Nigerian publicly quoted cement manufacturers are feeling the pangs of sluggish economic recovery evidenced by the decline in their sales revenue and thinning profit margin.
In the first half of the year 2019, Nigeria biggest cement players Dangote and Lafarge, with combined market share over 90 percent, shed a total of N16.7 billion as their revenue shrank some 3 percent.
However, gross receipts of Cement Company of Northern Nigeria’s (CCNN) nearly tripled to N32.1 billion, thanks to a merger that quadrupled its production capacity to 2 million metric tonnes.
However, the said companies grew their post-tax profit in the review period.
Evaluating those numbers by key financial metrics gave mixed results.
While the average operating margin (OPM) of the industry dipped to 26.9 percent half year-2019 from 27.4 percent a year earlier spurred by decline in Dangote Cement’s number, net profit margin (NPM) rose to 17.9 percent from 14.2 percent, thanks to Lafarge’s profit rebound.
This implies cement makers roughly retained N179 as profit from each thousand naira of revenue generated after settling direct, indirect, interest and tax expense.
The capacity of cement makers to turn each naira invested in assets to more profit worsens as industry’s return on asset (ROA) slowed to 3.6 percent in the review period from 4.8 percent a year earlier.
Dangote Cement gained N70 for every thousand naira committed to assets, with CCNN coming a distant second with N20 and Lafarge N16.
Gauging their performance on return on equity (ROE), cement makers delivered less profit on owners’ funds in the review period as industry’s number dipped to 6.9 percent from 9.3 percent last year.
The industry leader, Dangote Cement, outpaced others by generating N143 for each thousand naira of shareholders’ equity half-year 2019, compared to Lafarge N40 and CCNN N21.
Cement producers maintained tempo in cost efficiency as cost margin remained almost unchanged at 57 percent.
Cost margin indicates the portion of each revenue naira expended on direct cost production of goods and services.
Lafarge expends about 75 percent of its sales proceeds on direct material cost, the highest in the industry, underperforming CCNN (55%) and Dangote Cement (41%).
Current market rout which has seen stocks listed on the Nigeria equity market tread bearishly as seen investors in stocks of Dangote and CCNN lose in value a total of about N434 billion since the start of the year.
Dangote cement saw its stock price slumped YTD by 10.38 percent as at the end of trading on Tuesday, however outperforming the Nigerian all share index which worsened to a YTD returns of -11.12 percent as at the end of trading same day.
Amongst peers in the industry, CCNN grossly underperformed the stock market as stock stood the worst performer eroding 39.43 percent of total investor’s holding in the company’s stock, translating in value, a worth of N97.893 billion.
Lafarge on the other hand amid market rout returned to its investors 17.26 percent YTD seeing the second biggest cement company by market capitalization outperform peers within the industry.
Cement industry mirrors performance of the broader economy. Prior to the 2016 economic downturn, the sector expanded in double-digits, but contracted in 2016 and 2017 when the wider economy was struggling with growth.
According to a report by Afrinvest, the cement sector has felt the pangs of weak economic performance at the devastating level mainly because the sector closely tracks the performance of the economy, government policies, reforms, and spending on infrastructure.
“The cement sector which accounted for 0.8 percent (N576.6 billion) of real GDP as at FY 2018 has seen growth moderate to an average of -1.0 percent in the past three years compared with 16.9 percent in the preceding decade,” the report stated.
While marginal pickup in Nigeria manufacturing and non-manufacturing PMI signals likewise behaviour in Nigeria’s GDP, slowdown in revenues of Nigeria’s biggest cement makers in H1 buttresses an expected slower growth in the economy.
Although future of the Nigerian cement industry still looks bright on the back of about 17 million housing deficit and infrastructure shortages in Nigeria, slow growth in the economy still pose threat to this reality.
Coupled with the above is rising urbanization and steady population growth in which Afrinvest report estimated at 50 percent and 3 percent respectively are positive prospects for the industry, however challenge remain the weak purchasing power which currently impedes housing demand.
Analysts at Lagos-based investment house, Afrinvest Securities, in their report titled ‘In search of growth triggers’, cited weaker economic growth, currency devaluation and inadequate expenditure on capital projects as the major woes confronting players in the industry.
Analysts however opined that a bigger prospect is outlook based on recently signed AFCTA deal which is believed should boost trade among African countries by reducing tariff barriers.
Cement producers in Nigeria stands a chance to benefit from AfCTA as they are likely to be more cost competitive due to excess capacity, tax breaks and availability of raw materials.
“In West Africa region, cement production is not vibrant due to the lack of raw materials in sufficient quantities, hence, imports are unlikely to be a threat,” analysts at Afrinvest stated in a published report.
On this note, Dangote cement is believed to gain most from AFCTA due to overcapacity in several regions of Africa.
David Ibidapo & Israel Odubola
