Tax holidays enjoyed by cement makers in Nigeria for investing in economically disadvantaged areas have helped them avoid a faltering performance.
Lafarge Africa plc, second largest producer of cement in Nigeria, would have recorded a full-year pre-tax loss of N22.81 billion but an income tax credit of N39.71 billion turned the tide around, as the company posted a net income of N16.87 billion.
The large chunk of the tax credit was due to the impact of minimum tax of N23.11 billion; also, tax exemptions from the Netherlands and the effect of pioneer status also gave impetus to earnings.
“Regulations allow them to call back some of their previously expenses on tax. For Lafarge Africa, PBT was negative. Dangote had lower PBT, but because of the income tax income they had higher PBT,” Tajudeen Ibrahim, head of research at Chapel Hill Denham Limited, said.
“For 2017 l expect cement volume to grow about 15 percent and that will be driven by Lafarge Africa, considering the new plant at Calabar,” Ibrahim said.
Pioneer status is granted to tax players that have invested copiously in an economic disadvantaged area. They enjoy tax holidays and reliefs like capital allowance on qualifying capital expenses acquired in a basis period.
Section 33 of the Companies Income Tax Act (CITA) provides that a taxpayer is liable to minimum tax where it has no tax payable or where its tax payable is lower than the minimum tax computed.
Dangote Cement, largest producer of the building material, could have had after tax profit drop, but thanks to an income tax credit of N5.69 billion that helped jerk up net income by 2.92 percent to N186.62 billion.
While cement manufacturers are able to pay dividend to shareholders based on a stellar performance, shortages of gas at the factory have ballooned production costs, as firms are forced to switch to a more expensive source of power like Low Pour Fuel Oil (LPFO).
The cumulative cost of sales of two dominant players in the industry that control 90 percent of the market – Dangote Cement and Lafarge Africa, increased by 30.14 percent to N502.86 billion in December 2016, as against N116.47 billion the previous year.
The upswing in costs is higher than the 17.87 percent rise in inflation for the month of February. Kiln fuel is the major cost of cement production, as manufacturers are increasingly switching to coal, which is more reliable than gas.
Other advantage of coal to other sources of energy is that it eliminates the need for expensive LPFO as back up. It also reduces foreign exchange needs for imported fuel.
Cement manufacturers are aggressively embarking on expansion while intensifying the backward integration with a view to making the country sufficient in cement production.
Dangote Cement has commenced the exportation of cement to Nigerians neighbouring countries.
“This is a remarkable achievement, given that only five years ago, in 2011, Nigeria was one of the world’s largest importers, buying 5.1Mt of foreign cement at huge expense to our balance of payments. We will increase our exports substantially in 2017,” Van der Weijde, group managing director of the company, said.
Lafarge Africa targets energy savings of N5 billion while it seeks to acquire a coalmine. It plans to spend as much as N30 billion on capital projects across Nigeria.
It is expected that state government’s ability to embark on capital projects on the back of improved FAAC allocation will invigorate construction activities with its attendant increase in the demand for building materials. This means the expected upswing in demand for building materials will bolster the top lines (sales) of cement makers and trickle down to the bottom line in form of improved margins.
“Overall, we view 2017 as a year of recovery from 2016 low base with higher prices, gradual claw-back in government spending and increasing non-Nigerian operations providing fulcrum for sustained top-line growth,” said analysts at ARM Equity Research Limited.
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