Nigerian Cement: At The End Of The Tunnel?


Tuesday, February 27, 2017 2.25PM / ARM Research

Volumes ebb and flow on fluid cement pricing in 2016
After a strong first half of 2016, when lower prices stimulated robust volume growth, sustained energy pressures forced sector players to abandon their low-price strategy in mid-August 2016.

Accordingly, the sector-wide price hikes cascaded into tamer volumes in Q3 16. Over Q4 16, subdued private construction activity and deadbeat fiscal picture suggests an extension of output slowdown, in our view.

For 2017, cutback in private sector demand should be tapered by gradual claw-back in government spending in the final half of the year. In addition, we expect pass-through from higher prices to more than offset impact of volume declines on sector top-line.

Disruptions to gas supply compound margin woes
Over 9M 16, energy challenges exacerbated gross margin pressures across the cement sector following an extended gas shortage that buoyed increased usage of more expensive back-ups.

Farther out however, with gas production gradually ticking up—a fall-out of FG’s conciliatory efforts—and a greater impetus towards energy flexibility which has seen coal mill projects reach advanced stages across our coverage, we see legroom for gross margin recovery over 2017.

Naira depreciation drives diverse impact for coverage names
Our base case scenario for the naira is for the CBN to shift the current peg to N400/$ sometime in H2 17—a move we expect to drive mixed impact, as in 2016, across our cement universe.

Specifically, despite its debt for quasi-equity swap in Q3 16 which shrank FCY loans by 82%, Lafarge remains the most exposed to currency fluctuations in our coverage universe.

At the other extreme, DANGCEM’s net positive dollar position stands it out as a safer bet under a volatile naira environment.

Tough operating environment to drive weaker FY 16E financial performance
Ahead of 2016 results release, we expect sector earnings to contract 35% YoY largely driven by Lafarge Africa, which faced significant FX related losses in prior quarters.

For DANGCEM, which announces results tomorrow, we are looking for a 3% YoY contraction in earnings mainly reflecting pressures on the energy front.

But recovery expected in 2017
For 2017, we expect sector performance to ride on net positive impact of increased cement prices on revenues and margins, notable improvements in energy efficiency as well as significant cutback in income statement exposure to vagaries of naira depreciation following Lafarge’s debt for quasi-equity swap.

Cement sector remains relatively cheap
Overlaying our thesis about a recovery in earnings for 2017 with the current market pricing after 2016 sell-offs, we find that our coverage cement companies are trading cheaper at respective 2017E PE and EV/EBITDA of 9.0x and 7.2x relative to Bloomberg averages of 18.0x and 10.0x for Middle East and African peers.

This is in addition to boasting superior operating return metrics relative to peers. Across our coverage companies, we prefer DANGCEM, given its superior upside potential of 16% which is partly reflective of strong investments in energy efficiency and subdued charges from the tax man.

Key risks
Broadly, a wider than anticipated NGN depreciation in 2017 which could sizably impact input prices (i.e. gas, gypsum) as well as re-ignite FX losses in the books of Lafarge owing to its $108 million debt.

While this risk could partially be offset by another price response, we highlight the potential for a boomerang effect on price sensitive cement demand.

Importantly, with peace talks in the Niger Delta creeks still very fragile, we remain cautious on the broader macro front with potential knock-on effect capable of extending ongoing deterioration in construction activity in 2017. 

Figure 1: Nigeria vs Bloomberg Middle East and African peer ratios

Table 1: Relative valuations with SSA peers

Volumes ebb and flow on fluid cement pricing in 2016
In contrast to a broad-based demand slowdown, cement sector new orders surged over the first six months of 2016 (+20% YoY to 12.1MT) aided by stimulation from significantly depressed prices.

According to industry sources, demand attribution to private sector gained 20pps YoY to 90% over H1 16 as a consequence1. However, sustained pressures on the cost front which provoked price responses across the sector in H2 16 consequently saw volumes pull back by over 5% in Q3 16—with combined 9M 16 output sliding 12.5% YoY to 16.4MT.

