May 27, 2008 42452 VIEWS






Overview of the Cement Industry

Cement can be defined as a hydraulic binder, which hardens when water is added. Technically, it can be defined as a material with adhesive and cohesive properties which makes it capable of bonding mineral fragment into a compact whole. It is essentially a necessity with no close substitutes. In Nigeria, cement is used in the construction of residential and public buildings, roads, bridges and drainages as well as rehabilitation of infrastructure. It is therefore an essentially commodity and forms part of the day-today living of an average Nigerian. The Nigerian cement industry was one of the earliest import-substitution industries in the country. The history of cement production in Nigeria dates back to 1957. Initially, three cement plants were commissioned by the Northern, Eastern and Mid-Western regional governments. Subsequently, other companies such as Ashaka Cement, Benue Cement Company (BCC), West African Portland Cement Company (WAPCO) and Cement Company of Northern Nigeria (CCNN) were established. Today, there are several cement manufacturing companies in Nigeria with plants located in various parts of the country. Some of the notable companies include: 􀂃 West African Portland Cement Company Plc (WAPCO); 􀂃 Ashaka Cement Company Plc; 􀂃 Benue Cement Company Plc (BCC); 􀂃 Cement Company of Northern Nigeria Plc (CCNN); 􀂃 Dangote Industries Limited; 􀂃 Nigerian Cement Company Limited; 􀂃 Edo Cement Company Limited; and 􀂃 Calabar Cement Company Limited. One major characteristic of the cement industry in Nigeria is the problem of demand vs. supply inequality. Since inception, available supply has not been able to meet the ever growing demand for cement. Even in the 1980s, during the economic recession which witnessed a decline in the demand for cement, these supply gaps were still very much evident. The modest but continuous growth in the Nigerian economy is a prospect for cement plants to increase local production. However, the extent to which they can do so effectively depends on the incentives underlying government policies as they affect local production, distribution and pricing.



Due to inherent industry challenges, local production has remained at 50% of installed capacity (with a year on year growth rate of approximately 3%). The government recently announced a ban on importation of bagged cement in an attempt to enhance greater market competition, encourage new investments, and stem the continuous rise in the price of cement. Such efforts have not yielded any benefits as the price of cement has increased by over 300% since 1999 and the problem of supply insufficiency still exists. One of the main challenges plaguing the industry includes lack of sufficient funding to carry out operations, especially on a large scale. Most of the cement manufacturers do not have the financial capacity to operate at optimal levels and hence are unable to meet up to the high demand for cement. Only the quoted companies such as WAPCO and BCC are able to raise funds from the public but such funds are often inadequate to meet the ever growing needs of their business.



The cement industry in Nigeria has experienced immense growth over the past few years. With a population of over 140 million people and a growth rate of approximately 3% per annum, the demand for and consumption of cement is expected to increase. Government however remains the largest consumer of cement in the country with an estimated 50% of total consumption. The frequency of road and bridge reconstruction as well as rehabilitation of social infrastructure emphasises government's continued patronage of the industry but also widens the demand-supply gap which currently exists. The Nigerian Cement industry has the potential to contribute to the larger economy in several ways. First, by virtue of its nature, the industry is labour intensive and is therefore a major employer of labour  both skilled and unskilled. The industry also has a significant contribution to the country's Gross Domestic Product (GDP) and is a source of Foreign Direct Investment. Through the construction, renovation and rehabilitation of major roads, bridges, networks and public infrastructure, the cement industry plays a major role in overall economic development and enhancement of social welfare.



