Capex implementation will drive cement demand 

The Nigerian cement market appears to be enjoying a renaissance, with Q1’18 performance coming in stronger y/y (Q1’18 real GDP growth: up 5.3% y/y). Analysts recall that cement demand was weak in 2017 as high prices as well as a weak economic environment took a toll on cement consumption, down 19% y/y to 18.5 million MT. 

However, analysts highlight that volumes across their coverage have shown signs of recovery in Q1’18 – up 2% y/y and 26% q/q to 5.4 million MT within the quarter, even as prices remained stable. According to management, volume ramp-up was particularly supported by stronger public-sector demand for cement as government continues to push to plug Nigeria’s infrastructure deficit.

 Following the budget passage, analysts expect stronger demand for cement through FY’18 as FG ramps up infrastructure spend, with a strengthened Capex budget of ?2.9 trillion (FY’17: ?2.2 trillion). 

That said, analysts note that improved Capex budget standalone does not necessarily translate to higher Infrastructure spend as they have seen in the past. So far, Capex implementation has not exceeded 75% in the past ten budgetary periods. However, they are more optimistic of Capex performance in 2018 due to the recent establishment of the Presidential Infrastructure Development Fund (PIDF). With seed capital of $650 million from the NLNG dividend account, the fund is expected to reduce financing challenges for critical power and road projects across the country. 

Also, with elections around the corner, analysts expect Capex execution to gain more traction as the government looks to deliver its election promises. Overall, they anticipate a relatively stronger cement demand in H2’18. 

Improving private sector to support cement demand 

Whilst private sector consumption slowed in 2017, analysts foresee stronger demand in 2018, as consumer wallets improve. Demand has already picked up in H1’18, with JBERGER’s Q1’18 report indicating a gradual recovery in private sector construction activity – up 9% y/y. 

Buoyed by a strong macro outlook supporting economic activity – FY’18E GDP: 1.9% – analysts foresee continued recovery in H2’18 and expect this to support cement sales. All in, they anticipate an 18% y/y rise in cement consumption to 21.8 million MT. 

Majors look to marketing to capture market share 

To take advantage of the optimistic volume outlook, cement majors have been ramping up marketing spend in recent quarters, with a view to capturing market share especially in the private sector. DANGCEM in particular recently began a marketing campaign that aims to increase cement sales during the rainy season. 

Due to the chemical nature of cement and a lack of compensating adequate storage for smaller scale retailers, sale of cement is usually weaker in the rainy season. DANGCEM management has therefore begun distributing metal containers, large umbrella stands and tarpaulins to roadside retailers to protect their stock of cement.

This strategy is supposed to deliver on two objectives; 1) Increase the willingness of retailers to stock up on cement in the rainy season and 2) Take advantage of the strategic location of the retailers (right by the roadside) to increase brand awareness as the containers, umbrellas and tarpaulins are all branded with DANGCEM logos. 

Lafarge Africa and CCNN have also raised marketing spend in recent quarters, with management commenting that the benefits are already being reaped in volume sales. Overall, marketing spend across analyst’s coverage (DANGCEM, WAPCO, CCNN) rose in Q1’18, with management anticipating a near-to-medium term payoff. 

Road construction will drive cement sales in Nigeria 

Come H2’18, the story of Nigeria’s poor road infrastructure and its potential to drive cement consumption would not change much. Approximately 68% of Nigeria’s road network remains unpaved, whilst a significant portion of the paved network is in need of rehabilitation. 

In a bid to improve this, the Federal Executive Council recently endorsed private sector participation in road construction, in exchange for tax concessions. The deal has gained some traction, with Flour Mills of Nigeria and AG Dangote Limited currently carrying out a joint rehabilitation of the Apapa road, in exchange for concessions of up to ten years. 

Going forward, analysts expect the policy to support private participation in road construction and consequently drive cement sales, especially with many other corporates showing interest. Specifically, they see demand for concrete road technology driving cement sales in Nigeria. 

