Dangote needs strong cement business as backup option for refinery financing

By David Whitehouse
Posted on Thursday, 12 May 2022 06:00, updated on Thursday, 23 June 2022 12:26

Fitch sees Aliko Dangote's involvement in operations as adding to the risks for his group. REUTERS/Temilade Adelaja

Dangote Cement will turn in a strong 2022 full-year performance, with high pricing set to compensate for weak volumes in the first quarter, according to new research from Chapel Hill Denham in Nigeria.

Volumes were 1.5% weaker in the first quarter in Nigeria, and down 7.6% in the rest of Africa. Management has blamed gas supply disruptions in Nigeria and maintenance and supply chain issues elsewhere. Despite that, the company was able to grow revenue by 24%, supported by higher prices in Nigeria.

Nigeria’s gas supply bottleneck is likely to put a ceiling on volume growth over the rest of 2022, the research says. Management told an analysts conference call that it favours profitability over volume growth. Chapel Hill Denham now expects full-year volumes to grow by 5.9%, a reduction of 3.2 percentage points from its previous forecast.

After strong share price performance, Dangote Cement now is still cheaper than peers such as Ciments du Maroc and Carthage Cement on the basis of enterprise value to earnings before interest, taxes, depreciation and amortisation (Ebitda), Chapel Hill Denham says. Dangote Cement now has an EV/Ebitda ratio of 6.8, versus 11.5 and 7.5 for Ciments du Maroc and Carthage Cement respectively.

  • Chapel Hill Denham raises its target price for Dangote Cement by 9% to 336.35 naira and retains its “buy” recommendation.
  • That implies a potential upside of 22.5% including a dividend yield of 7.4%, Chapel Hill Denham says.

Refinery Risks

The outlook for Dangote Cement may have wider implications for the whole group. The business is a significant contributor to Dangote Industries, West Africa’s largest conglomerate created by Aliko Dangote.

Fitch Ratings this month assigned Dangote Industries a Nigerian national long-term rating of ‘AA(nga)’ with a stable outlook. Still, Fitch says, Dangote Industries has limited financial flexibility with which to complete its refinery and petrochemical plant. The timely completion of the project “is a key driver” of Fitch’s assessment, and “only limited delays or cost overruns may be tolerated in the current rating.”

Fitch argues that Dangote Industries suffers from weak corporate governance. The existence of a “complex group structure with a large amount of related-party transactions” has “a negative effect on operational and financial transparency,” Fitch says.

  • “We also view the dominance of Aliko Dangote, as CEO and the main shareholder, in operations as an additional risk.”

The timetable for commissioning the refinery has been consistently slipping. Aliko Dangote said in April that he expects commissioning before the end of Muhammadu Buhari’s term as president next year. Fitch says the refinery is likely to contribute around $1b to EBITDA annually when ramped up from 2024.

  • The refinery still needs another $1.1b of Capex this year, Fitch says. The company plans to partly meet this through bond sales. If the money isn’t raised, or costs overrun, Fitch says that existing lenders to Dangote Industries don’t have the further needed financing capacity.
  • In that case, asset sales in cement, or selling refinery project stakes, would be likely options to plug the gap, Fitch says.

The Bottom Line

Narrowing lender capacity to back the refinery means Dangote needs cement to keep performing well.

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