahmud Kazaure
Musa Rabiu
Oliver Obu
Source: Company Data
CEO
CFO
COO
Regional CEO, Nigeria
Pan-Africa, CEO
Project Director
Group Chief Sales
Head of Transport
Supply Chain Director
Group Legal Counsel
Group HRO
Group FCD
Figure 33: Ownership Structure
Sustainability pillars and social responsibility
Dangote Cement PLC appears to be committed to promoting sustainability and aims to comply with all
applicable legislation, regulations and codes of practices; integrate sustainability considerations into all
business decisions; ensures that all staff, clients and suppliers are fully aware of the 7 sustainability
pillars-“The Dangote Way” (Figure 36). DangCem is a holder of the certificate in ISO 9001, quality
management system, ISO 14001, environmental management system and BSOHSAS 18001,
occupational health and safety management system. The commitment for environment and broader
sustainability agenda are integral to the company’s activities and management. In addition, DangCem
Corporate Social Responsibility Policy focuses on Education, Sport, Research and Skills Development,
Environmental Sustainability, Health, Safety and Welfare, Infrastructural Development and Security.
The company’s donations, sponsorship and charitable donations amounted to N1.02B in 2017.
INVESTMENT RISK
Regulatory and legal risks
(R1/L1) DangCem needs to fulfil environmental safety rules and regulations in order for it to be
successful, and most production activities including proper disposal of waste and environmental
regulations on air and noise pollution has to be complied with and failure of Dangote to comply with all
given regulations can result in fines, penalties or serious legal consequences. Dangote is subject to laws
passes by the Government which may not be in the best interest of the firm like the Edo mining rights
dispute between Dangote and BUA cement which led to the shutting down of the mine, which halted
production in such mines.
Source: Company Data
Figure 34: Top Institutional Holders
BlackRock Fund…
0.27%
Parametric…
0.05%
Ashmore…
0.06%
Holberg…
0.06%
Morgan Stanley…
0.07%
T.Rowe Price…
0.09%
APG Asset…
0.05%
Genesis…
0.63%
0.00% 0.20% 0.40% 0.60% 0.80%
Source: The Wall Street Journal
Figure 35: Corporate Governance Assessment
Quality
1.Shareholders and the AGM
2. Management Board
3. Supervisory Board
4. Transparency & Governance
5. Reporting & Audit
Total
Source: Team Assessment
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%
68%
73%
84%
81%
95%
81%
9
Market Risks
Decline in GDP growth rate in Sub Saharan Africa (M1): Overtime GDP growth rate in Nigeria and Sub
Saharan Africa has been on a decline, which could mean a decline in household final consumption
expenditure, meaning a decline in construction activities and operations which would lead to a decline
in the demand for cement, overtime.
Dependency on oil (M2): Nigeria which serves as Dangotes largest market, is heavily dependent on Oil
making her a mono economy, and changes or fluctuations in Oil price could seriously affect the
economy of the country and these poses as a risk to Dangote because an adverse fall in oil price could
drastically cause a decline in the demand for Cement.
Figure 36: Sustainability Pillars-“The Dangote
Way”
Source: Company Data
Business and operational risks
Downtime caused by unforeseen events (B1): The nature of the cement industry makes it susceptible
to accidents and this could pose as a risk to Dangote Cement because it will halt business activities and
also stop production which may impair business performance.
Figure 37: Porter’s Five Forces
Unplanned breakdown of plants and equipment (B2): This is likely to occur as the business makes use
of different plants and equipment in its daily operations, and these plants depreciate overtime due to
constant use, wear and tear which could also pose as a risk in business operations.
Pan African operations (B3): risks exists in DangCem Pan African operations like its operations in Ghana
and Republic of Congo that has consistently yielded losses, and the Tanzanian unit is expected to remain
loss-making until it has access to a gas plant, which the company has stated will occur at the end of
2018.
Financial risks
Foreign exchange risk (F1): Dangote Cement currently imports some of its raw materials and also have
plants in some countries that are heavily dependent on foreign exchange earnings and this could serve
as a risk to the business as foreign exchange fluctuations could have adverse effects on Dangotes
business activities and depreciation of the local currencies of some of these countries can affect the
demand for Cement.
Source: Team Assessment
Figure 38: Naira to US Dollars
Political risks
Political uncertainty in African countries (P1): Sub-Saharan African countries are plagued with high
levels of Political uncertainty which may delay policy adjustments and dampen investors and consumer
confidence which may impair the business performance.
Political instability (P2): This is prevalent in Sub Saharan African countries as there are constant cases
of terrorisms and attacks that may affect business performance and dampen economic activities in
these countries.
Source: Bloomberg
Figure 39: Risk Matrix
Source: Team Assessment
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10
Appendix 1
Endnote
1. World Development Indicators, 2017 Report.
2. Global Cement Report, 2016
3. “About Us”. Company site: Dangote Cement PLC.
4. Listed Securities Company Details - Retrieved from Nigerian Stock Exchange website.
5. Business Daily Newspaper Online
6. World Economic outlook, October 2018 Report- Retrieved from International monetary fund Website.
7. Global Infrastructure outlook, 2017 Report- Retrieved from Gihub.org
8. Cardinal Stone, Cement update 2016 report.
9. Exiting recession: Nigerian Govt’s economic recovery efforts yielding fruits - Udoma”. Retrieved from Premium Times Nigeria newspaper online (6 Sept 2017).
10. Centre for Affordable Housing Finance in Africa (CAHF) Publication.
11. Dangote Cement, FY14 Company Report.
12. Dangote Cement, FY15 Company Report.
13. Dangote Cement, FY16 Company Report.
14. Dangote Cement, FY17 Company Report.
15. Dangote Cement, H1 2018 Company Report.
16. ARM Equity Research, H1 2018 Report on Nigeria Cement Sector.
17. Renaissance Capital Equity Research, 2018 Sector Update on Nigerian Cement Industry.
18. Bloomberg stock quote on Dangote Cement- Retrieved from Bloomberg.com
19. Renaissance Capital Equity Research, (Q2)2017 Report on Nigerian Cement Industry.
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11
Appendix 2
Dangote Group
Dangote Industries Ltd, also known as Dangote Group is a diversified and fully integrated conglomerate with a hard-earned
reputation for excellent business practices and products quality with its operational headquarters in Lagos, Nigeria in West Africa.
