The Nigerian cement wars heat up

The Nigerian cement wars which had been brewing for quite some time over cement standards erupted fully last week as Lafarge SA, announced it will combine its Nigerian and South African assets to form a new company to compete with Africa market leader Dangote Cement Plc.

The entity which will be known as Lafarge Africa Plc will be listed on the Nigerian Stock Exchange (NSE).

Lafarge Africa Plc also plans to seek shareholder’s approval in July to raise N100 billion ($613 million), in public offer of debt or equity.

Before the announcement Lafarge had been on the defensive in Nigeria and Africa as the more aggressive expansion of Dangote Cement threatened to limit its ability to compete in the fast growing African cement market.

In Nigeria, which is Sub Sahara Africa’s largest cement market, the introduction of new rules by the Standards Organisation of Nigeria (SON), which restricted the 32.5 grade of cement mostly produced by Lafarge to plastering, also threatened the profit margins of Lafarge.

The Lagos listing of Lafarge Africa Plc (as opposed to Johannesburg) is a positive for the NSE as well as a direct attempt to reduce the dominant position of Dangote Cement in Nigeria and Africa increasingly.

It is also a recognition of the solid growth taking place in Nigeria as it builds out its infrastructure (see Fig 2),currently inadequate to support its $510 billion economy.

Nigeria’s cement market which has grown by 10.9 percent per year since 2004 has seen its production capacity rise to 29 million metric tons per annum (mta) eclipsing South Africa’s 14m mta installed capacity as at 2013.

The new firm Lafarge Africa Plc will have cement production capacity of 12 million metric tons, group revenue of $1.25 billion (N202.5 billion) in 2013 and a market capitalization of over $3 billion on the NSE.

Dangote Cement on the other hand currently has cement production capacity of 20.25 million metric tonnes, 2013 group revenue of $2.45 billion (N386.2 billion), and a market capitalization of $23.8 billion (June 6).

This throws up for equity investors the issue of the valuation gap between the two firms.

Dangote Cement currently trades at 10 time’s sales (although the firm plans to increase its Africa capacity to 60 million tonnes by 2016).

Lafarge Africa Plc’s $3 billion valuation upon listing would mean it trading at about 2.4 times sales.

While some of Dangote Cement’s premium valuation can be justified by its efficiency (gross margins of 63 percent in 2013), newer plants, accelerated growth, low debt and dominance of the Nigerian market, the potential valuation gap between it and Lafarge Africa Plc is just too wide in our opinion.

This means Lafarge Africa Plc’s valuation will either eventually move up to converge with Dangote Cement, (meaning it’s a buy for investors), or Dangote Cement’s valuation will move down (in the short term at least), until it begins to bring new plants and capacity on stream.

Dangote Cement’s stock may also be pressured short term by the need to increase its free float of shares (currently 4.93 percent) to 20 percent by October 2014 to comply with NSE rules.

PATRICK ATUANYA & BALA AUGIE