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Cement makers earnings ratio shrink in H1 as energy cost bite deeper

Cement makers earnings ratio shrink in H1 as energy cost bite deeper

The impact of soaring energy costs is biting hard on Nigerian manufacturers as Nigeria’s largest cement makers, Dangote Cement Plc, Lafarge Africa Plc and BUA Cement Plc face a shrinking profitability ratio, findings from BusinessDay shown.

Cement makers’ earnings before interest, tax, depreciation, and amortization (EBITDA) margins shrink to 44.09 percent in the first half (H1) of 2022 compared to 48.12 percent in the same period of 2021, according to data sourced from Nigerian Exchange Group (NGX).

According to Investopedia, EBITDA is an alternate measure of profitability to net income. By stripping out the non-cash depreciation and amortization expense as well as taxes and debt costs dependent on the capital structure, EBITDA attempts to represent cash profit generated by the company’s operations.

Across the board, Dangote Cement (DangCem) reported the highest year-on-year (y/y) decline in EBITDA margin by -470bps to 46.18 percent in the first half of 2022 from 50.8 percent in the first half of 2021.

EBITDA margin for BUA Cement and Lafarge Africa contracted to 46.4 percent and 32.7 percent in the first half of 2022 from 32.7 percent and 36.1 percent, respectively, in the first half of 2021.

“The upward movements in cost drivers, such as raw materials and energy, explain the sliding trend in EBITDA margin for the industry”, adding that “all three cement companies, production cost per tonne, energy cost per tonne, and distribution cost per tonne rose y/y on average,” a report by FBNQuest Capital said.

The report further noted that distribution-related expenses recorded the biggest escalation following higher diesel costs.

“Year to date, diesel prices are up 2.5x on average. On an energy cost per-tonne basis, Lafarge posted the largest y/y increase of NGN6,698/tonne to NGN15,870/tonne in the second quarter of 2022. However, DangCem and BUA had larger percentage increases of 79 percent y/y and 106 percent y/y, respectively,” it said.

Read also: Cement makers see profit surge to 10-year high

Energy costs reported by BUA cement grew by 64.64 percent to N43.58 billion in the first half of 2022 from N26.47 billion in the corresponding period of 2021. In the same vein, fuel, and power consumed by Dangote Cement in the first half of 2022 amounted to N129.96 billion, up from N98.98 billion in the first half of 2021.

The report stated “For production, alternative fuels are either now more expensive or scarce. BUA’s energy bill moderated quarter on quarter (q/q) in Q2 ’22 but remains at relatively high levels. BUA’s significant exposure to increased pricing volatility is due to the company’s higher reliance on coal, LPFO, and liquified natural gas (LNG).”

“DangCem and Lafarge were previously shielded from pricing volatility due to a heavier reliance on piped natural gas. However, they were more exposed to pricing volatility in the first half because of production outages at oil and gas facilities in the Niger Delta,” FBNQuest Capital said.

Both companies were forced to increase the use of alternatives, which explains the rise in energy cost per tonne for both DangCem and Lafarge from N7,514 per tonne and N8,340 per tonne to N10,700 per tonne and N11,116 per tonne, respectively,” according to FBNQuest Capital cement update report.

Despite cost pressure, DangCem’s EBITDA grew by 6 percent to N373.16 billion in the first half of 2022 from N351.07 in the first half of 2021. Its peers, Lafarge, and BUA, both recorded EBITDA improvements by 16.5 percent and 49.7 percent y/y to N60.98 billion and N87.50 billion respectively in the first half of 2022.

Revenues for the cement sector improved by 23.47 percent to N1.18 trillion in the first half of 2022 from N959.85 billion in the first half of 2021.

BUA, Lafarge, and DangCem delivered growth of 51.72 percent, 28.67 percent, and 17.01 percent, respectively, in the first half of 2022.

FBNQuest analysts in their cement update report stated that “the robust growth was price-led as the industry continued to benefit from increases taken in 2022. We estimate that average prices were up by around +25% y/y to just above N60,000/tonne.”

Financial performance

Aggregate profit after tax for the cement makers grew by 2.86 percent y/y on average to N270.87 billion. DangCem delivered negative growth of 10.19 percent y/y to N172.1 billion in the first half of 2022 reducing the industry’s profit.

BUA posted the strongest y/y improvement, up 41.42 percent to N61.36 billion, while Lafarge’s profits were up by 32.10 percent to N37.41 billion.

Cash and cash equivalents reported by DangCem grew by 16.68 percent in the first half of 2022 to N108.89 billion from N93.31 billion in the first half of 2021.

Lafarge and BUA also grew their total cash and cash equivalents by 39.18 percent and 123.7 percent to N78.75 billion and N128.24 billion respectively.