It has enjoyed significant growth over the years and accordingly is currently undertaking the construction of the world’s largest
Single-Train Petroleum Refinery in Lagos, Nigeria. Dangote Group currently has the following subsidiaries:
Okpella Cement Plc
Dangote- Bail Nigeria Ltd
Bulk Pack Services Ltd
Twister BV
Greenview Development Nigeria Ltd
Dangote Agro Sacks Ltd
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12
Appendix 3
Dangote Cement Plants (Regional Locations)
Source: Company data
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participating in the CFA Institute Research Challenge 2019
13
Appendix 4
Company’s Products
Appendix 5
Regional Macroeconomic and Cement Overview
NIGERIA
DANGOTE PRESENCE
Location
Obajana, Ibese,
Gboko
Trucks
6,872
DEMOGRAPHICS
Capacity
Type
Population
Urbanization
2018 GDP
growth
29.3Mta
Kiln fuel
Gas/Coal
Integrated
Power
Gas/Diesel
186m
50%
1.90%
Total
Capacity
43.7Mta
CEMENT MARKET
Cement
Consumption
122kg
Total Mkt
18.6Mt
CONGO
DANGOTE PRESENCE
Location
Mfila
Trucks
30
Capacity
1.5Mta
Kiln fuel
Coal
Type
Integrated
Power
Grid
DEMOGRAPHICS
Population
5.1m
Urbanization
64%
CEMENT MARKET
2018 GDP
growth
2.00%
Total Capacity
3.2Mta
This report is published for educational purposes only by Covenant University students participating in the CFA Institute Research Challenge 2019
Cement
Consumption
349kg/Person
Total Mkt
1.7Mt
14
CAMEROON
DEMOGRAPHICS
DANGOTE PRESENCE
Location
Douala
Trucks
181
Capacity
1.5Mta
Kiln fuel
n/a
Type
Grinding
Power
Grid
Population
23.4m
Urbanization
52%
2018 GDP
growth
3.8%
Total
Capacity
4.3Mta
CEMENT MARKET
Cement
Consumption
111kg
Total
Capacity
CEMENT MARKET
Cement
Consumption
15.6Mta
Total
Mkt
2.7Mt
Total
Mkt
ETHIOPIA
DEMOGRAPHICS
DANGOTE PRESENCE
Location
Mugher
Trucks
412
Capacity
Type
Population
Urbanization
2018 GDP
growth
1.5Mta
Kiln fuel
Coal
Integrated
Power
Grid
102M
17%
7.5%
82kg
8.3Mt
GHANA
DEMOGRAPHICS
DANGOTE PRESENCE
Location
Tema
Trucks
1,097
Capacity
1.5Mta
Kiln fuel
n/a
Type
Import
Power
Grid
Population
28m
Urbanization
51%
2018 GDP
growth
6.3%
Total
Capacity
9.9Mta
CEMENT MARKET
Cement
Consumption
202kg
Total
Mkt
5.7Mt
2018 GDP
growth
7.0%
Total
Capacity
8.2Mta
CEMENT MARKET
Cement
Consumption
222kg
Total
Mkt
3.3Mt
Total
Capacity
1.6Mta
CEMENT MARKET
Cement
Consumption
82kg/Person
SENEGAL
DEMOGRAPHICS
DANGOTE PRESENCE
Location
Pout
Trucks
38
Capacity
1.5Mta
Kiln fuel
Coal
Type
Integrated
Power
Coal
Population
15.4m
Urbanization
47%
SIERRA LEONE
DEMOGRAPHICS
DANGOTE PRESENCE
Location
Freetown
Trucks
n/a
Capacity
0.5Mta
Kiln fuel
n/a
Type
Bulk Import
Power
Grid
Population
7.4m
Urbanization
42%
2018 GDP
growth
3.7%
This report is published for educational purposes only by Covenant University students participating in the CFA Institute Research Challenge 2019
Total
Mkt
0.5Mt
15
SOUTH AFRICA
DEMOGRAPHICS
DANGOTE PRESENCE
Location
Aganang Delmas
Trucks
Outsourced
Capacity
2.8Mta
Kiln fuel
Coal
Type
Integrated
Power
Grid
Population
56m
Urbanization
62%
2018 GDP
growth
0.8%
Total
Capacity
20.5Mta
CEMENT MARKET
Cement
Consumption
234kg
Total
Mkt
13Mt
TANZANIA
DANGOTE PRESENCE
Location
Mtwara
Trucks
612
DEMOGRAPHICS
Capacity
Type
Population
Urbanization
2018 GDP
growth
3.0Mta
Kiln fuel
Coal/Gas
Integrated
Power
Diesel/Gas
56110M
30%
5.8%
Total
Capacity
110Mta
CEMENT MARKET
Cement
Consumption
88kg
Total
Mkt
4.8Mt
ZAMBIA
DEMOGRAPHICS
DANGOTE PRESENCE
Location
Ndola
Trucks
367
Capacity
1.5Mta
Kiln fuel
Coal
Type
Integrated
Power
Grid
Population
16.6m
Urbanization
40%
2018 GDP
growth
3.8%
Total
Capacity
3.9Mta
CEMENT MARKET
Cement
Consumption
101kg
Total
Mkt
1.6Mt
Appendix 6
Board of Directors Profile
Position
Name
Information
Chairman
Aliko Dangote
(Appointed as Chairman Jan 2002)
Aliko Dangote is the founder of Dangote group of companies, he has been
chairman since its formation, and he was appointed on the 4th of November
2002 and has obtained honorary doctorate degrees from Coventry University
in the United Kingdom and the University of Ibadan. He was awarded the
National honor, Grand Commander Order of the Niger (GCON).
Group CFO
Brian Egan
(Appointed as CFO in April 2014)
Arvind Pathak
(Appointed as COO in Jan 2018)
Devakumar Edwin
(Appointed in Jul 2005)
See Executive Team Profile
COO
Non- Executive Director
Non-Executive Director
Sani Dangote
(Appointed in Jul 2005)
See Executive Team Profile
Degrees in Engineering and Management, he has held several positions in
Dangote group and has successfully executed several industrial projects
funded by the World Bank. He has been responsible for various projects and
production units in Dangote Groups expansion since 1997. He was appointed
on the board on the 22nd of July 2005
He is an alumnus of Harvard Business School, and a fellow of the Chartered
Institute of Shipping, he is an accomplished business man with investments in
key sectors of the economy. He has occupied various leadership positions in
different organizations and is currently a member of several Chambers of
Commerce. He was appointed on the board on the 22nd of July 2005
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16
Position
Name
Information
Non-Executive Director
Olakunle Alake
(Appointed in Jul 2005)
Non-Executive Director
Abdu Dantata
(Appointed in Jul 2005)
Non-Executive Director
Douraid Zaghouani
(Appointed in Apr 2015)
Independent NonExecutive Director
Dorothy Udeme Ufot SAN
(Appointed in Apr 2016)
Non-Executive Director
Viswanathan Shankar
(Appointed in Dec 2017)
Member
Cherie Blair CBE, Q.C
Member
Mick Davis
Degree in Civil Engineering, he has years of experience in banking and
management consultancy industry. He has served as a Director and NonExecutive Director in different organizations and is a fellow of the Institute of
Chartered Accountants of Nigeria. He has deep finance and accounting
experience and brings substantial experience in finance, mergers and
acquisitions to the board. He was appointed on the board on the 22nd of July 2005
He is a fellow of the Nigerian Institute of Shipping, and has held his current
position since the group was established more than 20 years ago. He has
attended various trainings within and outside the country including the famous
Kellog School of Management. He also serves as Chairman of Agad Nigeria
Limited and has served as Director and Non-Executive Director in various
organizations. He was appointed on the board on the 22nd of July 2005
Degrees in Civil Engineering and Business Administration. He has held a number
of senior managerial positions in sales and marketing roles in both Europe and
North America. He also serves as the Chief Operating Officer of the Investment
Corporation of Dubai, where he manages the areas of Strategy, Government
Relations, Marketing, Finance &Funding and, Risk and Information Technology.