Cement production in Nigeria is a lucrative business especially for those with the required capacity to run it. Demand for cement is literarily insatiable and so wastages are minimal. Shelter is a scarce necessity and its demand in recent times has been on a steady rise especially among the young corporate class. It therefore behooves on the producers to formulate strategies aimed at meeting up to this ever increasing demand. As at 2006, demand for cement was estimated at over 10 million metric tonnes. With a YOY growth rate of 3% per annum, this figure is expected to grow to 11 million and 13 million by end of 2010 and 2015 respectively. This high rate is fuelled by factors such as increase in GDP, growing population and per capita income, mortgage sector reforms, high demand for home ownership, increasing need for infrastructural development especially within the urban areas. Such increasing demand has widened the demand-supply gap as government's efforts towards controlling the inequality have so far proved abortive. The Federal Government recently lifted he ban on importation of bagged cement in an attempt to boost supply as it was evident that local production was not sufficient to meet up to demand. The erratic power supply among other industry challenges has stifled government's efforts in this regard. Importers still maintain a larger market share and often bring in low quality cement at exorbitant prices. The situation has therefore not changed as cement still remains very scarce and expensive. A bag of cement currently sells for N2,200 compared to N625 in 2002, representing a Compound Annual Growth Rate (CAGR) of 23%.



Due to the inherent scarcity, high cement prices continue to increase construction costs making buildings unaffordable to potential buyers. In an attempt to tackle this problem, government granted licenses to importers to buy bulk cement for bagging in Nigeria. This has still not had its desired effects. We believe that in order to boost supply of cement, certain inherent challenges within the system have to be tackled effectively.



Demand for cement has been on the rise ever since the commencement of cement production in 1957. Despite the post oil boom recession in the mid 1980s to early 1990s, supply has not been able to catch up with demand. This inequality has not been aided by the rise in per capital income during the last 5 years and increase in government's cement consumption rate due to the ever increasing level of road reconstruction and rehabilitation. From 2003 to 2007, estimated annual demand for cement has grown from 8.2 million metric tonnes to 18 million metric tonnes, representing a CAGR of 22%. This trend is expected to continue in future as the economy expands and purchasing power improves. In terms of market share, WAPCO maintains a clear dominance. With 55% market share by turnover, its closest rival is Ashaka Cement at 31% while the combination of CCNN and BCC produces a market share of 14%. The other players in the industry are marginal players with little or no share of the market. Some of them have not even started production yet and as such do not posses any immediate threat to the major players.



Despite the increasing demand for cement over the years,

Nigeria's annual cement consumption is still relatively low when compared to other select countries. The average cement consumption in the world is estimated at 273 Kg/Capita which is much higher than that of Nigeria at 90 Kg/Capita. Nigeria's cement consumption remains the lowest in Africa. Such statistic can be attributed to the high cost of cement as well as supply inadequacies caused by several industry exogenous factors such as epileptic power supply.



Characteristics of the Cement Industry

Labour Intensive: Due to the nature of the cement making process, the industry is highly labour intensive. Unlike other sectors that require minimal human inputs, cement making involves a significant amount of manual processes. The industry currently employs over 5,000 people, making it one of the largest employers of labour in Nigeria. Also, technological inadequacies make it more imperative to deploy human labour in the day-to-day running of the cement manufacturing companies.





Capital Intensive: Just like any other sector in the manufacturing industry, the cement manufacturing process is highly capital intensive. This is due to the heavy automation and machinery deployed in running the business as well as the construction of high capacity plants. The increasing demand for cement in Nigeria imposes a high degree of pressure on local manufacturers to increase their capacity and its utilisation. Such objectives can only be met if the companies have access to financial capital needed for maintenance, upgrade and expansion.





Entry Restrictions: Even though the industry is a competitive one, the existence of high initial set up costs, maintenance costs and inconsistent government policies makes it extremely difficult for aspiring manufacturers to gain entry into the market. This has further increased the dominance of some of the top companies WAPCO, Ashaka Cement, BCC and Flour Mills as they have the financial clout required to withstand the rigours and challenges of the industry.





Product Homogeneity: One peculiar feature of the cement manufacturers is the homogeneity of its product offerings. Although there are slight variations in terms of quality and grade, cement still remains the sole product manufactured or imported and subsequently sold. The industry has no substitutes and so prices are determined largely by the forces of demand and supply. Therefore, the increasing scarcity of cement implies that prices will continually be on the rise as consumers do not have the privilege of choice between alternatives.





