ALERT: Likely fall in Future Earnings in the Building Material Sub-Sector


December 07. 2012/ Proshare Research


Related News: Dangote Cement's Gboko Plant shuts down as Dumping hits Nigeria's Cement Market

Yesterday, the management of Dangote Cement Plc, the leader and biggest player in the building material industry announced plans to shut-down its ‘Gboko Plant’ (with a four million MT production capacity) due to the influx of imported cements in the country; which in its estimation, has made it uncompetitive and economical to sustain active and full capacity production.

Well before the announcement however, the trend for stocks in the sub-sector would suggest that investors are gradually reacting to the possibility of a significant fall in the future earnings of these listed companies, on the back of considered ongoing stiff and uncompetitive pressure arising from a ‘glut’ in the market.

The argument has been that the liberalised import regime flies in the face of the ‘backward integration’ policy of the government as it creates an excess supply to a market that is finding it difficult to find infrastructural and building projects to justify the installed capacity - an indication of poor economic policies at the detriment of local markets.

When one considers the significant infrastructural deficit and the global shift towards the use of concrete roads vis-à-vis the installed capacity in Nigeria relative to natural resources; the current situation challenges the proposition that the policy and current development is thought led.

A counter economic argument has however been raised as how these local companies would even sustain an export program to other West African countries when they could not compete with the imported ones into Nigeria? Is it a case of their price un-competitiveness as a result of inherent cost components related to power, labour and logistics/distribution?

Either way, there is a looming crisis if firms in the sector are willing to shut down. Investors should therefore be genuinely concerned as to the future of their investments in the sector if the situation remains at status quo.

In this contribution, Proshare’s ‘The Analysts’ offers a timeline review of the trend and associated impacts.


The 1-week Performance Review of the Building Material Sub-Sector

Activities in the Cement sub-sector have been on the downtrend in the last one week, resulting in a sub-sector average loss of -2.23% as sentiments in the sector appeared negative against the available positive sentiments, (though with cautious bargain) in the general market.

The sub-sector experienced more of distribution in the last week while money flow pattern into the stocks in the sub-sector plunged and is likely to extend the southward trend in the coming sessions.

A analysis of the sub-sector revealed that ASHAKA CEMENT PLC  recorded a 1-week loss of -6.4%, after plunging by -5.0% in the last session; the biggest fall in the last two months. Its technical analysis suggest the stock to close neutral in short term and remained bullish in mid-long term period, suggesting growing negative sentiments towards the stock amid growing distribution pattern.


Also, LAFARGE WAPCO PLC -  PLC witnessed a similar trend to record a 1-week loss of -2.5% as investors appeared wary towards investment in equities of cement companies, resulting in a scramble for short term profits as the stock(s) already appeared in overbought range, trading at its top - as indicated by our technical analysis.

In addition, the stock closed neutral in short term and remained bullish in mid-long term period, indicating growing negative sentiments towards the stock.


Cement Companies with No Price Movements


However, CEMENT CO. OF NORTHERN NIGERIA PLC (CCNN) recorded no price movement in the last 1-week as investors remained cautious while the money flow into the stock appeared very week as indicated by money flow index. The stock closed neutral both in short term and mid-long term, indicating absence of bargain drive towards the stock as sentiments appeared mixed.

In similar pattern, Dangote Cement Plc closed flat, recording no price movement in the last 1-week as bargain drive towards the stock appeared feeble amid growing bearish volume in the recent time.

The stock closed bullish in both short and mid-long term period while the money flow into the stock appeared flat with similar trend in the accumulation pattern. Notwithstanding, the low float of the stock still has a significant impact on the movement of the stock.


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