He has worked with Xerox for more than 25 years and served as the Chairman of
the Board of both companies. He was appointed on the board on the 29th of April
2015
She is the Managing Partner of Dorothy Ufot & Co, which she founded in the year
1994, she has more than 26 years of experience in commercial litigation and was
admitted to the Nigerian Bar in 1989 and conferred the SAN in 2009. She serves
as a Non-Executive Director of well-known companies and became one of the
eight Global Vice-President of the ICC Commission on Arbitration. She was
appointed on the board on the 19th of April 2016
Degrees in Physics and Business Administration. He is the CEO of Gateway
Partners and has served in various leadership positions of well-known
companies. He is a member of the Sub-Saharan Africa advisory committee of the
Export-Import Bank of the United States and is a member of the board of trustees
of the Singapore Indian Development Association (SINDA). He was a member of
the Board of Standard Chartered PLC and worked in Bank of America for 19 years
before joining Standard Chartered in 2001. He was appointed on the board on
the 10th of December 2017
She is a leading international lawyer and a committed campaigner for women’s
rights. She founded the Cherie Blair Foundation for Women and is the Chair of
Omnia Strategy LLP, she has also hosted a number of charitable events and she
currently serves as an independent director on the Board of Groupe Renault,
which is a part of the Renault/Nissan/Mitsubishi Alliance, the world’s leading zero
emissions vehicle manufacturer and the world’s second largest car manufacturer
by volume in 2017. She was awarded a CBE in 2013 for services to women issues
and to charity in the UK and overseas.
He is the current Chairman of Macsteel and Chief Executive of the Conservative
Party of the United Kingdom. He has occupied top leadership positions in wellknown companies. He has extensive capital markets and corporate transaction
experience, and has successfully completed more than $120 billion of corporate
transactions. He participated in the listing of Billiton on the London Stock
Exchange and the merger of BHP and Billiton into the largest diversified mining
company in the world.
Degrees in Accountancy & Finance and Financial Management. He is chairman at
ARM Pensions Managers Ltd, and has served on the board of several companies,
he is the Group Chairman at Ecobank Transnational and has previously occupied
top positions at Delloitte West &Central Africa holdings, Nigeria Stock Exchange
and Senior Partner at Akintola Williams Deloitte. He is a fellow of ACCA, ICAN and
NIT. He was appointed on the 30th of January 2014 on the Board
Independent
Executive Director
Non-
Emmanuel Ikazoboh
(Appointed in Jan 2014)
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17
Appendix 7
12
Executive Management Team Profile
POSITION
NAME
INFORMATION
Acting CEO
Joseph Makoju
(Appointed as CEO in Jan 2018)
Group CFO
Brian Egan
(Appointed as CFO in April 2014)
COO
Arvind Pathak
(Appointed as COO in Jan 2018)
Acting Regional CEO, Nigeria
Anantharaman Vellore
Acting Regional CEO, PanAfrica
Rao Kallepalli
70 years. Degrees in Mechanical Engineering. Previously held leadership position
in Lafarge Cement WAPCO and has worked in several world class corporations like
Shell BP, Blue Circle (UK) and has also served as Special Adviser (Electric Power) to
the President, Federal Republic of Nigeria under two separate administrations. He
has experience in the cement industry spanning over 37 years and is a member of
several professional bodies. He currently serves as the Chairman of Cement
Manufacturers Association of Nigeria (CMAN). He is also a recipient of the National
Merit Award (OON).
Previously held positions as the Executive Director and Chief Financial Officer of
Petropavlovsk PLC and Aricom PLC both of which are listed on the Main board of
the London Stock Exchange. He has the needed wealth of experience having served
in this office in well-known companies and has more than 20 year’s international
experience in senior financial roles. He is a trained accountant and a member of
the Institute of Chartered Accountants in Ireland.
He has more than 30 years of experience in the Cement industry. Previously
worked at Reliance Cement as CEO and has worked in operations and maintenance
of plants as well as leading important Greenfield projects. Degrees in Engineering
and has been trained in a number of management courses.
Previously had a long career in the Indian cement industry having worked with the
country’s leading producers where he held various leadership roles. He has over 31
years of experience in the Cement industry. He has degrees in Industrial
Engineering and Operations Research.
Experience in project management spanning over 30 years and has held senior
positions in management consultancy and industrial Engineering.
Director of Projects
Kashinath Bhairappa
Previously worked with different Cement manufacturers in India at different levels
in project management and execution. Degree in Mechanical Engineering.
Group Chief Sales &
Marketing Officer
Oare Ojeikere
Significant cross-industry marketing experience and has previously worked as
Marketing Director in Coca-Cola Nigeria and Airtel Ghana. He has held
management roles in Coca-Cola, Accenture and Xerox.
Head of Transport
Juan-Carlos Rincon
Supply Chain Director
Knut Ulvmoen, MFR
More than 24 years’ experience in the cement industry, worked in multinational
cement groups and has high degree of managerial knowledge and international
experience. He has also held senior management positions in different parts of the
world.
He has been instrumental in the development of the company
Group Chief Legal Counsel
Mahmud Kazaure
Group Chief Human
Resources Officer
Musa Rabiu
Group Financial Controller
Designate
Oliver Obu
He has broad legal experience including commercial law, international business
and civil litigation and is licensed to practice law in Nigeria, States of Maryland and
New York in USA and also before the Supreme Court of the States. Degrees in Law
and Comparative Jurisprudence.
