FX challenges push Dangote Cement’s finance cost to six-year high

Thanks to a 722 percent loss in foreign exchange (FX), Dangote Cement has recorded a 148 percent increase in finance costs in the first half of 2022, the highest in the last six years. This is according to findings by BusinessDay.

In Africa’s biggest economy, companies are squeezed by rising costs brought on by spiraling inflation, volatile foreign currency, and infrastructure bottlenecks such as bad roads at the ports and epileptic power supply.

A rigorous analysis by BusinessDay shows Dangote Cement’s finance cost increased to N75.2 billion in H1 2022, from N30.4 billion in the same period last year, the highest in six years.

According to Investopedia, finance costs are defined as the interest and other costs incurred by the Company while borrowing funds.

The rise in finance cost was a reflection of the 722 percent increase in foreign exchange loss to N40.66billion in H1 2022 from N4.94billion reported in H1 2021, arising from severe currency depreciation (CFA and Ghana Cedi) in some of their Pan-African operations and also attributable to dwindling Naira in the foreign exchange market.

It was also a reflection of the increase in interest expense by 36 percent to N34 billion in H1 2022 from N28 billion in the same period last year due to additional borrowings.

The company issued additional bonds with a face value of N116 billion bringing the total publicly issued bonds to N266 billion as of 30 June 2022, according to its notes to the interim financial statement.

This impacted the decline in profit before tax which declined to N264.9 billion in the period under review from N281.3 billion.

Consequently, its profit declined by 10 percent to N172 billion in the first half of 2022 from N191.6 billion in the same period according to its latest financial statement on the Nigerian exchange.

Read also: Analysts maintain Buy Ratings on Dangote Cement

The cement company’s revenue however increased by 17 percent to N808 billion from N690.5 billion in the comparable periods.

For context, in the I&E window the naira depreciated by 2.8 percent as the exchange rate rose to N425.05 per dollar at the end of H1 2022 from N435 per dollar at the end of December 2021 from N307 per USD$1 as of 31st December 2019.

The local currency also depreciated by 6.0 percent in the parallel market where the exchange rate rose to N615 per dollar at the end of H1 2022 from N580 per dollar at the end of December 2021.

Although an increase in interest rates can also be seen as a driver of finance costs for companies, “the impact of the hike in interest rate cannot be significant till the second half of the year,” Sesan Adeyeye, CSL limited research analyst said.

The company’s cash flow from financing activities recorded by the firms’ financial books revealed that it paid a total of N29.2 billion as interest in H1 2022 from N26.6 billion in H1 2021.

It recorded an increase in the cash used in financing activities by 18 percent to N354 billion from N300 billion.

In May 2022, the Central Bank of Nigeria raised the Monetary Policy Rate (MPR) by 150 basis points to 13 percent, and later by another 100 basis points to 14 percent in July, which means financial institutions are to lend to customers at a minimum of 14 percent, enabling them to reprice their loans.

“Prior to repricing, there would already be terms and conditions that give the banks the right to change the interest on loans to be paid due to unforeseen market conditions,” Sodiq Safiriyu, investment research analyst at Meristem Securities Limited, said.

“Therefore, when the CBN changes rates, the banks would have to re-negotiate the interest on loans with their existing customers,” he added.

Analysts believe the impact of this hike would be significant in the second half of the year.

Dangote Cement recorded a decline in net cash flow from operating activities to N295 billion in H1 2022 from N301 billion in the comparable periods while net cash flow used in investing activities increased by 82 percent to N82 billion from N45 billion in the comparable periods.