Cement makers look to budget to lift profits

Cement makers in Africa’s largest economy are increasingly looking to the passage of the 2016 budget to ease pains caused by slow construction activities as bottom lines remained hard hit.

The cumulative net profit of the four dominant cement makers (Dangote cement, Lafarge Africa, Ashaka cement and cement Company of Northern Nigeria (CCNN) had net income fall by 32.39 percent to N51.37 billion in the first quarter of 2016 from N75.98 billion as at March 2015.

This is lower than the year on year 25.11 percent increase as at the first quarter of 2015.

BusinssDay calculations shows the four firms recorded an abysmally poor 1.17 percent increase in sales to N200.17 billion as at March 2016, caused by 18 percent price cut implemented by the largest producer of the building material, Dangote.

Experts say continued delay in the passage of the 2016 budget caused by the disagreement between the executive and the legislatures over irregularities is increasingly slowing down construction activities and undermining the growth of the industry.

Analysts say these firms cannot increase price of their products without a rise in demand which means government proposed capital expenditure spending  will  help kick start construction activities hence  bolster cement volumes.

“At the beginning of 2016, we anticipated that the proposed NGN 6.07 trillion 2016 budget, out of which NGN1.60 trillion (c.27%) was allocated for capital expenditure, would help boost economic growth and, by extension, demand for building materials on the back of increased construction activities across the country,” said Adetutu Ajibode, industry analyst with Meristem Securities Limited, in an email note to BusinessDay.

“This expectation has however not materialized due to the continued delays in budget passage, which has hampered crucial investments in infrastructure both from government and Public Private Partnerships (PPP),” said Ajibode.

Buhari presented a record N6.1 trillion  ($30.6 billion) spending plan on Dec. 22, saying expenditure needed to increase about 20 percent from 2015 to stimulate the economy of Africa’s biggest oil producer, which has been hammered by the slump in crude prices. Growth fell to 2.8 percent last year, the slowest pace since 1999.

The four companies had net margin, a measure of profitability and efficiency, reduced to 25.28 percent in the period under review as against 38.90 percent the previous period.

“Notably, the profit margins of the industry dropped in the first quarter. Sales volumes could also improve on the implementation of the 2016 budget,” said Tajudeen Ibrahim, head of research at Chapel Hill Denham, in an email note.

Some construction firms felt the hit of the cash crunch as Julius Berger Plc, the largest construction company quoted on the floor of the bourse had profit drop significantly by 75.63 percent to N251.26 million while sales dipped by 34 percent to N1.03 billion to start 2016 financial year.

“If you look at the budget, you have a huge focus on Capex when passed, contract will be awarded and this will help companies like Julius Berger rebound to growth, said Adetokunbo Ajayi, a real estate expert.

“There should be improvement in operational activities,” said Ajayi.

Experts say the apart from economic slowdowns, the construction industry has been affected by the insurgency which culminated in foreigners carry out construction work leaving the region in droves.

Construction grew by 4.14 percent  in nominal terms (year on year) in Q4 of 2015, a decline of 14.71% points compared to the rate of 18.85% recorded in the same quarter of 2014, and a decline of 1.20% points compared to the rate recorded in the preceding quarter, according to data from the National Bureau of Statistics (NBS).

Nominal growth quarter on quarter was 13.77%. Construction contributed 3.36% to nominal GDP in the fourth quarter of 2015, slightly less than the 3.46% it contributed a year earlier, yet higher than the 3.15% it contributed in Q3 of 2015, according to the NBS

There is glimmer of hope and a silver lining as some cement makers have embarked on aggressive expansion while seeking the necessary financing for the purpose of strengthening their capital structure, a strategy that will enable them tap into the Nigeria’s huge population that crave for accommodation.

Lafarge Africa Plc plans to raise N60 billion to refinance its debts and restructures its balance sheet for optimum performance in the years ahead. The N60 billion would be raised through second tier bond with short-to-medium tenors of two, three and five years.

“Historically, growth in the cement sector has been driven largely by economic growth, on the back of increased government and consumer spending. Hence, we opine that the persistent slowdown in cement sales in recent times may not be unrelated to the corresponding slow-down in the Nigerian economy,” said Ajibode.

BALA AUGIE