Strategic management professional with over 30 years’ experience. Previously
Registrar/CEO, Chartered Institute of Personnel Management (CIPM) and a Fellow
of the institute.
Degree in Economics& Statistics and MBA from Lagos Business School. Key member
of the Company’s Finance team and has worked on the development of financial
models for numerous projects undertaken by the Group.
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18
Appendix 8
Corporate Governance Assessment
Corporate Governance Scorecard
Goal of the Scorecard: to provide an extensive and comprehensive picture of the governance quality of listed companies.
The structure and sections of the Scorecard reflect the chapters of the Corporate Governance Code.
The Scorecard has two main features:
- P-questions that can be dealt with by publicly available external sources (i.e. the company's publications and its website) and
- E-questions that need evaluation, individual appraisal and judgement that should also be a result of discussions with the
company (i.e. the particular quality points).
With this approach, a broad picture of the strengths and weaknesses of the individual company governance performance can be
gained.
The total score is the aggregate of the individual section scores on the Results sheet.
Sections
1.Shareholders and the General Meetings
2. Management Board
3. Supervisory Board
4. Transparency & Governance
5. Reporting & Audit
Total
Max. Points
7.00
14.00
28.00
10.50
10.50
70.00
E
5.00
5.50
14.00
5.00
5.50
35.00
P
2.00
8.50
14.00
5.00
5.00
35.00
Total Score for DangCem
1.Shareholders and the General Meetings
2. Management Board
3. Supervisory Board
4. Transparency & Governance
Max. Point
7.00
14.00
28.00
10.50
Points
4.75
10.25
23.50
8.50
%
68%
73%
84%
81%
10.50
70.00
10.00
57.00
95%
81%
5. Reporting & Audit
Total
Rating levels:
100% - 90%
Excellent
90% - 80%
Very Good
80% - 70%
Good
70% - 60%
Satisfactory
Source: Team Assessment, DVFA Scorecard for Corporate Governance
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19
Appendix 9
Awards
Awards to Dangote Cement Plc





NSE CEO Awards-(2017)-Most Compliant Listed Company for 2017, having demonstrated the highest degree of compliance with the rules
and regulations regarding disclosure obligations of listed companies on the Exchange in 2017.
SON MANCAP Certification Award(2018)- Standard Organization Award has certified Dangote Cement Plc as having passed the Mandatory
Conformity Assessment Programme, an attestation of Dangote Cements quality products and its capacity to conduct and in house tests on
its raw materials and finished products in conformity with relevant national standards. a new revised standard for cement production in
Nigeria
Moodys Corporate Family Ratings (2017) - assigned a Ba3 local currency rating reflects the company’s strong standalone credit profile and
track record of demonstrated financial support from a larger and more diversified parent Dangote Industries Limited.
First Nigerian company to join the Forbes Global 2000 companies
Obajana Cement plant is reputed to be one of the largest cement plants in the world
Awards to Aliko Dangote






Awarded the African Business Leader of the year in recognition of his efforts as a driver of change with the courage and imagination to
make difficult decisions with long term value and sustainability in mind which can ultimately transform corporations (2011) and (2015)
Winner of the Guardians manufacturing awards CEO of the year (2017) - to distinguish sector players in the manufacturing industry, who
have consistently outperformed in spite of prevailing economic circumstances.
Forbes 2013- Most powerful man in Africa
Times Magazine 2014- Top 100 Most Influential people in the World
He holds the Second highest national honor in Nigeria of Grand Commander Order of the Niger.
He holds the highest honors in the Republic of Benin of Grand Commander of the Order of Benin Republic.
Awards to Dangote industries Ltd






Dangote Group emerged African Business of the Year organized by the London based African Business magazine in collaboration with the
Commonwealth Business Council (CBC) (2011)
Sustainability Enterprise and Responsibility Awards (SERAS) 2018– in recognition of its 2017 Sustainability Report and Progress in
Sustainability Best Practices and Reporting in 2018
One of the Top 5 Most Responsible Business in Africa by SERAS 2018
Africa CEO Forum(2016) - African company of the year for achieving the most remarkable expansion on the continent in 2015
Manufacturing Company of the Year by Guardians manufacturing awards(2017)
Dangote Group excels at the maiden CAMCAN Nigeria Capital Market Performance Awards 2018 to reward resilience based on performance
of companies listed on the NSE for the year ended December 31, 2017.
Dangotes Contribution to the Society



Social investment programmes directed towards health care, education and environmental sanitation in host communities during the
company’s 2018 Sustainability Week.
Dangote Cement awards a multi-million Naira educational scholarship to 115 students fro it’s 15 host communities for the 2017/2018
academic scholarship
Dangote Cement awards cash and kind rewards to distributors during the Distribution Award Ceremony in recognition of the distributors
long standing commitment to the company.
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20
Appendix 10
Share Performance during Election Periods
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21
Appendix 11
Porter’s Five Forces
Overview
DangCem’s has over time concentrated on its core competencies, using high-level business integration strategy to maintain a
competitive edge over their close rivals, with prospects to further intensify its core business strategies so as to sustain growth and
improve company’s performance over the short and long term.
Threat to New Entrant- Low
The threat to entry in the market is low because of the large capital requirement needed to operate, construct and functional utilize
the capacity of a cement plants and its accompanying logistics such as transportation. DangCem’s total CAPEX over the past three years
(FY15-17) summed up to N454 Million, which would be difficult for any new entrant to match up with, considering the difficulty of
accessing start-up capital.
Threat of Substitute- Low
The threat of substitution is also very low. The only possible substitute for cement when used for construction is clay, which is definitely
not reliable when constructing beam structures like bridges or even towers. Also, when it comes to construction of road, cement is also
readily more affordable and durable than bitumen (asphalt), hence strongly preferred by most construction workers.
Bargaining Power of Buyers- Insignificant
The buyers of DangCem are either construction companies or wholesale distributors. However, what largely attributes for the
insignificance of their bargaining power is because they are price takers, hence have no control over the price of the products. DangCem
to retain loyalty of the customers has adopted strategies such as rewarding top performing distributors in sum and in kinds over the
past few years.
Bargaining Power of Suppliers- Insignificant
Bargaining power of suppliers is equally very insignificant in recent years, since the conversion of DangCem’s plants to be full operated
on coal rather than LPFO. Also DangCem’s high level of business integration across its value chain ensures that no supplier has any part
to play in influencing cost both in the short and long term.
