Nigeria: Lafarge won’t chase Dangote, BUA to build new cement capacity

By David Whitehouse
Posted on Tuesday, 2 November 2021 16:38, updated on Thursday, 23 June 2022 12:27

Labourers stand on top of a trailer transporting cement along Ajah-Lagos expressway in Lagos
A trailer transports cement along the Ajah-Lagos expressway. REUTERS/Akintunde Akinleye

Lafarge Africa plans to improve the utilisation of its installed cement capacity in Nigeria to meet increased demand, Nigeria country CEO Khaled El Dokani tells The Africa Report.

The company’s ‘debottling’ programme underpinned by new industry technology will lead to the availability of about 2 million tons of incremental capacity and will address the market’s medium-term growth prospects, El Dokani says. He expects the utilisation rate will increase from about 55% now, to about 80% in two years.

Analysts have questioned whether the company’s plans are ambitious enough. In the first quarter of 2021, according to analysts at Chapel Hill Denham, Lafarge only had about 7 million metric tons (mmt) of operational capacity, out of its total installed capacity of 10.5mmt. In the first half of 2021, Dangote Cement lifted Nigerian capacity by 33% to 9.9 mmt, while BUA Cement is planning a new cement line at Kalambaina to  increase market share.

  • Lafarge is likely to continue to trail behind Dangote Cement and BUA – in capacity terms – at the end of 2022, according to the analysts.  “The cement market is growing, but Lafarge is missing out.”
  • El Dokani says there is no prospect of Lafarge building new plants in Nigeria in the short term. Improving the use of installed capacity is the best way to protect shareholders’ interests, he argues. “The focus is to get the de-bottling exercise done.”

On 28 October, results showed that Lafarge Africa’s earnings before interest, taxes, depreciation and amortisation (Ebitda) rose by 9.6% in the third quarter, compared to a year earlier, with revenue climbing by 25%.

Still, Chapel Hill Denham notes, the company’s cost of goods sold (COGs) rose by 30% in the third quarter. Production and distribution variable costs, as well as maintenance fixed costs jumped by 48.3% and 39.1%, respectively, compared to a year earlier.

Cost inflation

Part of the increase in third-quarter revenue came from the need to compensate for cost inflation, El Dokani says. For now, he says, the company’s price increases are offsetting the higher costs. Nigeria’s central bank is not making enough dollars available, and scarcity is likely to continue to contribute to cost pressures in coming quarters, El Dokani adds.

  • Unlike Lafarge, Dangote Cement has been able to raise prices high enough to cover rising costs and improve margins, Chapel Hill Denham says. Dangote Cement’s gross margin of 61.6% is at its highest since 2015, the analyst says.
  • Lafarge management will “likely consider implementing a faster price increase to, at […] best, protect margin,” according to the research.

El Dokani is positive about the market’s prospects for 2022. Inflationary pressure raises the company’s costs, but also spurs investment in construction as a way of storing value, he says. Nigeria still has low cement consumption per head, relative to other countries, and lack of road infrastructure will underpin demand, he adds. “This is exactly what happened in 2020 and 2021.”

Despite its reservations on Lafarge’s capacity and margins, Chapel Hill Denham expects that a rising tide will lift all boats.

  • The firm has a buy rating on Lafarge with a 12-month target price of N38.70 ($0.094), versus the current price of N27.3.
  • The shares trade at an enterprise value to Ebitda ratio of 3.54 times, versus a peer average of 8.11 times, Chapel Hill Denham says.

Bottom line

Focusing on existing capacity, rather than building more, may look like a smart strategy during Nigeria’s next downturn.

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