CSPR Sector Report - Cement Sector - Emerging Prominence From a Deficit Past


Tuesday, October 29, 2013 16:54 PM / CardinalStone


Download the sector report on the Industrial Goods sector. This report captures our view on medium-term cement consumption outlook in Sub-Saharan Africa and essentially Nigeria, using the correlation between gross fixed capital formation and economic growth. Based on our analysis, we expect Nigeria to account for about 25% of SSA’s cement consumption over the next three years. Thus, we project Nigeria’s cement consumption would grow by 9.4% CAGR over the next 3 years to 23.6mtpa., as latent demand becomes exposed in line with increasing production capacity. We reiterate the robust fundamentals and strong growth outlook of the Nigerian cement producers despite currently rich valuation.




Sub-Saharan Africa - Growth hub of the next decade...

 The vast deficit in Africa’s infrastructure and increase in cement consumption has seen major global cement manufacturers come into the African markets. From a very low base about two decades ago, Africa now constitutes a significant percentage of multinational cement firms’ portfolio. Cement production has been rising gradually in the Sub-Saharan African (SSA) region over the last two decades, growing by a CAGR of 6% to an estimated production of 61mtpa in 2010 from 19mtpa in 1990. In addition, we have seen countries like Nigeria double production capacity over the last two years.


Robust consumption outlook for Nigeria...

We emphasize Nigeria’s strong growth outlook for cement consumption, and the sector’s attractiveness as the foremost consuming country in SSA, contributing nearly a quarter of total projected SSA consumption. Guided by our projections, it is apparent that even at the minimum, Nigeria’s demand will continue to match production in the near term. Thus, with SSA and Nigeria’s low per capita cement consumption of 88kg and 107kg respectively, which is way below estimated 751kg in Middle East and North Africa, the SSA and Nigerian cement market remains a cement producer’s reverie, given the enormous potential for growth.


...Driven by increasing wealth and investment flow

Increasing natural resource discoveries in several African countries (Uganda, Congo, Ghana etc) should undoubtedly induce stronger interest in Infrastructure development. Over the last couple of years, we have seen an increase in FDI inflows into sub-Saharan Africa that were largely driven by investments in extractive sectors in countries such as the Democratic Republic of the Congo, Mauritania, Mozambique, and Uganda. In Nigeria, in addition to expectation of rising government CAPEX in the long term, we have seen sustained private sector investment flow into the real estate sector; all of these would contribute towards increasing Nigeria’s cement consumption.


Valuation – Overstretched, we are buyers at lower prices

Whilst we like the strong growth potential and fundamentals of the cement sector, we deem the prices of stocks in the sector over stretched and thus maintain a SELL recommendation on the counters. On a relative valuation basis, the cement producers are trading at a forward FY’13 P/E estimate of 13.6x relative to *emerging market estimates of 11.4x.




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