Rivalry within the Industry- High
The rivalry faced by DangCem within the cement industry is also very high, which takes the form of strategic price competition, costefficiency and intensive marketing in other to gain market share. Despite the presence of an open market and competitors in the market,
DangCem still remains a leading force to reckon with in the Cement industry, with a market share of over 65 percent in Nigeria. To
reduce the threat of rivals, DangCem could minimize price competition and distinguish its products from competitors by innovating or
improving the quality of their cement products.
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22
Appendix 12
SWOT Analysis
Appendix 13
Z-SCORE
ALTMAN Z-SCORE FOR DANGCEM
INCOME STATEMENT
2017
NET SALES
805,582
OPERATING INCOME
304,208
BALANCE SHEET
CURRENT ASSETS
TOTAL ASSETS
410,299
1,665,883
CURRENT LIABILITIES
520,476
TOTAL LIABILITIES
884,523
RETAINED EARNINGS
639,462
The Altman Z-Score Analysis is used to
verify company's financial health and
the probability of filing for bankruptcy.
If the Z-score is below 1.81 - a firm has
a high probability of bankruptcy, while
a score of 2.99 indicates a financially
sound firm that is far from filing for
bankruptcy. The formula is (1.2*Z1) +
(1.4*Z2) + (3.3*Z3) + (0.6*Z4) +
(1.0*Z5).
PUBLIC COMPANIES
MARKET VALUE OF EQUITY
3,561,466
CALCULATIONS
WORKING CAPITAL/TOTAL ASSETS (Z1)
-0.066
RETAINED EARNING /TOTAL ASSETS (Z2)
0.384
EBIT/TOTAL ASSETS (Z3)
0.183
MARKET VALUE OF EQUITY/TOTAL LIABILITY (Z4)
4.026
NET SALES/TOTAL ASSETS (Z5)
0.484
Z-Score
3.960
LIKELIHOOD OF BANKRUPTCY IS HIGH IF Z-SCORE IS
BELOW 1.81. DANGCEM DOES NOT FACE THIS SITUATION,
RATHER THE FIRM IS FINANCIALLY SOUND AS ITS Z-SCORE
IS GREATER THAN 2.99
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23
Appendix 14
M Score Analysis
The Beneish’s M-Score analysis created in 1999 by Messod Beneish, was employed by our team to verify the DangCem’s earnings quality in their financial
results relative to earnings manipulation detection. The method contemplates different variables which identify any earnings manipulation or financial
distortions incurred by the firm. For interpretation needs, with an M-score lower than -2.22, the firm is not likely to be a manipulation of earnings. However,
an M-score greater than -2.22 indicates it is likely that the firm is.
Input Variables
Net Sales
COGS
2016
2017
615103
805582
(323,816)
(351,290)
Net Receivables
26279
30155
Current Assets
303164
410299
PPE
746052
834838
Depreciation
(74,750)
(83,939)
Total Assets
1529104
1665883
SGA Expense
(119,336)
(155,297)
Net Income
180929
289590
Cash flow from Operations
278594
272883
Current Liabilities
525793
520476
Long-Term Debts
152475
242894
479888
420746
Derived Variable
Other L/T Assets (TA-(CA+PPE)
Days Sales in Receivable Index (DSRI)
0.876
Gross Margin Index (GMI)
0.840
Asset Quality Index (AQI)
0.805
Sales Growth Index (SGI)
1.30967
Depreciation Index (DEPI)
1.003185
Sales, General and Administration Index (SGAI)
0.993641
Leverage Index (LI)
1.033062
Total Accruals to Assets
0.010029
M-Score (5-Variable Model) 2016
=-6.065+(0.823*DSRI)+(0.906*GMI)+(0.593*AQI)+(0.717*SGI)+(0.107*DEPI)
M-Score (8-Variable Model) 2016
=-4.84 +(0.92*DSRI) +(0.528*GMI)+(0.404*AQI)+(0.892*SGI)+(0.115*DEPI)(0.172*SGAI)+(4.679*ACCURAL TO TA)- (0.327*LI)
-3.0595
-2.444
Result: Likelihood of DangCem Manipulation its earnings results is low based on the M-Score Model
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24
Appendix 15
Financial Analysis
Key Financial Ratios
Profitability
Net Margin
EBITDA Margin
Operating Profit Margin
Return on Asset
Return on Equity
F13
F14
F15
F16
F17
F18F
F19F
F20F
F21F
F22F
52%
59%
51%
24%
37%
41%
57%
48%
16%
27%
37%
53%
42%
16%
28%
23%
42%
30%
9%
18%
25%
48%
38%
12%
26%
26%
49%
40%
14%
29%
32%
48%
40%
17%
35%
33%
47%
39%
21%
38%
35%
48%
40%
23%
40%
36%
48%
40%
23%
39%
Liquidity
Current Ratio (x)
Quick Ratio (x)
0.91
0.74
0.59
0.41
0.83
0.56
0.58
0.42
0.79
0.61
0.91
0.74
0.91
0.74
0.91
0.74
0.91
0.74
0.91
0.74
Efficiency
Receivables Turnover (X)
Payables Turnover (x)
Inventory Turnover (x)
Fixed Asset Turnover (x)
Total Asset Turnover (x)
0.030
0.22
0.07
0.66
0.46
0.040
0.24
0.11
0.52
0.40
0.023
0.26
0.11
0.54
0.44
0.043
0.44
0.13
0.53
0.40
0.037
0.34
0.12
0.68
0.48
0.037
0.34
0.12
0.71
0.46
0.037
0.34
0.12
0.77
0.46
0.037
0.34
0.12
0.91
0.46
0.037
0.34
0.12
0.97
0.46
0.037
0.34
0.12
1.04
0.46
Financial Leverage
Interest Coverage
Debt to Total Capital Ratio
Leverage
44.83
17%
1.6
92.57
28%
1.6
13.44
25%
1.7
60.87
26%
1.9
23.12
21%
2.1
16.39
23%
2.1
19.67
15%
2.0
53.37
2%
1.8
(52)
-7%
1.7
(20)
-24%
1.7
Value Ratio
Earnings per Share (NGN)
Dividend Per Share (NGN)
Payout Ratio
11.85
7.0
59%
9.42
6.0
64%
10.86
8.0
74%
7.99
8.5
106%
11.65
10.5
90%
13.93
12.7
90%
19.20
17.3
90%
23.43
21.1
90%
26.54
19.9
75%
29.41
22.1
75%
Appendix 16
DangCem: DuPont Analysis
DangCem: DuPont
F18F
F19F
F20F
F21F
F22F