One of the principal arguments for concrete roads is its durability (with an average lifespan of 30 years compared to Asphalt’s 10 years), with concrete roads also requiring less maintenance. Given the poor state of Nigeria’s current road infrastructure, analysts expect the relative durability of concrete roads to improve its attractiveness in the medium term.

On the negative side however, the cost of paving concrete roads is estimated to be higher than asphalt, although the gap has closed up in recent times, post the devaluation of the naira. That said, they see the adoption of cement road construction as a major game changer in the sector going forward. Using the estimated 135,000km unpaved road network in Nigeria, total adoption of concrete road technology could potentially translate to additional 247.5 million MT of cement sales.

Although, total adoption is unlikely, analysts expect a modest adoption to still pose strong upside for consumption of cement in Nigeria. expansion. CCNN has also begun taking steps to cut its energy cost profile, with the new 1.5MT plant configured to run on multiple fuel sources including coal and LPFO. Supported by still-strong cement prices, analysts expect margins to remain healthy across the domestic cement market. 

Will demand ever catch up with capacity? 

At current installed production capacity of 43.7 million MT, capacity is still sizably higher than analyst’s estimated 21.8 million MT 2018 demand. Factoring in current expansion projects (DANGCEM: 9 million MT in Itori and Okpella, BUA: 3 million MT in Edo), capacity should increase to 56.7 million MT by 2020. 

If the status quo is maintained, a volume CAGR of 21% would be needed for demand to match supply in the next five years (2023). Analysts see this as ambitious even after considering Nigeria’s large infrastructure deficit, given that the sector is approaching maturity. 

That said, analysts see the export market as a major long-term volume driver for cement majors. So far, cement majors have been exploring export opportunities, with all three listed producers currently exporting to one country or the other. Whilst Dangote Cement currently exports cement to Sierra Leone and Ghana, the cement giant also exports clinkers to Cameroon.

Analysts note that demand for cement is expected to improve in these regions. As Sierra Leone continues to ramp up on infrastructure spend, cement demand in Cameroon has strengthened as the country ramps up on stadium construction ahead of the 2019 African Cup of Nations. 

Also, they understand that CCNN has been taking advantage of its proximity to the Niger and Benin borders while Lafarge recently began exporting cement to Cameroon and Ghana. Much like Nigeria, these countries have large infrastructural deficits and do not have the major inputs locally in commercial quantities to enable full production of cement. 

The proximity to Nigeria coupled with relatively higher cement prices in these regions therefore make these countries attractive destinations for export. Analysts note that in a bid to support its export, Dangote Cement plans to complete a jetty in Apapa in Q4’18 which would serve as an export hub to neighboring countries. Lafarge Africa is also rehabilitating a key road in Calabar which serves its major export routes, whilst CCNN has recently completed the expansion of the Kalambaina plant, with a view to ramping up exports. 

Stronger volumes, pricing to support strong FY’18 performance 

Given their strong volume outlook, analysts estimate a 17% y/y rise in volumes across their coverage to 20.7 million MT. Also, analysts expect cement price to remain strong in FY’18, especially as management across their coverage companies have ruled out price cuts for the rest of the year as they look to protect margins. 

Consequently, they forecast an average 8% y/y topline growth across their coverage. Furthermore, analysts expect continued improvements in energy mix to support EBITDA margins across DANGCEM (FY’18E: 51%) and CCNN (FY’18E: 27%), with average margin expansion of 292bps in 2018. They remain cautious on WAPCO, given the recent industrial challenges in its South African operations (accounts for c.30% of business). 

However, given the low base from 2017, analysts anticipate a larger margin expansion of 828bps – taking the full year EBITDA margin to 17%. Overall, driven by stronger topline and margin, they forecast an average PAT growth of 39% across their coverage. 

Source: Analysts at Vetiva Capital Management

Reporting for EasyKobo on Wednesday, 27 June 2018, in Lagos, Nigeria.