All the company’s idled capacity has already been restarted, Puchercos says. Money will be spent to “debottleneck” existing plants, which can typically result in lifting capacity by between 5% and 15% per plant, he says.
- A new plant is also being built at Okpella in Edo state and this will be commissioned “in the next few months”.
Recent increases in demand for Nigerian cement are faster than in growth periods in emerging markets such as China and India, he says. “I’ve almost never seen such growth” in 20 years in the industry. He expects strong demand to continue for at least three to six months.
The demand is being driven by private investors – including house builders – rather than government projects, Puchercos says. Some of the demand is pent up from previous years, and there has also been an anticipation of naira devaluation, which has led some to get the money into real estate.
The strength of demand was enough to lead the company to halt the export of clinker. Part of the reason for this was political, as exports could have been badly perceived at a time of strong domestic demand, Puchercos says.
- The company is planning to gradually resume clinker exports soon.
The need to deploy capital to meet demand means that share buybacks have taken a back seat. The company bought back 0.24% of its outstanding shares in December 2020, instead of up to 10% initially announced. The previous share buyback program has been extended, but there are no dates yet for when any buyback might be made, Puchercos says.
African free trade
The cement industry, Puchercos says, revolves around the need to build capacity even when there is no demand. One way to ease that burden, he says, is to find export markets to compensate for the cyclicality of domestic demand.
The African Continental Free Trade Area (AfCFTA), he says, can help in this process. The ease with which clinker is transported means that the benefits of free trade to the cement industry are likely to be most obvious in clinker trade, he says.
Nigeria’s stretched road network makes distributing cement harder. Puchercos’s solution is to put more trucks on the road in the calculation that some of them will get through sooner or later. In the long term, he says, more needs to be done to develop the country’s roads.
Chapel Hill Denham’s view
According to research from Chapel Hill Denham in Lagos in May, the Okpella plant with a capacity of 3m metric tons (mmt) together with debottlenecking will push the company’s total installed capacity in Nigeria to 36.25mmt in 2021.
- In May, Chapel Hill Denham increased its full-year 2021 earnings per share (EPS) estimate by 11.8% to N16.66 ($0.041).
- It also raised its forecast for 2021 growth in earnings before interest, taxes, depreciation and amortisation (EBITDA) to 20.9%, with an EBITDA margin of 45.6%.
- Key to the strength of Dangote’s competitive position are its energy costs. Chapel Hill Denham calculates per-tonne energy cost in the first quarter of N4,888($11.91), compared with N8,666 ($21.11) at BUA Cement and N6,752 ($16.45) at Lafarge.
- A share price of N215 ($0.52) gives a forward price-to-earnings (PE) ratio of 12.7 times, Chapel Hill Denham says.
- The firm rates Dangote Cement stock as a buy.
African free trade can benefit cyclical industries as new export markets are developed – and shield companies like Dangote Cement from the next downturn.
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