Cement makers’ earnings surge during pandemic as economy slumps

The coronavirus pandemic and a difficult business environment have sent the economy in a tailspin, and a recession is inevitable. Foreing reserves are falling, Naira is depreciating, inflation is spiking, food prices are soaring, and investors are fleeing the country in droves. A weak consumer purchasing power and huge energy cost hinders companies from delivering higher returns to shareholders in the form of bumper dividend and share appreciation.

Manufacturers are finding it difficult to source dollars needed for the importation of raw materials and equipment, which is why productivity has remained low. Amid these challenges, the three dominant cement makers-dangote Cement, BUA Cement, and Lafarge Africa- reported strong growth in earnings, which is why investment houses have retained “Buy ratings” on their stocks.

The cement makers are all “quality stocks”, with strong balance sheets, and also growth stocks, with well protected profits. Together, the four companies reported revenue of N1.09 trillion as at September 2020, which represents a 12.91 percent increase from 2019’s N972.27 billion. Interestingly, N1.09 trillion revenues are 45.22 percent of the entire sales of the largest listed manufacturers in the country.

The largest cement makers also realized N255.63 billion in net income, which is 36.28 percent uptick from last year’s N187.56 billion. They have used shareholders’ money or investment to generate profit and grow the business.

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Dangote Cement’s annualized return on average equity increased to 32.40 percent in September 2020 from 24.0 percent the previous year. Lafarge Africa’s ROAE moved to 16.10 percent in the period under review from 11.80 percent the previous year. BUA Cement’s ROAE rose to 18.30 percent in September 2020 as against 14.80 percent the previous year.

The strong earnings performance by these firms was largely driven by recovery in cement consumption led by the private sector as an unprecedented low yield environment bolstered appetite for the real estate environment. Also, the pricing environment remains favourably stable.

Dangote Cement achieved an average realized price per tonne growth of 8.3 percent year on year (yoy), supported by Nigeria (+2.9 percent yoy), and more pertinently, Pan Africa (+5.8 percent yoy). Despite exogenous currency shocks as evidenced by Naira devaluation, cement makers’ input cost are running below revenue growth, underpinning margins.

Average cumulative EBIT or operating income margin of the largest producers of the building material increased to 33.50 percent in September 2020 from 32.49 percent the previous year.

BUA is making efforts at cost optimization, one of which is the configuration of the Sokoto plant to run on gas. The company imports 70 percent of coal that it uses to power plants at the factories. Cash isn’t cement makers problem but how to spend it

Former military head of state general Yakubu said during the oil boom of the seventies that Nigeria’s problem isn’t cash but how to spend it.

With a combined N616.75 billion in net cash flow from operating activities, cement makers have the financial strength to settle their obligations to debtors, pay dividend, and fund their future expansion plans.

The uptick in net cash flow from operating activities was largely driven by reduction in inventories and receivables, and an excellent working capital management. Interestingly, these companies have translated sales Naira into profit at the various stages of measurement ; and they are able to generate returns for their shareholders.

The average cumulative cash margin increased to 62.15 percent as at September 2020 from 27.07 percent the previous year; BUA Cement has a cash margin of 115 percent, which means cash is 1.15 times revenue.

Investors remain bullish on cement stocks With the recent bull market, it is not impossible for cement stocks to go vertical on sustained improvement in market sentiment. Notably, the recent dovish stance of the central bank that cut policy rate triggered an unprecedented rotation from bonds to equities.

The Nigerian Stock Exchange (NSE) All Share Index (ASI) has gained 30.43 percent (YTD) since the start of the year. Dangote Cement has a YTD of 40.80 percent while BUA Cement has a YTD of 46.10 percent and gained 1.66 percent as of Friday in Lagos.