April 30, 2021/Cordros Report
This report discusses the major trends that have shaped the Nigerian Industrial Goods sector and our investment thesis on the Building Materials companies (Cement producers). