Dangote Cement H1 2015: Please wake me up, I hope I am dreaming

Dear Africa Interested Individuals:

                                                        I just stumbled upon Dangote Cement's H1 2015 result.  My sensibilities that were at ease suddenly stood at attention.  This is not a drill.  Find below my most astonishing observations from the company's H1 2015 result that I deem to bee "out of sorts and out of wack." 

Management stated in the financials that the total cash in the bank as at June 30th, 2015 was $258m; this is an increase of about $155m from six months prior.  Management stated that it made finance income of $153.5m during the first six months of 2015.  Despite my awareness that balance sheet positions are at a point in time, management is implying on average that it was paid a rate of 60% on its fallow cash at the bank.  This is even a better story than audited fiscal year 2014 where management said it earned finance income of $150m on cash at the bank of  $100m.  I guess repentance is gradually building up.  If a company is making this, then, what are they paying on borrowed funds?  

Finance costs were $122m as at H1 2015 on total outstanding debt as at 6/30/2015 of $1.546B.  This implies average finance costs of 8.7% (this implies a lower rate than the Central Bank of Nigeria offers on its agricultural loans to farmers of 9%; anyway, this is low hanging fruit let us move on,) a significant drop from average finance costs of 13.6% during FY 2014.  Dangote Cement actually paid finance costs totaling $134.7m which is higher by $12.8m than what is actually stated on the income statement.  So, you may ask why will a company actually make a payment and not want to reflect the exact figure on its income statement?  It is called "optics" or like I like to call it, playing to the gallery.  The income statement is a show; it is where companies make the news worldwide for good and bad reasons.  In my opinion, $12.8m extra is on the income statement from this act that should not be there.  Management in a nutshell is also telling the whole world that it was paid more for its cash by banks than it had to pay on its debt to banks as at H1 2015.  This is debt outstanding that actually increased 27.5% ($333.1m) over the first six months of 2015.  Debt increase actually doubled (dollar for dollar) sales increase over the first six months of 2015.  Meanwhile, the company had free cash flow of $353.7m as at H1 2015.  The same issue with Unilever Nigeria; large companies keep borrowing money in excess of necessity.              

Management stated that it earned finance income of $153.5m as I mentioned earlier.  Management actually earned interest income of $5.2m as at H1 2015 and not $200m as stated on the income statement.  In my opinion, the income statement was further boosted by $148.3m in non-existent interest income.  When the actual interest income is related to cash at the bank we get an average deposit rate of 2% which is more like large corporates in Nigeria get on "call deposits."  The truth will always set us free.  

All of this is happening to a cement company that is selling its annually produced cement at a slower pace on average every year (except for a temporal positive reversal from FY 2010 - 2011.)  The company appears to be getting bigger faster than how fast it sells the cement the increased size produces.  The company has a lot of idle capacity in my opinion.  The relationship between cement sales and the resources available to produce cement are now back to FY 2008 levels (which is before the currently structured Dangote Cement came into existence.)  

The above is very sad not just for Nigeria but for fellow Africans.  Is this how we are going to become an emerging market?  This is unfortunately the stock that the Nigerian All-Share Index is depending on to drive the index upwards given its approximately 30% control of total market capitalization on the Nigerian Stock Exchange.  The market keeps on waiting for foreign institutional investors.  Nigerians invest in your market now!  Why are you on the fence?  There is over $1B (one billion dollars) in cash sitting in bank vaults across Nigeria.  Banks in Nigeria have even started refusing dollar (and related currencies) over-the-counter deposits!  Why are the owners not buying stocks and boosting demand?  Look at Malawi and even Venezuela.  Why will they invest when the more they look, the less they see?  The larger we get, the more opaque we become.  Nigeria! "I hail thee!"   I am awake now and I am not dreaming; this is real and professionally nauseating. 

An intelligent, professionally dishonest person is worse than a dullard who is professionally honest.  I refuse to be the former and I cannot be the latter.  The truth will set us free; I will keep telling it.    

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