A market of more than 100 million inhabitants, where only one-third of those over 25 have a bank or mobile finance account (compared to an average ... of 58.5% in sub-Saharan Africa and 79.5% in neighbouring Kenya). An economy where one public institution, Commercial Bank of Ethiopia (CBE), alone manages 55% of outstanding credit. A banking industry so inefficient that its costs absorb 56% of its revenues, but where the return on assets is four times higher than that of Moroccan banks…
Growth prospects for Nigerian cement producers are supported by the country’s low consumption combined with need for more infrastructure such as roads. Nigerians consume about 105 kilograms of cement per head per year, far behind Egypt on 570 kg and South Africa on 210 kg.
President Muhammadu Buhari has said that cement is the area where the policy of “backward integration” and encouraging local production has had the greatest success. The three main players, Dangote Cement, Lafarge Africa and BUA Cement, lifted their combined revenue by 31% in 2021 versus 2020. Yet according to Nairametrics, the industry still accounts for less than 1% of Nigeria’s GDP. Central bank governor Godwin Emefiele in January urged cement manufacturers to focus on meeting domestic demand rather than exporting.
Lafarge, which was able to raise ex factory prices 26% in the first quarter from a year earlier, has the largest share-price upside, the research argues. The company has refocused on Nigeria and exited margin dilutive businesses in Ghana and South Africa. Revenue and profit after tax growth for Lafarge are now likely to be running well ahead of Chapel Hill Denham’s forecasts of 34.6% and 3.4% for the full year, the research adds.
- Still, Chapel Hill Denham says, Lafarge may still need to install need capacity to take full advantage of Nigeria’s growing demand.
- Dangote, meanwhile, has the highest revenue per tonne in the industry and the best earnings before interest, taxes depreciation and amortisation (EBITDA) margin.
- While more fully valued than Lafarge, it still has scope to consolidate on its leadership position in Nigeria and other countries, the research says.
- Chapel Hill Denham rates both Lafarge and Dangote Cement as “buy”.
BUA Cement has a strong earnings record and is now the second-largest cement company in Nigeria both by installed capacity and by volumes. Its standing as the country’s lowest-cost producer is based on its flexibility in energy use. Its plants are configured to run on multiple fuel sources and can switch from one source to another at no extra cost, Chapel Hill Denham says.
Nigeria’s gas supply bottlenecks will likely continue in 2022, meaning that BUA is likely to see the best volume growth, Chapel Hill Denham says. But that prospect is more than priced in already. BUA’s ratio of enterprise value to EBITDA is 28 times. That compares with 4.6x for Lafarge and 7.6x for Dangote Cement, and an average for African peers of 7.6 times, the research says. Further, Lafarge has the greatest potential for cost savings, due to a planned captive power plant at Ashaka, the research says.
- Chapel Hill recommends selling BUA shares and has a target price of 43.13 naira, 35% lower than the current price of 66.85.
- Lack of liquidity in the traded stock also clouds the case for BUA Cement. Chapel Hill Denham estimates a free float of 3.7% for the company, versus 14.3% for Dangote Cement and 16.2% for Lafarge.
Nigerian cement has strong prospects but investors need to ensure that individual stock prices don’t get too far ahead of the growth.
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