Cement Sector Update - In Search of Growth Triggers


Monday, February 25, 2019  02:40 PM / Afrinvest Research


Executive Summary 

In this report, we have highlighted the factors that have posed the most challenges to the cement sector. We have also identified recent strategies being implemented to tackle some of these challenges. Our overall outlook on the sector is “Overweight “as valuations remain compelling in light of the long-term drivers of the sector. 

Based on our measured positive outlook, we believe there is still value in cement companies. The overall sector is currently priced at a discount with a P/E ratio and EV/EBITDA ratios of 12.5x and 14.0x%, which is below the average of 23.1x and 15.9x respectively for select EM and FM peers. Across companies under our coverage, we have issued “BUY” rating to Dangote Cement and “SELL” to Lafarge. For CCNN, we are waiting on the combined books of the newly merged entity before revising our valuation. Lafarge Africa which had high exposure to FCY debt has gotten new debt terms that will ensure lower finance costs and a return to profitability. However, due to recent equity raising, returns to shareholder will remain underwhelming. Meanwhile, cost-efficiency and pan-African operations are expected to support improved profitability in Dangote Cement. 

In the aftermath of the 2016 economic recession, growth in the Nigerian economy is still stuck below pre-recession and pre-oil price shock levels. The growth rates of 0.8% and 1.9% recorded in 2017 and 2018 respectively have been underwhelming, staying below the long-term growth rate of the economy at 7.6%. While there have been signs of a recovery, many sectors are yet to fully recover from what is clearly a broad-based downturn in the economy.

The cement sector has not been spared from this carnage, with the sector recording a precipitous decline in growth given that it tracks the performance of the economy closely. Between 2000 and 2014, the cement sector expanded at a robust CAGR of 13.7%. However, growth has averaged -1.0% in the past three years, with only a marginal recovery in growth to 4.5% in 2018. Similarly, in other sectors of the economy where activities support the cement sector — the real estate and construction sectors — growth has been lacklustre. 

For companies in the cement industry, the pains of a slowing economy have been devastating. The steep currency devaluation recorded between 2014 and 2017 led to an increase in costs, given the exposure of energy costs and debt to foreign currency risk. Combined with the moderation in the spending power of consumers, high costs led to a steep increase in cement prices, which in turn affected volumes of cement sold. The implications were a broad-based decline in margins across companies, with overall profitability barely growing over a five-year period. 

However, in recent times, the cement sector is starting to recover. Energy costs have been diversified and FX risks are now limited. We are optimistic of a recovery in volumes which will boost revenues, and that lower energy costs will support a fast-paced expansion in profitability in 2018. Over the medium-term, we believe the cement sector remains well placed to deliver superior returns given the wide infrastructure gap in Nigeria. However, we expect the sector to grow at a gradual pace, given the lack of reforms to drive growth back to long-term trend.


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