Idea of the Week: Africa’s Dangote Cement is Paving the Way to a Bright Future

On the road to investing in Africa, a smooth ride depends upon avoiding the potholes. For a continent with the fastest population growth and persistent needs for housing and infrastructure, Dangote Cement plc (DANGCEM.LG) may be a concrete investment.

In January, 2014, Dangote President and CEO Aliko Dangote will co-chair the World Economic Forum in Davos-Kloster, Switzerland — an indication of his company’s prominence. Furthermore, Dangote will shortly be listed on the London Stock Exchange.
It’s one of the most prominent cement producers in Africa, the highest-capitalized company on the Nigerian Stock Exchange and the fifth-highest capitalized on the continent. Previous years’ performances have been further confirmed by excellent results in the first half of 2013, and the company will shortly be listed on the London Stock Exchange.

Not only is Africa’s population growing, but so is its GDP. It faces an ongoing housing deficit and governments are turning increased attention to public infrastructure and urbanization, making it an interesting venue for real estate investments despite the still-low levels of GDP per capita. The Nigerian government budget for 2013, for instance, allocated 32.5 % of capital spending on infrastructure development; an increase of more than 8% since 2011 with further upside potential in the coming years. Other African countries are following the same path.

Outpacing the market

With a market share of more than 60%, Dangote is the largest producer of cement in Nigeria, the most populous country on the continent with 174.5 million people. Besides the financial solidity of its main shareholder (Aliko Dangote is the richest man in Africa), the company showed in recent years sound management capacity by consolidating its national market share and expanding its operations all over Africa. Analysts expect Dangote to become the largest local cement producer and exporter by 2016, with a production capacity of 55 million metric tonnes. It is therefore no surprise to see Dangote outperforming the already positive performance of the Nigerian stock market for 2013, with a price increase of about 150% compared to an index gain of around 130%.

Source: Thomson Reuters Datastream

Investment factors

To further analyze these results, let’s have a look at the StarMine Smart Holdings model below, which rates stocks comparing the popularity of 25 investment factors important to fund managers with the company’s performance on those factors. It provides an aggregate score at the region, country, sector and industry levels, based on a 1 to 100 percentile ranking. If we look at the “model breakdown” section, we can clearly note how well Dangote scores on many of those factors. Out of the 10 most popular, the company scores above the 70th percentile in five of them, performing weakly only in EV/EBITDA LTM. Not surprisingly, Dangote’s overall performance in the Model Summary ranges from the 98th to the 100th percentile.

Source: Thomson Reuters Eikon/StarMine

Bottom line results

These data are confirmed by the impressive interim financial figures presented by the company for the first part of 2013. Thanks to its cement plants’ capacity expansion, gross revenue grew by 28.5% year on year, while operating margin increased to 55.9% in June 2013, compared to 49.5% in the same period in 2012. Those results may lead to a more favorable financial exposure: Dangote’s consistent track record and performance should allow the company to improve its risk perception and secure cheaper funding from institutional lenders. The company’s loan exposure overall increased, however short term borrowings decreased by 28.7% to leave space for long term facilities better matching its business needs.

Foreign exchange risk and lack of liquidity on the Nigerian stock market still make it difficult to invest in Dangote, but once it finalizes its London Stock Exchange listing, its shares may be as liquid as cement is firm.

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