06 December 2018 : Following the higher than expected decline in ‘cementitious’ volumes over the third quarter 2018 by Lafarge (-16.3% QoQ) and DANGCEM (-23.3% QoQ), analysts have revised their FY 18E for Nigeria cement volume lower to 20.4mt (previously 21.4mt) which is a growth of 11%. Analyst's cautious approach reflects the impact of the prolonged rainy season, which still prevailed for most part of October and the electioneering concerns which has now slowed ongoing infrastructure projects. Farther out in 2019, the construction sector is set to witness an uncertain environment. Specifically, analysts believe most part of the first half of 2019 will be focused on assessing the political environment and the likely delay from the passage of the 2019 budget. Thus, analysts expect a moderate growth in domestic cement volume by 7.4% to 21.9mt (Previous: +11% to 23.9mt) in 2019.
The market witnessed price erosion over Q3 2018, with average cement price declining by ~N850 and ~N1,770 relative to Q2 2018 and Q3 2017 respectively. On one hand, analysts attribute the decline to the seasonal price adjustment during the rainy season, while on the other hand, analysts believe the recently ignited competition following the commissioning of the Kalambaina Cement plant by BUA Group in Sokoto State further amplified the price erosion. For the rest of 2018, analysts expect price to stay at current levels with average price for the year settling at N43,625 (previous estimate of N43,769). In 2019, analysts believe the price competition will enter a new realm and estimate average of ~2.5% annual price erosion over FY 19 – 22.
Analysts have lowered their FVE on DANGCEM to N 253.03 following i) downward revision of their 2018 and 2019 volume growth to 8.7% and 11.8% to 23.5mt and 26.5mt respectively1 ii) slight adjustment to revenue per ton over Q4 18, with average price for the year now settling at N43,921 per ton (lower by 3.7% YoY); iii) N513 upward revision in cost per ton to N16,061, with gross profit now expected to expand by 121bps (previously: +223bps) to 57.6%; and iv) an 100bps upward review in opex to sales to 21% following a faster growth in both distribution and administrative expenses over Q3 18. On the positive, analysts remain sanguine on volume growth beyond 2019, following expectation of clinker exports to West African countries and improved cement consumption in Nigeria over the next five years as capex spend by government across levels gain traction. Due to current pricing and attractive valuation, analysts still maintain a STRONG BUY rating on DANGCEM.
For Lafarge, analysts lowered their LAFARGE FVE to N18.07(fromN29.93) as analysts now expect i) a more significant dilution with additional shares of 7.4 billion (previous 3.0 billion using a high price of N29) from the proposed N89.2 billion rights issue; and ii) downward revision to their 2019 volume growth estimate to 3% (previous 5.4%) with a slight downward revision in price per ton by ~4% over 2019-2020. While analysts lowered their forecast cost to sales ratio at the South Africa operation on average by ~1.2% to adjust for their projected speedy turnaround of the plant, the reduction was offset by expected shut-ins at either of Shagamu or Ashaka plants over their forecast period. Analyst's discussion with management revealed that plans are in place for possible expansion at either of the Ashaka or Shagamu plants, with their thought suggesting that cashflow from the sale of the South African operation could be deployed for the construction. As a result, analysts have raised their cost to sales ratio to average 76% (prior average of 74.7%) over FY 19 - 20.
Prolonged raining season tattered volume growth
The two largest cement producers in Nigeria recorded steep decline in ‘cementitious’ volume over Q3 18 compared to Q2 18. While, the sector historically records lower volumes in the third quarter due to the rainy season, the quantum of decline over Q3 18, was far above analyst's expectation. Going by their estimate, the two cement producers (DANGCEM and LAFARGE) combined recorded volume decline of 21.6% QoQ in Q3 18 compared to 11.2% decline recorded same period in 2017. Individually, DANGCEM (Q3 18: -23.3% QoQ vs Q3 17: -10.1%) recorded the steepest decline, a development analysts attribute to the renewed competition in the North and South East with BUA Sokoto (including CCNN) and BUA Cement Okpella, Edo State respectively. For Lafarge (Q3 18: -16.3% QoQ vs Q3 17: -14.3%), volume contraction during the period was largely in line with the level recorded same quarter in the prior year. To an extent, analysts see Lafarge’s ability to maintain market share during the period as largely commendable, despite the strong muscle pulled by DANGCEM to drive volumes.
Reflecting the decline over Q3 18 ,analysts have revised their FY 18E for Nigeria cement volume lower to 20.4mt (previously 21.4mt) which is a growth of 11%. Analyst's cautious approach reflects the impact of the prolonged rainy season, which still prevailed for most part of October and the electioneering concerns which has now slowed ongoing infrastructure projects.