Despite the differing patterns of volume growth in H1 16 and Q3 16, both periods coincided with a business terrain lacking genuine government stimulation for Nigeria’s recessionary macros. For evidence, revenue challenges on the fiscal front—a fallout of low oil prices and disruptions in crude production—resulted in softer capital expenditure (-8% YoY to N753.6 billion) which missed a high budget target set for 2016.

Furthermore, substantial pullback in FAAC allocations which impinged on the ability of state governments to embark on capital projects weighed on overall construction activity.

Unsurprisingly, the sector officially entered recession in the second quarter of 2016 having already posted its first contraction in more than 5 years in Q1 16.

Largely reflecting the steep price cuts at the start of 2016 which tempered the impact of volume gains in H1 16, revenue growth was 9% lower YoY over 9M 16 at N427 billion.

Figure 2: Historical capital expenditure breakdown in Nigeria (N’ billion) 

Figure 3: Sector volumes and revenue chart2

Disruptions to gas supply softens gross margin…
Beyond the revenue pressures, energy challenges resurfaced as a key pressure point for cement companies after domestic gas supply markedly declined over 9M 16 (-18% YoY to 227.9 BCF3) following sustained militant attacks on gas infrastructure in the Niger delta region.

Consequently, gas utilisation fell across our cement universe (-37pps YoY to 51%) as players resorted to more expensive sources (LPFO and imported coal). Compounding the situation, gas prices in Nigeria were hiked 66% in early 2016 as part of reform efforts to boost investment in gas infrastructure.

Thus, across our coverage, average fuel cost per ton rose 32.3% YoY to N4,616 (or ~29% of total cost per ton) to stoke gross margin compression across the sector (average: -13pps YoY to 38%).

In all, Lafarge suffered the harshest gross margin deterioration (-22pps YoY) on account of sterner price contraction in Southern Nigeria, where the company’s largest plants are domiciled, and the business’ recourse to more expensive LPFO across its Nigerian plants amidst sizable decline in energy efficiency in its traditionally coal-fired Ashaka plant in the period.

By contrast, CCNN bucked the gross margin contractionary trend (9M 16 Gross margin: +90bps YoY to 37%) across the sector after having left its energy mix unchanged in the last three years (LPFO: 69%, biofuel: 31%) with its target consumers relatively less sensitive to price changes.

Figure 4: Changes in energy mix across sector


…cascading to industry-wide price response
In view of the sizable cost pressures on the domestic front, industry leader (DANGCEM) abandoned its previous pursuit for greater market share, which had informed the price cutting strategy embarked upon in H2 15, by announcing a 37% increase in cement prices to N2,100 per 50kg bag (N42,000 per ton) in August 2016.

The move raised local cement prices by 70% and 32% relative to H1 16 and FY 2015 averages. Nonetheless, weighted Nigerian prices were still 19% lower YoY over 9M 16 due to sharper southward price movements in H1 16., when the industry leader prioritized market share consolidation over price gains.

Tracking back, we recall that the now famous September 2015 price cut (-18% QoQ), which marked the start of a barrage of further downward price adjustments over H1 16, came on the heels of sustained loss in market share to Lafarge in 2015 which we believe was central to the industry leader’s decision to tilt to a low-price strategy that saw it claw back market share at the expense of margin erosion.

In mimicking DANGCEM, other cement companies adapted and tweaked the strategy into a differential pricing across varying Nigerian locations that left ex-factory prices in the South West 20% lower than that in the North.

The move had led to even sterner margin implications for these companies given their relatively lower level of cost efficiency with Lafarge particularly shouldering a weighty burden owing to its proximity to the epicenter of market competition.

Beyond the positive revenue connotations therefore, the fresh price adjustment eroded price competitiveness of Nigerian cement across Africa in our view, with domestic prices now 21% higher than those in previous export markets of Ghana and Cameroon.

