GCR Affirms Dangote Cement AA+ (NG) Rating

GCR Ratings (GCR) has affirmed the national scale long-term and short-term issuer ratings of AA+ (NG) and A1+(NG), respectively, accorded to Dangote Cement Plc.

In its latest rating note, the emerging market ratings agency said concurrently, it has also affirmed the national scale long-term issue rating of AA+ (NG) accorded to each of Dangote Cement Plc’s existing Senior Unsecured Bonds.

It stated that the company’s N3.6 billion series 1 Tranche A Senior Unsecured Bond was fully redeemed in May 2024, and the rating has been withdrawn. The outlook on the ratings is stable.

GCR said the affirmed ratings reflect DCP’s sustained competitive advantages and market leadership which have translated to strong earnings and cash generation.

These strengths are however balanced against the elevated short-term debt, and the consequent increase in finance cost, which, combined with high dividend payouts creates further liquidity pressures.

The ratings also remain constrained by the relatively weaker credit profile of DCP’s parent company, Dangote Industries Limited, GCR Ratings said.

The ratings agency said the competitive strengths of DCP are anchored by its substantial operational scale, higher production capacity and greater geographical diversification relative to peers.

The company’s current total installed capacity is 52 million tonnes, across ten African countries, in contrast to its closest peers who operate solely in Nigeria and have a combined 21.5 million tonnes capacity.

Despite pan African revenue doubling in recent years, Nigeria still accounts for over 70% of the company’s earnings before interest tax depreciation and amortisation (EBITDA).

“Looking ahead, the focus is to facilitate export operations from Nigeria to other West African markets, which would diversify operations and could create better competitive advantages over the long term”, GCR said.

The firm also noted that earnings assessment remains a key rating strength for Dangote Cement Plc, notwithstanding the weaker market demand in Nigeria.

Its revenue increased by 36% to N2.2 trillion for the financial year ended 2023, with a further annualised top line growth of 48% in Q1 2024.

The company’s growth was largely driven by higher pricing and the effect of translation gains from Pan African earnings given the weaker Naira, said GCR Ratings.

Analysts wrote that despite these price adjustments, EBITDA margin contracted to 35% in March 2024 from 39% in 2023 from 43% as costs could not be fully transferred to consumers.

“We expect steady increase in volumes driven by a robust public construction pipeline over the next two years, while margin should be supported at around 37% over the next 18 months on the back of further price increases and cost optimisation plans”.

Analysts at GCR explained that despite the consistent rise in debt, the strong earnings and cash flows continue to support a positive leverage assessment.

Gross debt spiked to N1.3 trillion as of 31 March 2024 from N736 billion in 2023; N588 billion in 2022, following the issuance of commercial papers in 2023 to fund DCP’s share buyback scheme, as well as the impact of devaluation on the USD-denominated debt.

Nevertheless, net debt to EBITDA was maintained below 1x, the rating note said, adding that DCP’s debt metrics are moderated by its very strong cash flows, underpinned by favourable credit terms with suppliers from an average of 38 days in 2022 to 67 days in 2023.

Thus, operating cash flows covered an improved 91% of debt in Q1 2024 compared to 56% in 2023 and 48% in 2022.

“We expect these metrics to be sustained at strong levels over the review period on the back of robust earnings and cash flows.

“Conversely, we have negatively considered the elevated short-term debt which is 60% of total and the consequent rise in finance cost which narrowed interest coverage to 5.9x in March 2024 from 7.2x in 2023 and a high of 18.6x in 2022”.

DCP plans to raise debt to refinance some existing loans, but the new debt would be costlier given the prevailing higher lending rates, GCR Rating said in its report.

This notwithstanding, analysts at the firm said they expect a modest improvement in Dangote’s interest coverage to around 7x-9x over the outlook period, on the back of better earnings.

The rating maintained that the cement company’s liquidity assessment remains a negative rating factor due to the low liquidity sources versus uses coverage of 1.2x over the next 12 months.

This is predicated on the sustained high short-term debt redemption of N638 billion, as well as our expectation that dividend payouts will remain high until DIL’s large projects are fully operational.

“We expect capital spending to be modest over the rating horizon largely related to replacement cost and some capacity expansion programmes across the company.

“Against these, we have considered the strong cash holding of N626 billion as at March 2024 and the projected robust operating cash flows, which would be complemented by substantial unutilised committed credit facilities of about N500 billion and the company’s access to a very diverse funding base”.

The rating note reads that the company’s liquidity pressures could however be worsened by a persistent rise in short term debt or material underperformance of operating cashflows.

A negative adjustment has been applied to DCP’s ratings to reflect the relatively weaker creditworthiness of DIL. This is because GCR considers DCP a core part of the group, accounting for over 70% of group revenue in 2023, the rating note said.

DIL’s credit profile assessment is constrained by the high debt incurred to fund the fertilizer and refinery projects.

Analysts believe that these projects are yet to meaningfully contribute to group revenue, but this should change within the next 18 months as operations attain a greater scale, with robust earnings and cash flows allowing DIL to gradually reduce debt.

DCP’s N100 billion in series 1 bonds, N46.4 billion series 1 (Tranche B & C) bonds, and N116 billion series 2 (Tranches A-C) bonds, are direct, unconditional, senior, unsubordinated, and unsecured obligations.

Hence, GCR said they rank pari passu with all other senior unsecured creditors of company and the bonds therefore bear the same national scale long-term rating accorded to DCP.

Accordingly, any change in DCP’s long term corporate rating would impact the ratings of the bonds. GCR analysts said in the assessment that they have reviewed the trustees bond performance report dated July 9, 2024, and no breaches were identified.

Outlook statement

The stable outlook reflects GCR’s view that DCP’s strong market position will continue to support robust earnings and cash flows, notwithstanding financial disruptions to the Nigerian economy.

“While we also expect liquidity pressures from the high short-term debt and huge dividend payouts, these should ease as DIL’s large projects becoming fully operational”, GCR Ratings said. #GCR Affirms Dangote Cement AA+ (NG) Rating

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