Government Involvement: The Federal Government has a major influence in the regulation and control of the cement manufacturing industry. Such influence ranges from control of pricing decisions, regular policy formulation and other regulatory responsibilities. The initial ban and subsequent lifting on the importation of bagged cement in an attempt to boost local production is one of several government policy efforts aimed boosting the potentials of the industry and also moderating prices.





Increasing Demand: The demand for cement globally increases with time. This is as a result of several demand inducing factors such as population growth rate, increase in purchasing power and per capita income and the need for continuous government spending on road reconstruction, project management and infrastructural development. Such rate of growth varies between countries with Nigeria however having one of the fastest demand growth rates in the world. Other developing economies in Africa also experience increasing demand for cement.



Industry Challenges





High Initial Setup Costs: The costs of establishing a cement company are extremely high. This is because the machinery involved as well as the cost of installing a new plant is large and as such many aspiring cement manufacturers cannot gain entry into the industry. In addition to the high initial costs, the cost of maintaining the heavy duty equipment used for the normal day-to-day activities makes it difficult for existing players to remain profitable. This has led to the forced closure of some companies such as Eastern Bulkcem and Ibeto Group.





High Distribution Costs: Due to the nature and composition of cement which is quite heavy, the costs of distributing the product to the final consumer is relatively high. As such most manufacturing companies are located near their customers so as to reduce the burden of transporting large sacks of cement across long distances. This explains the reason why most producers are regional players who prefer to operate within a specified coverage area.





Unfavourable Government Policies: Over the years, government policy making towards the cement companies and the manufacturing sector at large has been disappointing. Policies such as the privatisation of previously government controlled cement companies which led to their collapse due to under funding, government's ban and subsequent lifting on importation of cement and the imposition of multiple taxes on producers have all had negative implications on industry growth prospects.





Insufficient Local Capacity: Perhaps one of the most visible challenges in the Nigerian cement industry is the lack of required resources to meet the ever increasing demand for cement. Cement consumption though still relatively low, has increased phenomenally over the last few years with local supply not being able to meet up. Government in its attempt to boost local production placed a ban on importation of cement in 2001 but later in 2007 lifted the ban due to the inability to meet its objective. We believe that if the underlying fundamentals of these companies are strengthened, such inequalities will gradually cease to exist.





Erratic Power Supply: One major challenge facing manufacturing companies generally is the issue of unstable supply of power. Being a capital intensive sector which to a large extent relies on the use of heavy duty automated machinery, constant electricity remains a critical success factor. However, due to the inconsistency and/or unavailability of the state generated power supply, companies are forced to rely on alternative sources of power generation which invariably imposes high overhead costs and reduces margins.





Technological Inadequacies: In more advanced countries, cement production is done based on highly effective and efficient automated machinery and equipment which ensures that the best quality cement is produced within the shortest time. In Nigeria, the available infrastructure and technology is not sufficient to produce at optimal levels and as such capacity utilisation will continue to remain low.



Industry Comparables

WAPCO is the industry leader by market capitalisation. It is currently the highest priced stock and has the largest number of shares outstanding. Despite Ashaka Cement's larger market share, Benue Cement Company (BCC) follows behind WAPCO with a capitalisation of N128 billion. This is due to its superior shares outstanding of 2.8 billion ordinary shares. Cement Company of Northern Nigeria (CCNN) trails its peers with just under N23 billion in market capitalisation. The cement industry capitalisation has not grown considerably over the years (especially when compared with the banks and insurance companies) due to its relative capital market underperformance in recent times. WAPCO also leads the market by earnings as our 1 year forward PAT (based on extrapolations from its interims) stands at N7.78 billion which is almost double that of its closest competitor Ashaka at N4 billion. BCC's 2008 forecast PAT is N1.87 billion while that of CCNN is N540 million. This scenario bears some similarity to the variation in market share by turnover and volume. 2008 forecast EPS for the industry also depicts market leadership by WAPCO and Ashaka. However, due to WAPCOÃ's superior shares outstanding, Ashaka reduces the gap considerably. BCC trails behind the top two due to its rather excessive paid up share capital of 2.78 billion shares. The company has therefore not been able to justify such huge shares outstanding as its recent decline in PAT from N3.1 billion to N1.2 billion has worsened its earnings valuation considerably.