Figure 5: Cement prices in select African countries ($/ton) 

Naira depreciation drives mixed impact for coverage names
Following NGN depreciation in June 2016, currency pressures provided another headwind to earnings in 9M 2016 with sector exposure to naira weakness largely emanating from gas contracts—which are denominated in dollar—gypsum imports, foreign currency denominated loans and salary payments to foreign staff.

Across our coverage, Lafarge stood out as the most exposed with about $594 million (~N181 billion) debt incorporated into its book following the full consolidation of UNICEM which drove net foreign exchange loss of N32 billion in 9M 16.

At the other extreme, naira depreciation bolstered DANGCEM’s earnings owing to the company’s significant net long dollar position from investments outside Nigeria which resulted in cumulative net FX gain of N54 billion over 9M 16.

Figure 6: 9M 16 FX exposure across cement sector

Tough operating environment to drive weaker FY 16E financial performance
Overall, we expect the confluence of higher input cost and FX-induced losses to drive sector earnings lower over FY 16 (-35% YoY to N136 billion) with Lafarge disproportionately contributing to the drag with an estimated N41 billion loss for the period.

Notably, the sector has already gravitated towards this expectation with 9M16 earnings printing near N97 billion (-50% YoY). In view of these pressures, we now look for sector PAT margin of 17% in 2016E (-11pps YoY) with dividend payouts expected to be muted across sector names.

Specifically, we expect CCNN to report depressed dividend payout (FY 16E DPS: 10k, FY 15 DPS: 10k) for a second consecutive year while heavy fall-outs from huge FX exposure dampens prospect for dividend payment at Lafarge.

Elsewhere, we expect DANGCEM to propose FY 16E dividend of N7.40 having adjusted forecasted earnings for non-cash foreign exchange gains. On current pricing, this payout expectation translates to a dividend yield of 4.4% (4.7% in 2015).

Figure 7: Historical and forecast EPS and DPS across coverage (N)

Higher prices and non-Nigerian momentum to shore top-line gains…
Following the price hikes in Q3 16, discussions with management and sector players point to a retracement in demand growth since September 2016, with the sector subsequently reporting 5% YoY contraction in cement volumes to 4.3MT in Q3 16 (H1 16: +21% YoY).

Thus, with the recent price increase having removed a key demand incentive, we now see scope for contraction in domestic sector volumes over 2017 (-11% YoY to 17.68MT). However, given the impact of significantly higher prices, we forecast Nigerian revenues to come in 28% higher YoY at N741billion.

Outside of Nigeria, industry leader looks set to continue its expansion with new operations commencing in Sierra Leone and Congo (combined plant capacity of 2.2MTPA) in Q4 16 even as 2017 sets up to mark their first full year of operation.

Beyond feeding on the need for greater diversification benefits, sector expansion into other African markets have been triggered by prospects for greater cement demand across the region with 1.4 billion Africans projected to live in urban areas by 2050 (vs. 408 million in 2010).

Interestingly, with average net debt to EBITDA across most SSA producers considerably high or in the negative (EA PCC: 7.8x, Tanga Cement: 6.3x, Cement Du Maroc: -1x), only a few cement companies have been able to seek fresh loans to expand footprints across the continent.

On this wise, DANGCEM’s relatively tamer net debt to EBITDA (1.6x) appears to have placed it in good stead to pursue its long-term goal of reaching 77.3MTPA capacity across the region by 2019.

However, lingering scarcity of much needed FX for expansion, political-cumpolicy instability in Ethiopia and Tanzania as well as rising competition in South Africa and Zambia have offered varied levels of near term challenges with the business having managed only 57% of this target till date.

That said, having been credited with increasing attribution for sector revenue growth over 2016, non-Nigerian operations are again expected to provide top-line support in the current year for both DANGCEM and Lafarge.

