Top three players in cement industry record N1.4trn revenue in nine months

 

Hope for dividends for shareholders rises

The Nigeria cement sector has continued to wax stronger despite the ravaging impact of the Covid-19 on its operations during the financial year ended December 31, 2020. With a positive growth in both revenue and profit in the ongoing financial year, the prospect is very high for investors in the industry to earn better returns on investment at the close of business in December 31, 2021. BUSAYO SAMUEL reports.

The Nigeria cement industry recorded a robust growth in nine months of the financial ending December 31, 2020 with revenue of top three players printing N1.43trillion.

Gross revenue by the leading players: Dangote Cement Plc, BUA Cement Plc and Lafarge Plc, increased by 30 percent year on year (YoY) from about N1.1trillion in September 30, 2020 to about N1.43trillion in nine months ended September 30, 2021, according to audited financial results filed by the companies with the Nigerian Exchange Limited.

Aggregate profit from the three industry giants increased by 33 percent (YoY) from N290.4billion in September 2020 to N35billion while prospect for shareholders also received a boost as growth in Earnings per Share was encouraging.

Meanwhile, Total Assets dropped by -22 percent (YoY) on the aggregate from N3.29trillion in the preceding nine months period to N2.56trillion in the review period.
Asset decline was triggered by BUA Plc which recorded a -8.0 percent shortfall from N766.3billion in September 2020 to N692.04billion as at September 30, 2021. Total Liabilities in the industry, however, grew 7.8 percent year on year to N1.8 trillion from N1.67trillion as of September 30, 2020.

Stock market analysts have expressed confidence that the industry will sustain the growth till the end of the financial year.

“We expect demand for cement to remain healthy in the last quarter of the year, supported by increasing housing infrastructure by individual homebuilders even as government accelerates spending on capital projects given slightly improved public finances. Our estimates are under review,” Investment analysts at Cordros Capital noted.

Peer-to-Peer:

Dangote

Dangote Cement Plc, largest cement producer in Africa has continued to set the pace in the industry in all parameters as it grew revenue by 34 percent year on year, above the industry aggregate of 30 percent. Revenue increased to N1.02 trillion as of nine months ended September 30, 2021 from N761.4billion in the same period in 2020. Profit before Tax went up YoY by 49 percent from N272billion as at nine months of 2020 to N405.5billion in the review period. After tax profit also grew by 33 percent to N278.25billion from N208.7billion. Earnings per Share which is a major consideration of shareholders grew 32.5 percent y/y to 1,623Kobo as against 1,225Kobo recorded in the previous year. Total Asset grew by 11.4 percent to N2.25 trillion in nine months ended September 30, 2021 compared with N2.02 trillion in the same period in 2020. Meanwhile, Total Liabilities went up by 19.5 percent to N1.35 trillion.

In three months, Dangote Cement reported a growth of 4.9 percent y/y in PAT in Q3-21 while EPS grew by 4.5 percent y/y to 502Kobo.

According to experts at Cordros Capital, “The subdued growth in Q3-21 EPS was due to a surge in net finance cost (+160.2% y/y) and higher tax charge (+41.6% y/y), both of which limited the trickle-down impact of the impressive topline growth (+16.5% y/y) to the bottom-line.”

Management of Dangote Cement disclosed that the decline in sales volumes was due to heavier rainfalls and the high base from the prior year given the strong rebound in cement demand in third quarter following the impact of the pandemic in half year in 2020. Management further disclosed that regular scheduled maintenance was extended in Q3-21, which slightly impacted production in the quarter.

“On Pan-African operations, the translation impact arising from the Nigerian naira’s devaluation combined with the mild increase in sales volumes (+0.9% y/y to 2.61MMT) drove the increase in the topline. Overall, the lower volumes in Nigerian operations pressured the group’s sales volume lower by 2.9 percent y/y to 6.89MMT in Q3-21 (9M-21: +15.4% y/y to 22.16MMT),” management noted.

Notably, net finance cost surged by 160.2 percent y/y to N13.89 billion in Q3-21, following the increase in finance cost by 36.4 percent y/y to N18.33 billion in Q3-21 amidst the decline in finance income (-45.2% y/y to N4.44 billion in Q3-21). The growth in finance cost is reflective of the impact of higher gross debt (+10.0% YTD to N543.45 billion). On the other hand, the reduction in finance income was due to the absence of FX gains in Q3-21 compared to N4.76 billion in Q3-20.

