Thursday, September 11, 2014 6:09 PM / DLM Research
The expansion in Nigeria’s economy over the years has been followed by an accelerated growth in the country’s cement industry. While the economy has risen c.14x since the country’s return to democracy in 1999, with services now accounting for the modal proportion of the economy post GDP rebasing, the cement industry has recorded c.9x increase in production capacity, from c.3.28MT in 1999 to c.28.95MT in 2013.
Production capacity in the industry has grown rapidly even as the industry has undergone a swift structural evolution, moving from near-complete dependence on imported cement just a few years ago to domestic production of large quantities of cement, enough to meet the strong and rapidly increasing cement demand of Nigeria’s robust populace.
The structural evolution has been driven by positive factors, inclusive of huge investments in the industry by domestic and foreign players, growing demand, protective government policies, favourable macroeconomic factors and benign economic growth - despite intermittent global economic slowdown, domestic insecurity and political unpredictability. Nigeria can now earn export income from cement, as local capacity, estimated at c.28.95MT as at Q12014, dominates annualised domestic demand at c.20.95MT.
In terms of value creation, Nigeria’s cement industry has, on average, been a consistent value creator. Cumulatively, the industry has also created wealth for shareholders. We estimate that between 2010 and 2013, the industry created a cumulative average value of 23.01% or ₦39.92billion in absolute Naira terms.
The industry has also increased wealth levels of equity portfolio investors, creating a cumulative average wealth of 58.13% between 2010 and 2013, in our estimation. This implies equity investors who allocated equal capital to shares in the industry at the start of 2010, and held on to these shares without periodic revisions, would have earned an average return of 58.13% on the total invested capital, neglecting transaction costs.
It is clear to us that there is value in Nigeria’s cement industry. We believe in the prospects, value and wealth creation potential of the industry. The industry is favourably characterised by thin cost and high margins, as major raw materials for cement production are cheaply available domestically, though power challenges remain a problem.
We side with efforts of players within the industry, as they look to not only boost local capacity to address demand but also put measures in place to produce more cheaply via diversifying fuel sources and reverting to low cost fuels.
If these efforts persist, they could lead to marked declines in production costs, given the chief role power/fuel costs play in aggregate production costs. We have rated the industry outperform; our outlook on the industry remains positive.