On the balance, we expect non-Nigerian revenues to print at N293 billion in 2017E (+14% YoY). In line with this expectation, we now forecast overall sector revenues at N1 trillion (+26% YoY) over 2017.

Figure 8: Revenue growth expectation across sector

…as rebound in gas supply fuel recovery in operating margin
After a difficult year, recent developments also suggest less pain for Nigerian cement players in 2017. Specifically, pressures on gas supply to industrial players significantly tapered (Q4 16: -5% YoY, Q3 16: -17% YoY, Q2 16: -18% YoY) as FG’s intensified conciliatory effort underpinned a nosedive in the number of vandalized pipeline points to 18 (from over 200 in January 2016).

In addition, sector initiatives towards greater energy flexibility are starting to take shape with DANGCEM having significantly progressed with its local coal mill project, which looks set to become operational before the end of 2017.

For Lafarge, own-milled coal utilization at Ashaka (7% of the business) is expected to return to pre-2016 levels of 80% in 2017 following maintenance-induced slowdown in 2016 while management guides to capacity improvement projects to burn ground petcoke or coal at Ewekoro and Mfamosing plants.

Based on these developments, we look forward to a temperance in input cost pressures over 2017.

Thus, overlaid with commencement of cost effective strategies at the OPEX level, we now see scope for sizable gains in operating profit across the sector in 2017 (+86% YoY to N314 billion).

Specifically, our view on OPEX improvement is aided by DANGCEM’s recent campaigns which led to the restructure of major O&M contracts, trim down of the number of foreign expatriates on payroll as well as optimization of logistic processes and minimization of freight cost.

Interestingly, Lafarge also communicated a turnaround plan centered around logistic optimization of freight cost and overall SGA expenses with a view to minimizing FX exposure. Overall, we forecast 2017 EBITDA of N400 billion.

Figure 9: EBIT margin forecast

Earnings to survive potential naira down-leg
Over 2017, we expect naira movements to play a key role in determination of cement pricing across Nigeria with industry leader guiding to possible response in the event of further currency-induced energy pressures.

Yet, more importantly, we look for broadly mixed outcome across coverage companies in a replay of 2016 fallouts that saw DANGCEM emerge winner with over N54 billion net FX gain.

Precisely, we have sensitized for different scenarios of naira depreciation to N350/$, N450/$, N500/$ to our base case of N400/$ over the remaining months of 2017.

On the strength of our base case, which implies 31%-naira depreciation relative to current interbank rate, we expect Lafarge to post cumulative net FX loss of N12.4 billion on its remaining $108 million debt while DANGCEM’s net asset position should underpin net foreign currency translation gain north of N29 billion over 2017.

Figure 10: Scenario outcomes for naira depreciation (N’ billion)


Overall, our base case currency scenario translates to net N16.8 billion addition to sector earnings with our PAT forecast for 2017 firmly at N269 billion (+98% YoY).

We also expect growth in earnings to cascade to substantial dividend payouts across coverage names.

Figure 11: 2017E EPS and DPS forecast (N)

Overall, we view 2017 as a year of recovery from 2016 low base with higher prices, gradual claw-back in government spending and increasing non-Nigerian operations providing fulcrum for sustained top-line growth.

Beyond this, we opine that sector investments in energy flexibility are set to provide buffer for margins, with our expectation for tamer naira contraction in the current year combining with sizable cutback in FX debt exposure to position the sector for major earnings rebound.

Lafarge Africa Plc. – Price and debt redemption on the cards?

Higher cement prices to drive sales rebound from low 2016 base
After enduring a difficult 2016 wherein top-line pressures, energy challenges and FX losses drove the significant after tax loss (N41 billion in 2016E), we expect 2017 to kick start recovery for the company.

As hinted earlier, we believe the recent price increase is net positive for coverage names. While heightened price sensitivity should result in cutback in private construction activity, recovery in fiscal capital spending should limit the scale of the declines based on the stimulatory impact.