EBIT margin
40%
40%
39%
40%
40%
Asset Turnover
0.5
0.6
0.6
0.7
0.7
Financial Leverage
2.1
2.0
1.8
1.7
1.7
Interest Burden
0.9
0.9
1.0
1.0
1.1
Tax burden
0.7
0.9
0.9
0.9
0.9
29.3%
35.9%
39.0%
40.6%
40.8%
RoAE
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25
Appendix 17
Balance Sheet
Balance Sheet (NGN m)
F15
F16
F17
F18F
F19F
F20F
F21F
F22F
Fixed assets
917,212
1,155,711
1,192,140
1,274,204
1,307,029
1,299,394
1,291,779
1,281,089
Prepayments
9,094
13,196
16,101
16,101
16,101
16,101
16,101
16,101
As at December
Non-Current Assets
Goodwill
2,610
4,145
6,355
6,355
6,355
6,355
6,355
6,355
Deferred tax
14,465
51,306
30,625
30,625
30,625
30,625
30,625
30,625
Investment
1,581
1,582
10,363
10,363
10,363
10,363
10,363
10,363
Stock
53,118
82,903
94,594
106,257
117,510
138,370
146,640
156,029
Trade Debtors
11,544
26,279
30,155
33,873
37,460
44,110
46,747
49,740
Prepayments
60,526
78,280
115,496
129,736
129,736
129,736
129,736
129,736
0
9
1,667
1,667
1,667
1,667
1,667
1,667
40,792
115,693
168,387
98,185
186,805
118,455
214,379
382,855
1,110,942
1,529,104
1,665,883
1,707,366
1,843,651
1,795,175
1,894,392
2,064,560
2,947
6,292
-
-
-
-
-
-
Trade creditors
127,597
268,966
270,721
304,100
336,304
396,005
419,674
446,545
Other liabilities
24,537
18,307
41,071
26,932
29,784
35,072
37,168
39,548
Current debt
44,328
214,008
144,783
105,477
104,829
43,474
42,739
42,005
Current Assets
Current income tax receivables
Cash and bank balances
Total Assets
Current Liabilities
Bank overdrafts
Deferred revenue
0
-
-
-
-
-
-
-
1,289
18,220
63,901
63,901
63,901
63,901
63,901
63,901
Deferred taxation
24,504
103,162
116,898
116,898
116,898
116,898
116,898
116,898
Long term borrowings
Taxation
Non-Current Liabilities
208,329
152,475
242,894
246,113
244,601
101,440
99,725
98,011
Deferred revenue
975
1,072
839
839
839
839
839
839
Employee benefits
3,992
-
-
-
-
-
-
-
Provisions
3,283
3,344
3,416
3,416
3,416
3,416
3,416
3,416
Long term payables
24,442
17,730
-
-
-
-
-
-
Non-Controlling interest
-6,235
-12,925
12,630
9,596
2,502
-10,830
-27,349
-45,972
Shareholders’ Equity
Share Capital
8,520
8,520
8,520
8,520
8,520
8,520
8,520
8,520
Share Premium
42,430
42,430
42,430
42,430
42,430
42,430
42,430
42,430
Capital contribution
2,877
2,877
2,877
2,877
2,877
2,877
2,877
2,877
Other reserves
Foreign exchange revaluation
reserve
Retained earnings
-1,007
-
-
-
-
-
-
-
-22,366
78,964
75,441
75,441
75,441
75,441
75,441
75,441
620,501
605,662
639,462
700,827
811,308
915,692
1,008,112
1,170,101
1,110,943
1,529,104
1,665,883
1,707,366
1,843,651
1,795,175
1,894,392
2,064,560
Total Liabilities and
Shareholder's equity
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26
Appendix 18
Balance Sheet (in %)
In %
F15
F16
F17
F18F
F19F
F20F
F21F
F22F
Fixed assets
82.56%
75.58%
71.56%
74.63%
74.63%
70.89%
72.38%
68.19%
Prepayments
0.82%
0.86%
0.97%
0.94%
0.94%
0.87%
0.90%
0.85%
Goodwill
0.23%
0.27%
0.38%
0.37%
0.37%
0.34%
0.35%
0.34%
Deferred tax
1.30%
3.36%
1.84%
1.79%
1.66%
1.71%
1.62%
1.48%
Investment
0.14%
0.10%
0.62%
0.61%
0.56%
0.58%
0.55%
0.50%
0.00%
0.00%
0.00%
As at December
Non-Current Assets
Current Assets
Stock
4.78%
5.42%
5.68%
6.22%
6.37%
7.71%
7.74%
7.56%
Trade Debtors
1.04%
1.72%
1.81%
1.98%
2.03%
2.46%
2.47%
2.41%
Prepayments
5.45%
5.12%
6.93%
7.60%
7.04%
7.23%
6.85%
6.28%
Current income tax receivables
0.00%
0.00%
0.10%
0.10%
0.09%
0.09%
0.09%
0.08%
Cash and bank balances
3.67%
7.57%
10.11%
5.75%
10.13%
6.60%
11.32%
18.54%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
Bank overdrafts
0.27%
0.41%
Trade creditors
11.49%
17.59%
16.25%
17.81%
18.24%
22.06%
22.15%
21.63%
Other liabilities
2.21%
1.20%
2.47%
1.58%
1.62%
1.95%
1.96%
1.92%
Current debt
3.99%
14.00%
8.69%
6.18%
5.69%
2.42%
2.26%
2.03%
Deferred revenue
0.00%
Taxation
0.12%
1.19%
3.84%
3.74%
3.47%
3.56%
3.37%
3.10%
Non-Current Liabilities
0.00%
Total Assets
Current Liabilities
Deferred taxation
2.21%
6.75%
7.02%
6.85%
6.34%
6.51%
6.17%
5.66%
Long term borrowings
18.75%
9.97%
14.58%
14.41%
13.27%
5.65%
5.26%
4.75%
Deferred revenue
0.09%
0.07%
0.05%
0.05%
0.05%
0.05%
0.04%
0.04%
Employee benefits
0.36%
Provisions
0.30%
0.22%
0.21%
0.20%
0.19%
0.19%
0.18%
0.17%
Long term payables
2.20%
1.16%
Non-Controlling interest
-0.56%
-0.85%
0.76%
0.56%
0.14%
-0.60%
-1.44%
-2.23%
Shareholders’ Equity
0.00%
Share Capital
0.77%
0.56%
0.51%
0.50%
0.46%
0.47%
0.45%
0.41%
Share Premium
3.82%
2.77%
2.55%
2.49%
2.30%
2.36%
2.24%
2.06%
Capital contribution
0.26%
0.19%
0.17%
0.17%
0.16%
0.16%
0.15%
0.14%
Other reserves
Foreign exchange revaluation
reserve
-0.09%
-2.01%
5.16%
4.53%
4.42%
4.09%
4.20%
3.98%
3.65%
Retained earnings
Total Liabilities and Shareholder's
equity
55.85%
39.61%
38.39%
41.05%
44.01%
51.01%
53.22%
56.68%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
This report is published for educational purposes only by Covenant University students
participating in the CFA Institute Research Challenge 2019
27
Appendix 19
Income Statement
