Positive outlook seen for cement producers despite challenges

Despite a sluggish performance as shown in their full year results, analysts see upside potential for Nigerian cement manufacturers, as a peaceful outcome of elections, possible appreciation in naira and boom in building and construction activities will drive growth of these firms.

The return of stability to the north of the country which prevented consumer goods firms from pushing their products to the crisis hit region, and relative stability in gas supply in 2015 will also
be a major driver of growth.

“We believe a revamped naira will help to moderate cement makers’ production and finance costs, thus reducing the pressure on sector profit,” said Saheed Bashir, an equity analyst with Meristem Securities Limited, in an emailed note.

“We however expect the naira to slowly strengthen against the dollar on the back of expected improvement in capital inflow into the country, as well as weakened demand for the greenback, as general elections come to a close,” said Bashir.

It also expected that the country’s poor state of housing and road infrastructure would push the demand for construction materials, thereby bringing about tremendous growth for companies in the building and industrial goods sector.

According to the United Nations, Nigeria’s urbanisation rate was estimated at 51 percent in 2012, which suggests that over 80 million people live in the cities.

The UN estimates that this number is growing at an annual rate of 3.5 percent.

The emerging middle class in Nigeria is slowly filling the latent housing gaps, as people in this income class crave for better accommodation, said Abiola Rasaq of the research and strategy unit, Associated Discount House Limited.

“It is a trend which should gradually increase owner occupancy rate in Nigeria, with resultant impact on cement demand,” said Rasaq.

Last year was tough for these firms, as weak demand; security challenges caused by the Boko Haram insurgency and frigid weather crimped sales.

Consequently, cumulative revenues of the four dominant cement makers (Dangote, Lafarge, Ashaka
and Cement Company of Northern Nigeria), as reported in their 2014 audited financial results, rose by a mere 1 percent, to N633.73 billion, from N629.73 billion.

This is less than the 16 percent growth in revenues recorded as of December 2013.

“Unlike its much larger rival, Dangote Cement, whose  Q4 sales were impacted by a weak demand, Ashaka Cement’s operations were hampered by security challenges in the last quarter of the year,” said Tunde Abidoye, equity research analyst with FBN Capital in a March 28 note to BusinessDay.

“Specifically, two separate insurgent attacks on the plant’s facilities in November and December weighed heavily on utilisation rates, sales and margins during the quarter,” said Abidoye.

Nigeria’s Central Bank scrapped its bi-weekly currency auctions in February and said it would sell dollars only at N198, a move that amounts to a de facto devaluation of Nigeria’s currency.

The challenging conditions of the erratic power supply and the devaluation of the naira culminated
in rising production costs hence eroding profits of consumer goods firms. Consequently, the cumulative after tax profit of the four firms plummeted by 25 percent to N200.64 billion in 2014, from N266.53 billion in 2013.

“This impacted negativelyon t he production cost and finance costs of these companies through higher cost of importation of raw materials, gas and coal as well as higher interest payments on loans denominated in foreign currencies, “said Bashir.