Thus, we estimate a 10% YoY contraction in Nigerian cement volumes to 4.70MT in 2017 (vs. -21% YoY to 5.22MT in 2016E). That said, feed-through from the raised prices, now at N42,000 per ton (vs. N29,437 in 2016E average), should leave sufficient scope for increase in Nigerian revenues to N197 billion in 2017F (vs. -18% YoY to N154 billion in 2016E).

Leaving xpectations for South African operations unchanged, we forecast group revenues to rise 23% YoY to N264 billion (vs. -20% YoY to N215 billion in 2016E).

Similarly, given recent improvement in gas supply across the sector, we have adjusted our target COGS to sales ratio for 2017 lower to 77% (-9pps YoY), implying a more than double YoY rise in gross profit to N61 billion—albeit flattered by expected low base from 2016 (N29 billion in our estimates). 

Figure 12: Gross margins and capacity utilisation forecasts

Earnings to stage recovery on debt restructuring
For us, Lafarge’s biggest bane over the past one year has been its heavy foreign currency debt exposure (~$597 million as at H1 16), which cascaded to N31 billion in net FX loss over 9M 16.

Following the company’s debt for quasi equity swap which led to substantial contraction in FCY and total debts, we expect FX losses to be significantly lower in 2017. Precisely, given our base currency assumption of N400/$, we now expect Lafarge to report FX translation loss of N12 billion in the current year.

Thus, we expect Lafarge to declare after tax profits of N4.7 billion in 2017 (vs. estimated loss of N41 billion in 2016E).

The troika of temperance in currency declines, improved gas supply and increase in cement prices are central to Lafarge’s earnings rebound.

However, all three components are exogenously determined, with the company’s price taker status in Nigeria leaving it susceptible to vagaries of price gyration.

That said, in view of anticipated acceleration in government spending, we expect recent increase in cement prices to have a more telling impact on 2017 turnover.

Lafarge is trading on a FY 17F EV/EBITDA of 10.8x (vs. 54.2x in2016E) relative to 10.0x for Bloomberg EMEA peers. In arriving at our FVE, we created two scenarios of possible treatments for Lafarge’s $473 million (N149 billion) converted shareholder debt.

The first scenario backs out the N149 billion obligation from our estimate of discounted FCFF (N488 billion) to arrive at FVE of N40.78 for the company. Alternatively, scenario two assumes the end point of management's debt restructuring is a debt for ordinary shares conversion.

In this case, Lafarge would have to issue 3.8 billion new shares (assuming market price of N39 per share) to bring the company's shares outstanding to 9.3 billion with FVE consequently printing at N40.11. Both scenarios imply 5% and 3% upside relative to stock's market close as well as a NEUTRAL recommendation.

That said, management's guidance as to the treatment of its quasi equity (scenario 3) implies no potential dilution after the debt for equity swap that reduced foreign borrowings by over 80% and sizably narrowed scope for fluctuations arising from FX debt obligations. In this instance, our FVE translates to N56.83.

Given the lack of clarity that have pervaded the treatment of debt for quasi equity swap as well as the "borrower's discretionary feature" inherent in the deal, Lafarge could very easily reclassify the quasi equity instrument to ordinary shares upon improvement in performance in a bid to compensate related shareholders for the huge risk assumed after the decision to leave repayments to the discretion of the borrower was made.

Thus, we have adopted scenario two as our base case with our new FVE of N40.11 implying a downgrade in our recommendation on the stock to a NEUTRAL (vs. BUY previously).

Risk to valuation
Despite factoring in the risk of potential dilution, Lafarge remains the most exposed Nigerian cement company to currency fluctuations.

Thus, we view a wider than anticipated contraction in naira as a key risk to this valuation. Beyond affecting earnings via translation losses from FX loans, naira depreciation could also mount renewed pressures on the energy front.

