Friday, November 28, 2014 16:44 PM / Chapel Hill Denham Research
The average price of cement in Nigeria moderated downwards between Q3-14 and Q4-14.
The average ex-factory price of cement in Nigeria has moderated to US$145/tonne (our estimate) from US$177/tonne, below our estimated average price of US$151/tonne for Sub-Saharan African (SSA) countries.
This is due to the 14% cement price cut in November 2014, led by Dangcem. Our estimated price also reflects the devaluation of the NGN against the US$ by the CBN on 25 November 2014. While the management of CCNN confirmed cutting cement prices in November 2014, the management of Lafarge Africa said they have moved in line with the latest price dynamics in the industry.
Although the other cement manufacturers did not disclose any price reduction, we believe they have either cut prices or implemented some sales rebates, being price takers in the industry. In our view, the price cut is unlikely to stimulate demand for cement, in the short term. This is consistent with the views of the management of Dangcem, the largest player in the industry.
Lafarge Africa and CCNN still look attractive if cement prices are further reduced in FY-15E.
We cut our FY-15E cement price assumptions for the industry by 22% on average to reflect the impact of the price cut in November 2014. Accordingly, our revised FY-14E and FY-15E average EBITDA margins for the industry are now 38.0% and 37.1% compared to our previous estimates of 38.9% and 41.6% respectively. Nonetheless, our sensitivity analysis shows that Lafarge Africa remains attractively priced even if cement prices fall further by 10% in FY-15E. Similarly, CCNN will still be attractive at the current price level if cement prices are further reduced by 5% in FY-15E.
Industry volume growth was flat in 9M-14, but Lafarge Africa stood out.
The sales volumes of the Nigerian cement industry grew by 1.3% yoy in 9M-14, largely due to inadequate supply of energy to fire some of the cement plants. The seasonal rainfall between July and September was also a drag on volume growth. However, Lafarge Africa stood out reporting 7.0% yoy cement volume growth in 9M-14 for WAPCO Operations, through increased market penetration. UNICEM (not listed) is another player we believe saw moderate growth over the period, based on our FY-14E outlook for the company and the industry growth number.
While the sales volumes of AshakaCem and CCNN were down by 1.2% yoy and 0.5% yoy respectively, Dangcem’s volume in Nigeria was down by 1.0% yoy in 9M-14. The EBITDA margins of the industry expanded to an average of 41.6% in 9M-14 from 36.1% in 9M-13. AshakaCem was the best performer in this regard as its EBITDA margins expanded to 37.0% in 9M-14 from 17.9% in 9M-13, driven by the 68% substitution of locally sourced coal for Low Pour Fuel Oil (LPFO). Although Dangcem’s EBITDA margins dropped to 61.0% in 9M-14 from 62.7% in 9M-13, the margins remained above the industry average.
We retain our BUY ratings on Lafarge Africa and CCNN.
We, however, cut our 12-month target price (TP) on Lafarge Africa to N126.07 (from N158.56) and CCNN to N15.30 (from N18.41). We also retain our HOLD rating on Dangcem, but cut our 12-month TP for the stock to N195.39 (from N240.77). The sector is trading on FY-15E P/E and EV/EBITDA of 13.3x and 11.8x vs. emerging market peers’ average P/E and EBITDA of 13.4x and 10.2x respectively.