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Sunday, January
16, 2022, 07:30 AM / by CardinalStone Research / Header Image
Credit: Ecographics
We envisage
another solid year for cement manufacturers, with private and public demand set
to be major fulcrums. This prognosis on cement consumption is likely to reflect
the knock-on effect of increased government spending and greater Public-Private
Projects (PPPs) by institutions like RITC and INFRACO.
Despite our
broadly positive view on the sector, likely temperance in CAPEX implementation
(as is often the case in most pre-election years), possible increase in market
competition, and FX devaluation are likely to be of concern in the current
financial year. Investors are, however, likely to remain excited about
prospects for better near-term rewards from cement players, with DANGCEM set to
lead the way with the second tranche of its buy-back program and WAPCO likely
to further reward shareholders, after the well-received interim dividend
payment.
Cement
demand to grow by 6.0% YoY in 2022
The domestic cement sector
looks set to extend its positive demand traction into 2022. Precisely, we see
legroom for a 6.0% YoY growth in cement volumes, aided by a projected rise in
overall budget implementation. Historical precedence suggests that this rise in
budget implementation may primarily be driven by higher recurrent expenditure,
with CAPEX implementation likely to follow the historical path of notable
moderations in pre-election years.
The view on recurrent
expenditure points to potential gains in the real estate sector. In addition,
PPPs, including the Road Infrastructure Development and Refurbishment
Investment Tax Credit Scheme (RITC) and the newly launched Infrastructural
Corporation of Nigeria Limited (INFRACO), are likely to provide relatively
milder support to cement demand. Our review of this potential driver is as
shown below:
I.
Under the RITC, the government grants income tax
credit to companies and individuals that provide funding for the refurbishment
and rehabilitation of roads. We have seen several companies, including Dangote
Group Plc, MTN Nigeria Plc, and Flour Mills of Nigeria Plc, take advantage of
this initiative, embarking on road construction projects in several parts of
the country.
II.
The recently launched Infrastructural Corporation of
Nigeria Limited (INFRACO) - conceptualized by the CBN alongside the African
Finance Corporation (AFC) and the Nigerian Sovereign Investment Authority
(NSIA) - is targeted at funding public projects like roads, rails and power
infrastructure across the country. Its initial seed capital of N1.0 trillion
($2.4 billion) is expected to grow to N15.0 trillion over time.
Price
increases may slowdown in 2022
Wholesale cement prices
have risen by an average of 15.0% since the start of 2020 as marketers
transferred some raw materials cost burden to consumers. Manufacturers believe
elevated demand levels aided this cost burden transfer. Our lower demand growth
expectation (6.0% YoY in 2022 vs 13.0% YoY in 2021) could therefore suggest
that the ability to pass on cost worries may slightly weaken in 2022. This
premise and a potentially tighter competitive landscape inform our 8.9% YoY
estimated increase in average cement prices for 2022.
Competition
to go up a notch in 2022
We envisage a tighter
competitive landscape in 2022, as manufacturers look to build on their 2021
performance. Our analysis suggests that the market share dynamic of 2021 was
largely influenced by DANGCEM's introduction of its new 3Mt line at Okpella and
WAPCO's production struggles in H1'21. These events, consequently, enabled
DANGCEM to deepen market presence at the expense of its peers. Per our
estimate, DANGCEM expanded its domestic market share by 2.5 ppts YoY to 62.5%
while BUACEMENT and WAPCO's market share contracted by 1.0 ppt YoY and 1.5 ppts
YoY to 19.2% and 18.4%, respectively.
In 2022, market share
dynamics could change slightly, with WAPCO and BUACEMENT likely to tune up the
competitive landscape. Specifically, the return of WAPCO's Ewekoro Line 1 in
September 2021, after being shut down for most of the year due to prolonged
maintenance, and BUACEMENT's expected commissioning of a new 3mta in Kalambaina
could support both companies' market share.
Click here for the full report.
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