Farther out in 2019, the construction sector is set to witness an uncertain environment. Specifically, analysts believe most part of the first half of 2019 will be focused on assessing the political environment and the likely delay of the passage of the budget. As a result, analysts do not expect to see any significant infrastructure spend by the FGN and the federating units over the first half of 2019, with its impact transcending to the private sector cementitious related spend. Accordingly, analysts forecast volume growth of 6% to 21.9mt in 2019 (Previous: +11% to 23.9mt). Beyond 2019, analysts estimate a more aggressive capex implementation by the FGN and even a more faster infrastructure development across the federating units, which necessitated analyst's five-year compounded annual volume growth of 8% by 2023.
Price competition becoming the new play
The Nigerian cement market witnessed price erosion over Q3 2018, with average cement price declining by ~N850 and ~N1,770 relative to Q2 2018 and Q3 2017 respectively. While analysts partly attribute the decline to the seasonal price adjustment during the rainy season, analysts believe the recently ignited competition following the commissioning of the Kalambaina Cement plant by BUA Group in Sokoto State further amplified the price erosion. As stated in analyst's recently published cement sector report (See report: Still room for strategic selection), analysts believe the recent capacity expansion in Nigeria, has widened the stage for competition given that consumption is growing at a relatively slower pace. As such, analysts see price being the new play as product differentiation hardly drives long lasting volume expansion.
Notably, following the introduction of Falcon Cement(32.5grade) ata N50 per 50 kg bag discount to 3X (42.5 grade), DANGCEM was able to diversify its product base to better position for competition with Lafarge Classic (32.5 grade). However, the competition was still in favour of Lafarge, as it still sold the product at N30 per 50kg bag discount to Falcon, while Lafarge Supaset (42.5 grade) was selling at N50 per 50kg bag discount to 3X. To address the loss of market share over Q3, DANGCEM earlier in October lowered the prices of both Falcon and 3X by N20 and N30 per 50kg bag respectively, to closely match the selling price of Lafarge classic and Supaset.
Elsewhere, given that BUA cement had maintained favourable pricing(N50-N30per50kg bag discount to 3X) in the North amidst interest by block makers given the relative setting speed and strength of its cement, with analyst's recent discussion with management of BUA suggesting the addition of iron ore in the production of its cement. Specifically, market information revealed that a 50kg bag of BUA cement produces ~58 blocks, compared to DANGCEM of ~50 blocks. Accordingly, DANGCEM recent introduction of BlockMaster – at a N50 and N70 per 50kg bag premium to BUA – is to address the other end of the competition. However, analysts do not think the introduction of BlockMaster achieved the desired result during the year, given that it came into market towards the end of the rainy season, wherein preference for faster setting largely holds.
For the rest of 2018, analysts expect price to stay at current levels with average price for the year settling at N43,625 (previous estimate of N43,769). In 2019, analysts believe the price competition will enter a new realm with the expected commissioning of the 3.0mt BUA OBU II cement plant in first quarter of 2019. As a result, analysts estimate average of ~2.5% annual price erosion over FY 19 – 22.
Dangote Cement Plc. – Attractively priced despite headwinds
Analysts have lowered their FVE on DANGCEM to N253.03 following i) downward revision of their 2018 and 2019 volume growth to 8.7% and 11.8% to 23.5mt and 26.5mt respectively2 ii) slight adjustment to revenue per ton over Q4 18, with average price for the year now settling at N43,921 per ton (lower by 3.7% YoY); iii) N513 upward revision in cost per ton to N16,061, with gross profit now expected to expand by 121bps (previously: +223bps) to 57.6%; and iv) an 100bps upward review in opex to sales to 21% following a faster growth in both distribution and administrative expenses over Q3 18. On the positive, analysts remain sanguine on volume growth beyond 2019, following expectation of clinker exports to West African countries and improved cement consumption in Nigeria over the next five years as capex spend by government across levels gain traction. Due to current pricing and attractive valuation, analysts still maintain a STRONG BUY rating on DANGCEM.
