Cement manufacturers in slow start to 2014

Nigerian cement manufacturers had a slow start to 2014 as revenues for the firms in the sector grew at a slower pace in the first quarter (Q1) than in Q1 2013.

The cumulative revenues of the four dominant cement makers (Dangote, Lafarge, Ashaka and Cement Company of Northern Nigeria), as reported in their Q1 2014 results, rose by 9.5 percent to N142 billion, from N129.71 billion. This is less than the 35 percent growth in revenues recorded in the first quarter of 2013.

Cement producers usually experience weak or seasonal cement sales volume in the first quarter, although the huge growth in volumes in Q1 2013 took place amid a rollout of additional production capacity by most of the firms.

“Government spending on infrastructure was relatively slow in the first quarter of the year, due to the late passage of the budget,” said Abiola Rasaq of the research and strategy unit, Associated Discount House Limited.

This, he said, had modest impact on cement demand attributable to public sector concrete-related projects.

The stifled production challenges and huge tax liability besetting Dangote Cement plc, which controls over 64 percent of the Nigerian market, also led to lower cumulative earnings for the four firms as after-tax profits slumped 4.2 percent to N58.36 billion in 2014, from N61.31 billion in 2013.

The cumulative tax liability of the four companies surged by 291 percent in Q1 2014 to N7.1 billion, from N1.81 billion in 2013, mainly as a result of the expiration of pioneer tax status of bellwether company, Dangote Cement.

Pioneer status is a tax holiday granted to qualified companies in eligible industries anywhere in Nigeria. It includes a seven-year tax holiday in respect of industries located in economically-disadvantaged local government areas and a five-year holiday in economically-sound areas.

While Dangote Cement had a N51 million tax credit in the corresponding period of 2013, it provisioned N5.4 billion for taxes in the first quarter of 2014, equivalent to 71.9 percent of the N7.10 billion industry tax bill for the quarter.

Since any tax losses can be carried forward, companies can typically extend their tax-exempt period, says Roy Mutooni, a research analyst with Renaissance Capital.

The firms also had a spike in operational costs due to the ramping-up of capacity utilisation from capacity additions to plants and cost of turnaround maintenance.

“The relatively weak gas supply led to an increase in the use of more expensive alternative energy sources, such as Low Pour Fuel Oil (LPFO) by the cement makers, which also shrank profits,” said Rasaq.

“This increased energy cost led to lower production margins and also slowed down production,” he said.

The cumulative cost of sales for the first three months of the year surged by 19.16 percent to N59.17 billion, from N49.66 billion in 2012, while operating expenses spiked by 15.82 percent to N17.17 billion.

“For the spike in OPEX, a lot of these companies have been adopting more of a direct sales distribution strategy and as such acquired additional trucks to support this, which was reflected in higher depreciation expense,” said an industry analyst who craved anonymity.

However, the poor state of housing and road infrastructure in Nigeria has been pushing demand for construction materials, thereby bringing about tremendous growth potential for companies in the building and industrial goods sector.

The country’s rapid rate of urbanisation, which stands at 51 percent, according to United Nations (UN) estimates, is also pushing demand for the product.

Building and construction, the second-fastest growing sector in Nigeria, grew by 14.31 percent in Q3’13, while the real estate sector has also sustained double-digit growth at 10.35 percent, according to Meristem Securities Limited, a research firm.

Despite some challenges faced by these companies, analysts believe that the introduction of the Mortgage Refinancing Corporation is expected to give further boost to top-line and bottom-line performances.

“With 2014 being a pre-election year, accompanying fiscal releases are expected to buoy growth in the building and construction sector,” said Aderonke Akinsola, a research analyst with Meristem Securities Limited.

BALA AUGIE