BUA

Arguably, BUA Cement Plc, is the second largest producer of cement in the country going by financial indicators. It comes behind Dangote in terms of assets with N692.04billion despite a y/y drop of -9.7billion from N766.3billion. Profit after tax stood at N65.91billion in the review period as against N53.49billion printed in nine months of 2020. Revenue grew by 19.4 percent y/y to N186.9billion from N156.6billion as at 9 months of 2020. EPS increased by 23.4 percent to 195Kobo signaling a good omen for shareholders. The figure in nine months of 2020 was 158Kobo.

The growth in EPS was due to the strong topline growth (+19.4% y/y) and moderation in net finance cost (-63.5% y/y), both of which outweighed the increases in cost of sales (+17.3% y/y) and operating expenses (+31.4% y/y).

Although management is yet to provide details behind the double-digit growth in revenue, experts imagine that sustained private sector demand combined with the upward adjustment in cement prices, implemented at the start of the year, supported the topline performance.

At the H1-21 conference call with Cordros Capital, management disclosed that the increase in price per tonne (+10.6% y/y) was due to reduction in the discounts offered to key distributors. For us, the action must have been induced by the need to mitigate the impact of the local currency devaluation on margins.

In three months, BUA recorded a revenue growth of 13.3 percent y/y which outstripped the growth in cost of sales ex-depreciation (+9.4% y/y) and Operating Expenses (OPEX) ex-depreciation of 68.0 percent y/y. “The surge in OPEX was due to growth in admin expenses (+50.8% y/y in Q3-21) reflective of the impact of the increment in wages and salaries. As a result, the trickle down impact of the revenue growth on margins was limited as EBITDA margin rose marginally by 0.6ppts to 48.4% in Q3-21. On a YTD basis, EBITDA margin weakened moderately to 46.8% from 47.1% in 9M-20.

Earnings were also lifted by the steep deceleration in net finance cost (-81.7% y/y in Q3-21), following the decline in interest expense (-80.5% y/y) even as finance income moderated (-69.5% y/y in Q3-21). The decline in interest expense is traceable to gains from refinancing expensive debts in the prior year given the low yield environment.

Stock analysts have expressed satisfaction with the margins delivered by the company despite energy cost pressures caused by the local currency devaluation amidst high inflationary pressures while expecting that economies of scale associated with its new Kalambiana line II (3MMT) will impact margins positively.

LAFARGE

Larfage Plc recorded a better growth in PAT in the sector in nine months as topline increased by 43 percent to N40.39 billion as at September 30, 2021 compared to N28.2billion in 2020. Growth in EPS was also the highest at 43.4 percent y/y to 251Kobo. The group’s total assets was however the least among the three at N512.4billion with a marginal increase of 1.02 percent from N507.2billion in 2020. Total Liabilities dropped by -13 percent to N1288.4billion in the review period.

However, gross margin weakened by 582bps to 31.1 percent in Q2-21 (9M-21; down 403bps to 38.6%), as cost of sales ex-depreciation (+36.6% y/y) grew faster than revenue (+25.0% y/y). The rise in the cost of sales was driven mainly by the variable cost which stood at 48.3 percent y/y and production cost (+84.9% y/y) components. “We believe the increase in these cost lines was due to the pass-through impact of the local currency’s devaluation on essential materials such as gypsum and more importantly gas contracts. Given that gas contracts are settled based on the official exchange rate, we imagine that the alignment of the official rate (N379.0/USD1) to the NAFEX rate (N415.0/USD1) in the second quarter has continued to exert upward pressures on energy cost,” analysts reported.

Earnings were lifted by the moderation in finance cost (-25.3% y/y in 9M-21), reflecting gains from the reduction in gross debt (-58.0% y/y to N22.45 billion in 9M-21 vs N53.44 billion in 9M-20). Meanwhile, the decline in finance income (-21.1% y/y) mirrored the reduction in cash and cash equivalents (-16.0% y/y to N54.50 billion in 9M-21).

It is expected that Lafarge will sustain the momentum in earnings in the last quarter of the year given analysts’ positive outlook on sustained private and public sector demand for cement amidst gains from its deleveraged balance sheet. “We believe concerns on the declining margins will be the central theme of discussion at the conference call. That said, we expect upward revisions to consensus 2021E EPS given the impressive run rate as of 9M-21. Our estimates are under review,” Analysts at Cordros Research noted.