Income statement (NGN m)
Sales (NGN m)
Cost of sales
Gross profit
Other income
Administrative expenses
Selling and distribution
EBIT
Share of profit from associate
FX related gains
Interest received
Finance charges
Profit before tax
Taxation
Profit after tax
F15
491,725
201,808
289,917
3,951
-32,546
-53,500
207,822
34,819
-54,347
188,294
-6,971
181,323
F16
615,103
F17
805,582
F18F
904,907
F19F
1,000,736
F20F
1,178,388
F21F
1,248,819
F22F
1,328,779
-323,816
-351,290
-380,061
-430,317
-506,707
-536,992
-571,375
291,287
10,542
-36,669
-82,667
182,493
454,292
5,213
-45,380
-109,917
304,208
2,167
524,846
570,420
671,681
711,827
757,404
366,018
401,148
464,324
501,216
535,923
35,926
-52,711
289,590
-85,342
204,248
13,000
-40,000
339,018
-101,706
237,313
22,417
-47,083
376,481
-56,472
320,009
14,215
-24,578
453,961
-68,094
385,867
25,725
-14,361
512,580
-76,887
435,693
45,943
-14,190
567,676
-85,151
482,525
41,155
2,662
-45,381
180,929
-38,071
142,858
Appendix 20
Income Statement (in %)
In % Turnover
F15
F16
F17
F18F
F19F
F20F
F21F
F22F
100%
100%
100%
100%
100%
100%
100%
100%
Cost of sales
-41.04%
-52.64%
-43.61%
-42.00%
-43.00%
-43.00%
-43.00%
-43.00%
Gross profit
58.96%
47.36%
56.39%
58.00%
57.00%
57.00%
57.00%
57.00%
Other income
0.80%
1.71%
0.65%
40.45%
40.09%
39.40%
40.14%
40.33%
1.44%
2.24%
1.21%
2.06%
3.46%
Sales (NGN m)
Administrative expenses
-6.62%
-5.96%
-5.63%
Selling and distribution
-10.88%
-13.44%
-13.64%
EBIT
42.26%
29.67%
37.76%
Share of profit from associate
0.27%
FX related gains
6.69%
Interest received
7.08%
Finance charges
-11.05%
-7.38%
-6.54%
-4.42%
-4.70%
-2.09%
-1.15%
-1.07%
Profit before tax
38.29%
29.41%
35.95%
37.46%
37.62%
38.52%
41.05%
42.72%
Taxation
-1.42%
-6.19%
-10.59%
-11.24%
-5.64%
-5.78%
-6.16%
-6.41%
36.87%
23.23%
25.35%
26.23%
31.98%
32.75%
34.89%
36.31%
Profit after tax
0.43%
4.46%
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28
Appendix 21
Working Capital Ratio
F15
Inventories
% ch
F16
F17
F18F
F19F
F20F
F21F
F22F
53118
82903
94594
106257
117509.6
138370.1
146640.4
156029.5
0.244336
0.560733
0.14102
0.123296
0.1059
0.177521
0.059769
0.064028
% of revenue
0.108024
0.134779
0.117423
0.117423
0.117423
0.117423
0.117423
0.117423
Days in inventory
39.42868
49.19435
42.85946
42.85946
42.85946
42.85946
42.85946
42.85946
Trade debtors
% ch
11544
26279
30155
33872.98
37460.13
44110.08
46746.51
49739.61
-0.26191
1.276421
0.147494
0.123296
0.1059
0.177521
0.059769
0.064028
% of revenue
0.023477
0.042723
0.037433
0.037433
0.037433
0.037433
0.037433
0.037433
Debtors days
8.568936
15.59387
13.66289
13.66289
13.66289
13.66289
13.66289
13.66289
Prepayments
60526
78280
115496
129736.1
129736.1
129736.1
129736.1
129736.1
% ch
0.040274
0.293328
0.475422
0.123296
0
0
0
0
% of revenue
0.123089
0.127263
0.14337
0.14337
0.129641
0.110096
0.103887
0.097636
Debtors days
44.92753
46.45108
52.32992
52.32992
52.32992
52.32992
52.32992
52.32992
127597
268966
270721
304099.7
336303.9
396004.8
419673.8
446544.8
% ch
0.352996
1.107934
0.006525
0.123296
0.1059
0.177521
0.059769
0.064028
% of COGS
-0.63227
% of revenue
0.259489
0.43727
0.336056
0.336056
0.336056
0.336056
0.336056
0.336056
Creditors days
Due to related parties /
Other liabilities
94.71332
159.6035
122.6606
122.6606
122.6606
122.6606
122.6606
122.6606
24537
18307
41071
26932.28
29784.41
35071.77
37167.98
39547.78
% ch
0.298427
-0.2539
1.243459
-0.34425
0.1059
0.177521
0.059769
0.064028
0.0499
0.029762
0.050983
0.029762
0.029762
0.029762
0.029762
0.029762
Days
18.21344
10.86331
10.86331
10.86331
10.86331
10.86331
10.86331
10.86331
Cash conversion cycle
-20.0016
-59.2275
-24.6716
-24.6716
-24.6716
-24.6716
-24.6716
-24.6716
Trade creditors
% of revenue
Appendix 22
Monte Carlo Simulation
Share Price Effect
WACC and terminal growth rate effect
Results Summary
Mean
Number of Trials
Standard error
Minimum
Maximum
Median
Range
Standard
Deviation
Variance
Skewness
Kurtosis
252.0314
1000
0.653975
197.6274
337.6934
250.7716
140.066
20.69085
428.1114
0.64
3.81
192 208 224 240 256 272 288 304 320 336 352
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29
Appendix 23
Peers Comparable
MktCap,
Company
Dangote Cement
EV/EBITDA, x
P/E, x
Dividend yield, %
Ticker
DANGCEM NL
Country
Nigeria
$mn
9,363
2018
8.2
2019
7.3
2018
13.9
2019
10.2
2018
6
2019
7
Bamburi Cement
Southern Province
Cement
Lucky Cement
BMBC KN
Kenya
525
10.4
10
31
34
5
7
SOCCO AB
Saudi Arabia
1,349
12.6
11.6
16.4
16.2
8.3
6.5
LUCK PK
Pakistan
1,161
-
6.9
10.3
11.9
2.2
3
Saudi Cement
SACCO AB
Saudi Arabia
1,875
12.5
11.7
18.6
14.1
7.2
6.5
Ciments du Maroc
CMA MC
Morocco
2,282
10.2
10.1
22.7
21.9
4.1
-
Yanbu Cement
YNCCO AB
Saudi Arabia
1,047
8.8
8.3
15
12.4
6
6.8
Yamama Cement
YACCO AB
Saudi Arabia
731
16.2
12.5
26.5
26.9
3.2
Arabian Cement
ARCCO AB
Saudi Arabia
612
20.3
16.3
15.7
DG Khan
DGKC PA
Pakistan
307
6
5
4.7
Raysut Cement
RCCI OM
Oman
204
Lafarge Africa
WAPCO NL
Nigeria
548
8.2
6.7
Oman Cement Co
OCOI OM
Oman
419
7.7
ARM Cement
ARML KN
