Dangote Cement Company has rebuilt strength in profit performance in the current year after a profit drop last year. Against a drop of 21% in profit in the preceding year, the cement manufacturing company may raise after tax by over 40% in 2015 based on the current growth rate.

The drop in profit in 2014 was due to inability to grow sales revenue – which was only 1.7% up at N391.64 billion. This year sales revenue is accelerating and this has spurred profit performance as well. Three favourable developments explain the improved profit outlook for the company this year- accelerating sales revenue, a moderation in cost of sales and a shift from a net interest expenses to a net interest income.

Aliko Dangote

The company closed second quarter operations in June with a sales revenue of N242.21 billion, which is an increase of 20.7% year-on-year. It is expected to close the 2015 operations with a turnover in the region of N450 billion. This will be an accelerated growth compared with a flat growth of 1.7% in the preceding year.

After tax profit amounted to N121.81 billion for Dangote Cement at the end of the second quarter, an increase of 27.6% year-on-year. Full year projection indicates an increase of over 40% in net profit for the company in 2015. It posted a net profit of N159.5 billion at the end of 2014. A new peak in profit is therefore expected from the company this year. Its peak profit so far is the N201.20 billion it reported in 2013.

Compared with last year when cost of sales grew ahead of sales revenue, cost of sales has moderated as at the end of June. Cost of sales grew by 14.9% compared with the growth of 20.7% in sales revenue, which has improved gross profit margin from 63.5% at the end of 2014 to 65.1% at the end of June.

Another major positive development on the income statement this year is a change from a net interest expenses position last year to a net interest income at the end of the second quarter. A shift from a net interest cost of N2.41 billion at the end of 2014 to a net interest income of N6.32 billion in the second quarter has boosted the bottom line significantly in the current year.

These developments have provided a new strength for the company this year in terms of ability to convert revenue into profit. Net profit margin has improved from 45.7% in the same period last year and from 40.7% at the end of 2014 to 50.3% at the end of the second quarter. Accelerating revenue and moderating cost are the summary of the operating story of Dangote Cement so far this year.

The company’s short-term debts grew by almost 60% to N176.44 billion within the six months of the year, which caused a tripling of finance costs to N24.38 billion year-on-year at the end of the second quarter. However a robust increase in cash resources enabled the company to grow interest income ahead of interest expenses.

Cash and bank balances rose by 151% over the closing figure last year to N51.63 billion at the end of June. This follows a rise of 23.7% in net cash flow generated from operating activities to N179.8 billion against declines in net cash used for both investing and financing activities during the review period.

The company earned N7.22 per share at the end of the second quarter, up from N5.63 in the same period last year. The full year earnings per share expectation is above N13 for Dangote Cement in 2015 against N9.42 in 2014.

FBN Holdings: rising cost constrains profit capacity

FBN Holdings raised gross earnings by 28% year-on-year at the end of June but could not convert the increased earnings into profit. Two major cost increases accounted for this – loan loss charges and interest expenses. Profit grew by just 7.7%, which leaves the company with full year prospects of a profit decline.

Non-interest income spurred revenue growth during the period with exceptional growth in income from investments and net gains on foreign exchange trading as well as other operating income. The bank requires a step up in revenue growth in the second half without which earnings growth will most likely slow down considerably this year.

The bank posted an after tax profit of N40.06 billion at the end of June, an increase of 7.7% year-on-year. Profit growth is expected to slow down in the second half and the full year prospects indicate a likely drop in profit for FBN Holdings in 2015. The company had grown after tax profit by 13.7% in 2014 to N82.84 billion. A decline in profit in the current year will mean a rise and fall pattern for FBN Holdings since 2013 when the bank’s profit went down by 6.7%.

Gross earnings amounted to N271.82 billion at the end of the second quarter, an increase of 28% in year-on-year. Based on the growth rate in the second quarter, gross income is expected to stand in the region of 547 billion for FBN Holdings at the end of 2015. Revenue growth is expected to slow down from the growth rate of 21.3% in the preceding year.

The moderate increase in profit against a strong growth in revenue is explained by rising cost. All the bank’s three main expense lines are on the rise but loan loss expenses and interest cost appear to be out of the control of management.

Loan loss provisions grew by 239% year-on-year in the second quarter to N22.58 billion, which is already quite close to the N25.94 billion impairment charge the bank made in all of last year. The proportion of gross earnings claimed by impairment charge rose sharply from 3.1% to 8.3% over the review period. Up to 11% of interest income was applied as impairment charges for credit losses against 4% in the same period last year.

Interest expenses also rose by 47.1% to N73.10 billion in the second quarter, far ahead of the 24.8% growth in interest income. Interest cost therefore claimed an increased share of gross earnings of the bank from 23.4% in the same period last year to 26.9% at the end of June this year. Interest expenses and impairment charges claimed virtually all the increase in interest income during the period.

The contribution of fee-based earnings to gross earnings increased from 22.4% in the same period last year to 24.3% this year. This provided the strength for the moderate improvement in profit. Customer deposits increased marginally by 2.5% to N3,126.16 billion compared with the growth of 47.1% in interest expenses. This means the average cost of deposits increased during the review period.

The third major cost element – operating expenses moderated relative to gross earnings at an increase of 15.1% to N118.40 billion at the end of the second quarter. With a more rapid growth in gross income, the bank was able to reduce operating cost margin from 48.4% to 43.6%. This provided the little cost saving that permitted the moderate increase in profit.

The bank lost profit margin, as costs grew generally faster than revenue during the period. Net profit margin declined from 17.5% in June last year to 14.7% this year. This is equally below the 17.2% net profit margin the bank generated at the end of 2014. Loss of profit margin follows the rapid growths in loan loss provisions and interest expenses.

FBN Holdings closed the second quarter operations with a net loan portfolio of over N2.08 trillion, which is a decline from the closing figure of N2.19 trillion for 2014. Its investment portfolio amounted to over N795 billion at the end of the second quarter.

The bank earned N1.10 per share at the end of the second quarter, which is a decline from N1.14 in the same period last year. Earnings per share is likely to decline from the N2.55 the bank recorded at the end of 2014.

Written by Mike Uzor. Uzor is a financial analyst.