Summary of Results and Forecasts – Lafarge Africa Plc

Dangote Cement Plc. – Sustaining market dominance

DANGCEM pulls the brake on price wars

DANGCEM has dominated the Nigerian Cement landscape in the last 10 years, with its low pricing strategy, which induced demand and market share (9M 16: +13pps YoY to 74%), stoking significant earnings pressure for rival players over the last three reporting quarters.

That said, the market share gains for DANGCEM, a fallout of the its low pricing regime, came at the expense of significant gross margin erosion (-14.5pps YoY to 47.6% over 9M 16) as the company opted to endure input cost pressures rather than substantially reverse its low pricing strategy over the first 8 months of 2016.

However, further shortfall in gas supply and recourse to more expensive alternative (LPFO) forced the company to completely abandon its low pricing campaign in mid-August—cascading to N600 increase in ex-factory prices of 50kg bag of cement.

For us, DANGCEM stands in poll position to benefit from this price increase given its economies of scale which continues to protect its status as price leader in the Nigerian cement space.

This is despite our expectation for a 52% YoY plunge in Q4 16 Nigerian volume estimate to 1.92MT—a fallout of high base effect from record Q4 15 output and demand response from price sensitive private home builders—which now leaves our FY 16 output prediction at 13.83MT (+4% YoY) relative to the strong 28% YoY growth recorded over 9M 16.

Thus, despite the over 30% YoY jump in prices in August, we now expect Nigerian cement revenues to come in 5% lower YoY at N402 billion (Q4 16: -27% YoY to N94 billion).

Elsewhere, given production concerns in Ethiopia and Tanzania as well intensifying market competition in other African climes, we have also reviewed non-Nigerian volumes expectation lower to 8.6MT over 2016.

This now leaves group revenues 22% higher YoY at N598 billion in 2016E. Whilst we expect this contractionary demand pattern in Nigeria to subsist over 2017 (-8% YoY to 12.7MT), we are however cognizant of potential support from gradual pick up in government capex.

Thus, largely underpinned by higher YoY prices and expected increase in government presence, we now forecast Nigerian and overall group revenues to grow 32% and 27% YoY to N532 billion and N759 billion respectively in 2017F.

Improving energy mix and cost efficiency to buoy EBITDA margin
Similar to the Lafarge case and underpinned by expected completion of its coal mill project, we have also re-adjusted our input cost to sales prediction lower to 47% (vs.52.4% in 2016E), implying 2pps YoY expansion in gross margins to 50% over 2017.

Importantly, we are cognizant of management’s recent termination of certain foreign maintenance contracts to reduce FX exposures.

Specifically, the business trimmed down its number of expatriates, opted to buy a few spare parts from domestic market and outlined plans to switch to locally produced coal.

Figure 13: Margin expectation for 2017

We see ramp up of government expenditure and increasing partnership with FG on concrete road construction as central to further earnings growth for DANGCEM.

Whilst the former could underpin fresh top-line growth momentum, the latter creates scope for further earnings expansion through tax concessionary arrangements.

Importantly, with government left with little alternative but to gradually accelerate infrastructure development in the current year even via partnerships with the private sector, DANGCEM is in a better position to sufficiently drive growth in 2017.

Already, the company successfully reached agreement with the FG over the construction of Lokoja-Obajana-Kabba-Ilorin road using concrete. According to FGN, Dangote would embark on the road construction in exchange for some tax remissions for a yet-to-be disclosed period.

Post the revisions to our model, our FVE is now 13% higher at N195.26—implying a 16% premium to the stock’s last trading price. DANGCEM trades at 2017F EV/EBITDA of 8.6x (vs. xxx for 2016E) relative to 10x for Bloomberg EMEA peers. We upgrade our rating on the stock to OVERWEIGHT (vs. SELL in previous communication).

Key risks to our valuation include a potential reversion to low price strategy in Nigeria and socio-political setbacks in foreign markets akin to the Ethiopian and Tanzanian crisis.

In addition to this, whilst coal mill project looks set for take-off in Nigeria, ramp up in utilisation is expected to be gradual as with the company’s other projects.

