Cement firms see steady sales growth despite economic slowdown
There are positive prognoses about Nigerian cement makers as future earnings will be driven largely by the acceleration of federal government capital spending and the country’s return to economic growth.
“The demand for cement will grow in Nigeria,” said Bruno Bayet Chief Financial Officer of Lafarge Africa in a telephone interview with Businessday.
“However, the economy is going out of recession, we see monetary policy taking place in the stabilization of the exchange rate and with lower interest. We believe that the prospect for the development of the cement industry will remain, there is need for infrastructure and affordable housing,” said Bayet.
Nigerian cement makers grew revenue at an average rate of 11.45 percent in the last three years and analysts expect future sales to increase due to federal government capital spending and the country’s return to economic growth.
The cumulative sales of the three major players (Dangote Cement, Lafarge Africa, and Cement Company of Northern Nigeria) increased by 8.25 percent in December 2014 and spiked by 16.16 percent to N760.16 percent in December 2015.
Combined revenues were up by 10 percent to N836.07 billion in December 2017 in a period when a sharp drop in oil prices and severe dollar shortage tipped the country in its first recession in 25 years.
Analysts forecast an average sales growth of 37 percent y/y for our cement names for 2017 year end.
Investors are optimistic about the future of the industry as they have continued to buy into the stock of these firms.
Dangote Cement, Lafarge and CCNN shares have gained 32.71 percent, 32.75 percent and 94 percent respectively this year.
In the last 15 months, the Nigerian government has spent N1.2 trillion on infrastructure as it seeks to borrow in order to bridge the huge infrastructure deficit, according to Finance Minister Kemi Adeosun.
According to granular budget data collected by the BOOST initiative for 24 countries in Sub-Saharan Africa, annual public spending on infrastructure was 2 percent of GDP.
Adeosun says the country aims to raise the proportion of government spending devoted to infrastructure to 30 percent from 10 percent and to mobilise private capital for additional funding.
Nigeria plans to sell as much as $5.5 billion of Eurobonds in the next three months to fund capital projects and replace local-currency debt, according to the Debt Management Office.
Nigeria is projected to be the world’s third most populous country by the year 2050, according to a report released by the UN Department of Economic and Social Affairs.
Despite the volatile and tough operating environment, cement producers have performed very well across the continent, with all their operations increasing sales and gaining market share.
For instance, across the rest of Africa, Dangote Cement increased cement volumes by 54.0 percent to more than 8.6Mt, including a maiden contribution from Tanzania.
Cement use in Africa is less than 50 kilograms (110 pounds) per person, with some countries as low as 30 kilograms, according to London-based Bloomberg Intelligence analyst Sonia Baldeira. That compares with China’s 1,737 kilograms per person and Europe’s 230 kilograms.
Dangote Cement, Nigeria’s largest producer of the building material has invested N136.2 billion across Africa in the 9 month period to September 2017, including N62.9 billion in Nigeria, and created nearly 2,000 jobs.
Analysts are of the view that the energy diversification among major players in the industry could result to a reduction on cost of production.The major cement producers have largely succeeded in diversifying their energy mix away from low-pour-fuel-oil and gas to other fuel sources such as coal, biomass and other alternative fuels.
“Going forward, ongoing investments in alternative fuel sources such as coal mines, aimed at de-coupling costs to US$, should help preserve margins and support earnings growth,” said analysts at FBNQuest Limited.
Dangote Cement, Lafarge Africa and CCN, had cost of sales increase by 13.15 percent while combined net margins moved to 22.97 percent from -40.35 percent the previous year.
Despite a volatile and tough operating environment, cement markers recorded growth in earnings as evidenced in their third quarter financial results.
Profit at Dangote Cement, Lafarge Africa and Northern Nigeria Cement Company (CCNN), surged by 181 percent in the nine months to September 2017 as sales increased by 56.13 percent to N840.87 billion.
Average growth rate of the aforementioned firms was16.81 percent for sales and 54.49 percent for profit for the 9 month period.
Drilling down the figures show Lafarge Africa recorded a loss of 18 billion on a quarter on quarter basis, driven by surge in other losses and net finance cost, and reversal to tax charge (N1.7billion).
“We were highly leveraged at a debt of N240 billion. The average cost of borrowing is close to 12% which had a negative effect on our profit after tax, YTD we have some negative effect from SA flows. Nevertheless, we will continue to improve in Q4 and will deliver good performance,” said Bayet.
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