Presidential elections are due in February 2023. The government intends to spend 6.0t naira ($14.4b) on capital projects this year, up 61% on an annualised basis from the first 11 months of 2021, FBNQuest says.
In addition to federal spending, lower levels of government have the incentive to complete road and other infrastructure projects before the election, the research argues. The use of tax credits for the private sector to take part in road building will further support cement demand. The Nigerian National Petroleum Corporation (NNPC) has been allowed by the government to use 620b naira of its tax liabilities to build roads in a programme expected to start this year. FBNQuest predicts annual cement volume growth of 10% in 2022, driven by demand for roads and real estate.
There are risks to the bullish outlook, FBNQuest notes. Rising oil prices mean that the industry faces high energy costs. On interest rates, the central bank has a timing quandary. Raises rates too quickly and industries such as construction will suffer. Move too slowly and further naira deprecation could lead to capital flight.
- The central case is still postive. For Dangote Cement, the research forecasts sales growth of 4% and an EBITDA (earnings before interest, taxes, depreciation and amortisation) margin of 50% this year.
- Lafarge, meanwhile, has not prioritised capacity additions and is likely to continue to “sweat” existing capacity through debottlenecking rather than increasing it, the research says.
- Lafarge’s current utilisation rate of 55.5% lags behind the industry average of 60.5% due to older facilities and repairs at the Ewekoro plant.
- FBNQuest predicts Lafarge sales and net profit increases of 5% and 8% in 2022.
- BUA’s commissioning of a new plant at Kalambiana in December means that it has overtaken Lafarge and moved into second place behind Dangote Cement. The two will continue to invest in new capacity, FBNQuest says.
- FBNQuest does not cover BUA. It has share price targets of 301.6 naira for Dangote Cement and 27.9 for Lafarge, implying upside of 10% and 6.5% respectively from today’s levels.
‘Highways of Death’
Nigeria’s roads are not a problem which can be fixed with a pre-election spending binge. Decades of investment and maintenance will be needed.
The lack of a functional railway system means that Nigeria depends on its roads to move 90% of passengers and freight. But the country has the lowest road-to-population ratio in Africa, and less than half of the network is paved.
A rapid spurt of building now will not help in the long term if the roads are not maintained. According to Izang Elijah Yusuf and Rabi Menmak Nimlan at the University of Jos in Plateau state, at any point over the last two decades, about 50% of the total road network was in poor condition. The current network is plagued by potholes, bumps, bushes, mud and poor bridges which make many roads lethal traps, with the share of federal roads in good condition standing at 15%.
- The “default government policy stance,” Yusuf and Nimlan write, has been “in favour of new road construction and rehabilitation at the expense of maintenance”.
- The result is “nothing but highways leading to death.”
Nigeria needs to build and maintain roads every year, not just before an election.
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