Cement Sector Update - Forging Ahead Through Macro Headwinds


Monday, September 26, 2016 11:20am / FBNQuest Research

Strong but varied unit volume growth in H1 2016
Sector-wise, unit volume growth for Nigerian cement companies in H1 2016 was stellar, at around 21% y/y. However, on a company by company basis, fortunes varied. While Dangote Cement, Nigeria’s largest cement producer, saw unit volume growth of +39% y/y in H1 2016, unit volumes for its smaller rivals, Ashaka Cement and Lafarge Africa, were flattish and fell -11% y/y respectively.

Growth in H1 was underpinned by strong demand from the private home building segment. However, the federal government’s (FG) plan to stimulate the economy through rapid release of the capital vote is expected to result in strong demand from the government side.

Given capital releases of around N750bn so far vs. N195bn for 9M 2015 together with continuing demand from the private segment, we expect y/y growth to be healthy in H2 2016. 

Headwinds in the form of benign pricing and a spike in energy costs  
Despite the extraordinary growth in volumes, topline and bottom line performances were constrained by significantly weaker (c.-24% y/y) realised prices and elevated fuel costs (over 30% y/y).

We believe the combination of benign prices and higher costs arising from the utilisation of more expensive fuel oil drove average gross margin contraction of -2,364bps across our coverage universe.  

Regardless, EPS growth to average 30% over the 2016-17E period
Although we expect EPS growth for Nigerian cement names to taper-off to low single-digits in 2016E (we expect Dangote Cement to be an outlier with EPS growth of 77%,driven largely by fx gains from naira devaluation), we see average earnings growth rebounding strongly to 30% y/y by 2017E.

We expect the earnings growth to be more significant for Lafarge Africa for which we forecast a swing to near normalised profit in 2017E from a loss position in 2016E.

Sector trading at a discount to international peers
Nigerian cement shares are trading on an average 2016E P/E multiple of 13.4x, and a 2017E EV/EBITDA of 6.9x. These represent average discounts of 40% and 25% respectively to the blended average P/E and EBITDA multiples of 22.3x and 9.2x that their emerging market and global peers are trading on.

Viewing these multiples together with their EPS growth potential (1-year forward EPS growth of 30% vs. 2% for EM and global peers), Nigerian cement names look more compelling on a relative basis.

Top picks: Dangote Cement and Lafarge Africa rated Outperform
Having sold-off -16.6% ytd  (vs.-1.4% for the ASI) Nigerian cement names now trade at a significant discount of -67% to the 40.1x average P/E multiple that their fast moving consumer goods peers are trading on.

Our cement names offer an average potential upside of 33% from current levels.  Of the three names that we cover, we rate Dangote Cement (PT N245.9, upside potential 35.1%) and Lafarge Africa (PT 89.7, upside potential 60.2%) as Outperform (OP) on the basis of their strong earnings outlook and a marked sell-off in the shares respectively.

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