Kenya
53
Average FM
Titan Cement
17
6.5
6.1
6.5
6.8
na
28.8
3.5
3.5
7.7
12.4
11.5
6.6
6.6
8.9
4.9
n/a
5.7
-
-
10.8
9.2
17
16.6
6.3
6
TITK GA
Greece
1,864
9
8.8
21.1
16.4
1.7
2.3
PPC SJ
South Africa
618
6
6.5
16.5
15.7
-
-
Akcansa Cimento
AKCNS TI
Turkey
251
5
4.5
6.6
6.3
13.5
9.9
Arabian cement
ARCC EY
Egypt
116
PPC Ltd
6.5
6
8.2
8
9.2
9.3
Average EM EMEA
6.6
6.5
13.1
11.6
6.1
5.4
Total average
9.7
8.4
14.7
14.1
6.3
5.8
Source: Bloomberg, Team Assessment
Appendix 24
Appendix 25
Valuation Summary
DangCem WACC Assumption
Based on our valuation, Dangote’s Nigerian operations account for
84% of the company’s value, while the rest of Africa accounts for 16%,
an improvement from its Pan-Africa contribution which was
historically 10%.
Segment
Nigeria
Africa
Total
Source: Team Assessment
EV (NGN mn)
3,877,840
594,199
4,472,039
% of EV
87%
13%
Risk free rate
Equity premium
Levered beta
Cost of equity
Cost of debt
Tax rate
After tax cost of debt
Leverage
Long-term growth rate
WACC
0.14
0.05
1
0.19
0.13
0.32
0.09
0.33
0.09
0.153
Source: Bloomberg, Company data Team Assessment
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30
Appendix 26
DCF valuation for Dangote’s Nigerian operations
Below we show our DCF assumptions for Dangote’s Nigerian operations. Based on our valuation, its Nigerian business has an enterprise value of NGN3, 278bn
($10.4bn).
Nigeria DCF
2018E
2019E
2020E
2021E
2022E
Operating income
347,803
0
0
0
0
0
Depreciation
48,463
50,425
52,655
55,535
58,810
-101,706
-7,103
-81,355
206,103
0
0
1
-56,472
13,032
-72,597
294,414
0
0
2
-68,094
21,663
-67,191
323,450
0
0
3
-76,887
8,540
-74,413
318,932
0
0
4
-85,151
9,593
-75,517
338,994
0
0
5
Discount factor
1
1
1
1
0
Discounted FCF
178,735
221,416
210,951
180,384
166,271
Taxation
Change in working capital
Capex
Free cash flow
% change
FCF margin
Period
PV of FCF
360,027
384,416
406,158
431,260
957,756
Terminal value
2,920,084
Enterprise value (NGN m)
3,877,840
EV, $mn
12,311
Note: NGN million (Unless otherwise stated)
Appendix 27
SoTP Valuation for the group
We use a 2019E EV/EBITDA multiple of 9x to value Dangote’s SSA business (ex-Nigeria) and a 2019E EV/EBITDA multiple of 7x to value its South African
operations. Based on our valuation, its operations outside Nigeria have an enterprise value of NGN594bn, 13% of the group’s valuation. Below we show our
SoTP approach to valuing the group to arrive at a target enterprise value and TP of NGN4, 472bn ($12.3bn) and NGN250, respectively, for Dangote.
FY19E
Multiple,
Discount
Enterprise
Att. EV
% of EV
EV in F18
Stake
EV ($mn)
EBITDA
x
rate
value
Nigeria
3,877,840
1
410,452
9
3,877,840
1
12,311
Africa
594,199
0
81,700
9
Ghana
31,590
Senegal
106,808
0
3,510
0
13,186
South Africa
Zambia
66,214
0
46,474
0
Ethiopia
183,878
Tanzania
20,412
Congo Brazzaville
29,160
Cameroon
106,920
Sierra Leone
Cote d'Ivoire
Total EV
Less: Net debt FY17
Equity value
Number of shares, mn
TP at YE18, NGN
705,744
1
612,029
1
1,886
9
31,590
9
118,675
1
27,395
1
100
1
102,917
1
339
14,780
7
6,885
9
103,459
1
89,720
1
210
61,965
1
53,737
1
148
0
21,735
0
3,240
9
195,615
1
169,639
1
584
9
29,160
1
25,288
1
65
0
3,240
0
14,850
9
29,160
1
25,288
1
93
9
133,650
1
115,903
1
339
7,938
0
882
9
7,938
1
6,884
1
22
-5,194
0
-608
9
-5,468
1
-4,741
1
-15
4,472,039
216,272
4,255,767
17,041
250
Note: NGN million (Unless otherwise stated)
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31
Disclosures:
Ownership and material conflicts of interest:
The author(s), or a member of their household, of this report does not hold a financial interest in the securities of this company.
The author(s), or a member of their household, of this report does not know of the existence of any conflicts of interest that might bias the
content or publication of this report.
Receipt of compensation:
Compensation of the author(s) of this report is not based on investment banking revenue.
Position as a officer or director:
The author(s), or a member of their household, does not serve as an officer, director or advisory board member of the subject company.
Market making:
The author(s) does not act as a market maker in the subject company’s securities.
Disclaimer:
The information set forth herein has been obtained or derived from sources generally available to the public and believed by the author(s) to be
reliable, but the author(s) does not make any representation or warranty, express or implied, as to its accuracy or completeness. The information
is not intended to be used as the basis of any investment decisions by any person or entity. This information does not constitute investment
advice, nor is it an offer or a solicitation of an offer to buy or sell any security. This report should not be considered to be a recommendation by
any individual affiliated with CFA Society Nigeria, CFA Institute or the CFA Institute Research Challenge with regard to this company’s stock.
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