Lafarge WAPCO Nigeria





Current Price (N)                    57.50

Shares Outstanding (billion)     3

Market Capitalisation (bn)  172.59

Trailing PAT (bn)               11.4

Trailing EPS (N)                     3.82

Trailing P/E ratio (x)               15.03






6 Month Target Price (N)       60


12 Month Target Price (N)     75


Short Term                              HOLD  ..  Long Term                              BUY



Company Profile

West African Portland Cement Plc (WAPCO or the company) was first established in 1959 with its factory in Ewekoro, Ogun state in 1960. The company commenced production with an initial capacity of 200,000 tonnes per annum but later grew this capacity to 1.5 million metric tonnes per annum. However, in the late 1990s, the company began to witness reduced output due to obsolete technology and an outdated production process. In August 2003, it therefore commissioned a new ultra modern state-of-the-art plant in Ewekoro. The plant has a capacity of 1.3 million metric tonnes per annum and has continued to produce at optimal levels since it began operations. As a result of takeover by Blue Circle Industries Plc UK, Lafarge SA of France became the majority shareholder in WAPCO. Continued interest of Lafarge in the affairs of its subsidiary company led to the announcement of a change of name from “WAPCO to "Lafarge Cement WAPCO Nigeria Plc. LeadCapital Research believes that the company will leverage on the strong reputation built by its parent company as the leading cement manufacturer in the world. WAPCO was listed on the stock exchange in 1979 and today has a market capitalisation of N172 billion. The company is the largest in its sector by market cap. and market share (by local production and turnover). WAPCO is also the industry leader by earnings and with the level of production currently being attained by its Ewekoro plant, we expect its current a further consolidation of its current industry dominance. WAPCO has been actively traded since its public listing nearly two decades ago. The company has consistently won the NIS ISO certificate for product quality by the Standards Organisation of Nigeria (SON). Particularly, the company won the following awards: NIS ISO 9001Certification, NIS ISO 14001 Certification, SON ISO Gold Award 2005 and Quoted company of the year award (2005). WAPCO intends to continue to take advantage of emerging opportunities in the cement industry by optimizing output production in its Ewekoro and Sagamu branches. Based in its relatively larger capacity, the company would undergo a gradual plan aimed at ‘tightening’ the gap between demand and supply. In an attempt to attain this objective, WAPCO recently announced its intention to raise extra funds through equity and/or debt injection which would be used to fund capacity expansion and utilisation.  Going forward, the company seems well positioned to increase its frontiers beyond the current level and compete effectively with its international contemporaries. Major challenges include its possible inability to operate due to unfavourable government policies and continuous multiple tax impositions which reduce earnings. Also, the lifting of the ban on cement importation would create fresh competition from importers thereby serving as a possible threat to overall market share growth. Lafarge however has the required resources to manage such challenges.





Investment Strategy

WAPCO has below average history of dividend payment having declared cash dividends 4 times in the last 10 years. The company declared a bonus issue of 1 for 1 in 2000 and 1 for 2 in 2001 but has failed to issue any bonuses since then. This has at various times elicited negative market reaction from investors leading to successive declines in its share price after their full year results have been announced. Despite its rather unimpressive dividend policies, based on its earnings capacity, WAPCO remains one of the cheapest stocks in its sector. Its 1 year forward PE ratio stands at 20.48x, below the industry average of 38.46x. In terms of its Price to Book, the stock is trading at 9.9x also comparing favourably with industry average of 11.3x. The stock has however not shown an ability to record decent price appreciation in the short term with its share price losing by 32% year to date and 17% over the last 12 months. We therefore place a HOLD recommendation on the stock for short term investors and a BUY for investors with long term horizons.







Ashaka Cement



Current Price (N)                    48.00

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