How finance costs dented cement makers’ 2022 margins

Due to supply chain interruptions caused by the Russian-Ukrainian war, the global inflation crisis became the order of the day, and central banks worldwide took a hawkish stance by raising their benchmark interest rates, while attempting to tackle inflation.

According to data from the Nigerian central bank, headline inflation reached a 17-year high of 19.34 percent in July 2022 before rising to 21.82 percent in January 2023.

As a result, interest rates rose by a total of 500 basis points in 2022, reaching 16.5 percent in December.

This resulted in an increase in the cost of borrowing for corporates and individuals, significantly dampening profitability and purchasing power during the year.

Data sourced from the Nigerian Exchange Group (NGX) showed the finance cost of Nigeria’s biggest cement makers grew by 116 percent to N156.9 billion in 2022 from N72.7 billion in 2021.

Kayode Eseyin, an analyst, of investment research and strategy, CardinalStone said that interest paid on bank borrowings and foreign currency losses are the major drivers responsible for the surge in finance costs.

“Although, this varies for the cement makers but soaring finance costs can have a negative pass through to profits. Profit for these firms increased but at a slow pace. The effect of increased finance costs can evidently be seen pressuring profits,” he added.

Furthermore, a breakdown of the finance costs data also shows that interest on borrowings reported by the cement makers surged 22.54 percent to N83.21 billion in 2022 from N67.9 billion in 2021.

In addition, the devaluation of Africa’s largest economy’s currency caused cement makers to report huge foreign exchange losses during the period, accounting for the growth in finance costs.

Foreign exchange losses reported by Nigerian cement makers surged by 699.82 percent to N72.56 billion in 2022 from N9.07 billion in 2021.

Consequently, despite revenue growth of 21.64 percent in 2022 driven by price increases, profit was pressured, growing by 6.18 percent to N536.77 billion in 2022 from N505.52 billion in 2021.

Additionally, the profit margin declined by 332 basis points to 22.82 percent in 2022 from 26.14 percent in 2021, despite profit and revenue growth during the period.

Company Analysis

Dangote Cement Plc (DangCem)

DangCem reported a 98.40 percent increase in finance costs to N130.37 billion in 2022 from N65.71 billion in 2021 due in part to the FX crisis impacting imported input components as well as depreciation in some Pan-African currencies, that is, CFA and Ghanaian Cedi.

Data reveals that foreign exchange losses surged by 515 percent during the period to N53.93 billion from N8.77 billion in 2021, while interest expenses rose by 31.6 percent to N75.24 billion in 2022 from N57.17 billion in 2021.

Read also: DangCem earnings under pressure as finance cost rises by 98%

As a result, despite revenue increasing by 16.96 percent to N1.62 trillion in 2022 from N1.38 trillion in 2021, profit was under intense pressure, growing by 4.90 percent to N382 billion from N364 billion in 2021.

Additionally, the profit margin decreased by 272 basis points to 23.62 percent year over year.

The cement maker declared earnings per share of N22.27 per share in 2022 from N21.24 per share in 2021 and proposed a final dividend of N20 per share.

BUA Cement Plc

BUA’s finance costs primarily surged by 516.96 percent to N10.55 billion in 2022 from N1.71 billion in 2021 on interest expense from debt securities.

The cement maker reported interest expense on debt securities of N9.01 billion, interest expense on borrowings of N6.74 billion, and interest expense on an overdraft of N458 million in 2022.

“This is consistent with its policy to unwind earlier capitalisation of bonds and loan interests on its Sokoto line 4 plant and other qualifying assets,” Coronation Research said in a note.

Furthermore, as part of administrative expenses, BUA recorded a foreign exchange loss of N5.50 billion in 2022, up 1,723 percent from N302 million in 2021.

Consequently, the profit margin declined by 703 basis points to 27.98 percent from 35.01 percent, despite revenue and profit growing by 40.28 percent and 12.13 percent respectively during the period.

Revenue increased to N360.99 billion in 2022 from N257.33 billion in 2021, while profit after tax deductions increased to N101.01 billion in 2022 from N90.08 billion in 2021.

The cement maker declared earnings per share of N2.98 per share in 2022 from N2.66 per share in 2021 and proposed a dividend of N2.80k per 1 ordinary share of 50 kobo each.

Lafarge Africa Plc

On the back of net foreign exchange loss, Lafarge reported a 202.65 percent to N15.98 billion in 2022 from N5.28 billion in 2021.

The cement maker reported foreign exchange losses of N13.13 billion in 2022, despite having recorded none in 2021. However, in line with its low Capex spending policy, the company saw borrowing costs fall by 79.6 percent.

It also reported interest on borrowings of N767 million in 2022, 79.6 percent lower than N3.76 billion in 2021. Bank charges and other interest costs surged to N1.64 billion in 2022 from N1.22 billion in 2021.

Management explained that the worsening exchange rate situation led to revaluation losses, thereby constraining its net income growth.

Revenue grew by 27.35 percent to N373.24 billion in 2022 from N293.09 billion in 2021, while profit was pressured, increasing by 4.80 percent to N53.45 billion in 2022 from N51 billion in 2021, bringing profit margin to 14.32 percent in 2022, 308 basis points down from 17.40 percent in 2021.

The cement maker declared earnings per share of N333 per share in 2022 from N317 per share in 2021 and proposed a final dividend of 200 kobo per unit of 50 Kobo ordinary share.

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