Thus, the business should remain slightly exposed to vagaries of gas supply in the near term. 

Summary of Results and Forecasts – Dangote Cement Plc

CCNN Plc – Cement price increase provides a life line

Price increase arrives when its needed most
Over 9M 16, CCNN’s performance was constrained by significantly depressed cement prices across the sector (DANGCEM: -18% YoY; Lafarge: -28% YoY) owing to the industry leader’s push for more market share.

Importantly, whilst dire fiscal conditions (at FG and State government levels) and overall macro weakness were also subtle pull-backs to CCNN’s performance in the nine months of 2016, the impact of price plunge remained the dire underpin of the company’s 17% YoY revenue contraction over the period.

On this wise, the recent N600 increase in price of cement—which is triple the cumulative cement price increase over H1 16—portends top-line relief for CCNN similar to our expectations for the larger players in the sector.

Yet, unlike its larger counterparts, CCNN’s size limitation has, for long, narrowed its ability to significantly influence revenues to a strategy seeking to retain premium pricing at the North-West market—a support which caved in the fourth quarter of 2015 as DANGCEM kick-started a barrage of price manipulation across Nigeria.

In view of its greater dependence on prices for topline support, we view CCNN as one of the big gainers of the recent price increase.

Specifically, we have reviewed our estimated 2016 ex-factory cement price in the North West 18% higher to N29,053/ton with our expectations for consequent reaction from cement consumers driving our 2016E volume estimate 8% lower YoY to 380KT (vs. -3% YoY to 400KT in previous estimate).

This now implies a 15% contraction in 2016E revenues of N11 billion (vs. N9.9 billion in prior forecast).

For 2017, we expect output to come in lower (-11% YoY to 340KT) akin to our expectation for larger players. Alongside the impact of significantly higher prices (+45% YoY), our volume adjustment translates to 2017F revenue of N14 billion (+29% YoY).

On the energy front, we have left COGS to sales ratio around 9M 16 levels in 2017F (73%) due to the company’s sustained reliance on LPFO (69% of total cost of production) that should see it miss-out on recent gains from increasing gas supply.

In any case, CCNN’s FX exposure—as evidenced by our analysis of its bought-in materials and services—looks set to remain heightened owing to unpredictability of LPFO supply from Kaduna refinery which has often forced CCNN into importation.

Thus, we expect gross margin to remain flat at 27% despite the price-induced jump in topline. On the balance, after tax earnings should rise 15% YoY to N952 million in 2017F (vs. -31% YoY to N824 million in 2016E).

Figure 14: Historical gross margins and capacity utilisation

CCNN is trading on a FY 16 P/E of 5.9x relative to 5.0x for Bloomberg EMEA peers. Our recent adjustments result in contraction in our FVE to N4.54— implying only a 1% upside to the stock’s last trading price. We downgrade our rating on the stock to a SELL (vs. NEUTRAL previously).

For us, key risk to valuation remains the company’s limited plant size which continues to restrict its capacity to take advantage of fresh demand when the need arises. This is in addition to the company’s heavy reliance on expensive LPFO, whose supply from the Kaduna refinery have been largely epileptic.

Summary of Results and Forecasts – Cement Company of Northern Nigeria Plc

ARM ratings and recommendations
ARM now employs a two-tier rating system which is based on systemic importance of the security under review and the deviation of our target price for the stock from current market price.

We characterize systemic importance as a function of a stock’s ranking among the group of top 20 stocks by NSE market capitalization over a trailing 6 month period (minimum) to the review date. We adopt a 5 point rating system for this category of stocks and a 3 point rating system for stocks outside this group.

The choice of top 20 stocks arises from the consideration that this group of stocks constitutes >75% of overall market capitalization and stocks outside this group are generally less liquid and individually account for <<1% of market capitalization.

For stocks in both categories, the basis for ratings subject to target price deviation is outlined below:

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