Specifically, analyst's double-digit volume growth of 11.8% in 2019 is driven largely by expectation of stronger growth in the rest of Africa of 22.1% YoY to 11.6mt. Analysts believe, the recently commissioned gas genset in Tanzania could push capacity utilization to ~40% over 2019. Also, analysts expect stronger growth in Cameroun, Ethiopia, Congo, Zambia and Ghana with respective capacity utilization of 93%, 85%, 20%, 70% and 35% respectively. Elsewhere in Nigeria, analysts now expect volumes to drag as competition becomes more intense in the domestic market. While management attributed the unusual QoQ decline in volumes of 23.3% in Q3 18 to flooding in some parts of the country, analysts believe the recently commissioned Kalambaina cement in Sokoto resulted in loss of market share by DANGCEM in the North. Also, analyst's discussion with the management of BUA revealed that the OBU Cement plant in Edo State is operating at ~90% capacity, with volumes now going as far as Enugu and management guiding to commissioning of the second line in OBU latest Q1 2019. Analysts believe, the increasing competition will impact DANGCEM’s volume in 2019 – irrespective of its ability to determine industry’s selling price – amidst slowdown in the economy over the first half of the year due to electioneering and unavoidable delay of the 2019 budget. Accordingly, analysts expect domestic volume growth of 4.8% YoY to 14.7mt in 2019, with overall group volume estimated at 26.2mt.
Analyst's recent discussion with DANGCEM revealed that, the certificate required for a reversal to the pioneer tax concession is yet to be delivered, a change in tone from the 9M 18 conference call where management stated the process could be concluded before the end of October. As a result, analysts are now more cautious on the possibility of the reversal, as such, analysts note that failure to effect the concession before the end of the calendar year of 2019, could result in 9.4% YoY decline in EPS to N10.9 (Q4 18E EPS: N1.57), while analysts see EPS expansion of 12.8% YoY to N13.5 (Q4 18E EPS: N4.23) if the concession is effected before the end of the year. Beyond 2018, analysts forecast average EPS CAGR of 19% over FY19E - FY22E as gains from Pan-African operation have a better trickling down impact on group’s earnings.
Analysts believe DANGCEM presents an attractive entry point in the cement sector in Nigeria and a quality name among Sub-Saharan Africa (SSA) peers, given its strong and diversified margins, balanced funding structure and exposure to growth markets in Africa. DANGCEM trades at 2019 EV/EBITDA of 9.0x which is at a discount to MEA peers of 11.6x and justified premium to Nigerian peers of 7.9x.
Lafarge Africa Plc. – Price crunch propelling stronger dilution
Analysts lowered their LAFARGE FVE to N18.07 (from N29.93) as analysts now expect i) a more significant dilution with additional shares of 7.4 billion (previous 3.0 billion using a high price of N29) from the proposed N89.2 billion rights issue; and ii) downward revision to their 2019 volume growth estimate to 3% (previous 5.4%) with a slight downward revision in price per ton by ~4% over 2019-2020. While analysts lowered their forecast cost to sales ratio at the South Africa operation on average by ~1.2% to adjust for their projected speedy turn around of the plant, the reduction was offset by expected shut-ins at either of Shagamu or Ashaka plants over their forecast period. Analyst's discussion with management revealed that plans are in place for possible expansion at either of the Ashaka or Shagamu plants, with their thought suggesting that cashflow from the sale of the South African business could be deployed for the construction. As a result, analysts have raised their cost to sales ratio to average 76% (prior average of 74.7%) over FY 19 - 20.
The management of Lafarge yesterday announced a right price of N12.0/share –a10.5% discount to the closing price as at Monday, 3rd December 2018 – for the N89.2 billion rights issue, suggesting a ratio of 6:7. Overlaying the proposed right price on the offering, analysts estimate additional shares of 7.4 billion with total shares outstanding at the end of 2019 estimated at 16.1 billion. On the positive, management guided that the rights issue will be used to refinance short term borrowings (N60 billion) and working capital needs. Overlaying the expected shares outstanding on their forecast PAT, analysts estimate average EPS dilution of N0.82 over their forecast period. However, analysts believe the dilution is better than another year (or more) of loss due to elevated finance expense.
Analysts expect positive earnings from FY19E and forecast average EPS growth of 34%overFY 19E – FY 22E. Over FY 18, analysts still expect the company to report loss before tax of N11.9 billion, a moderation from a loss after tax of N34.6 billion in FY 17. The impacts of their adjustments culminated in FVE of N18.14, however, analysts are highly cautious on LAFARGE and thus rate the stock a SPECULATIVE BUY. LAFARGE trades at 2019 EV/EBITDA of 8.6x which is at a discount to MEA peers of 15.1x and justified discount to Nigerian peers of 7.9x.
Reporting for EasyKobo on Thursday , 06 December 2018 in Lagos, Nigeria
Source: Oluwasegun Akinwale from ARM Securities Limited
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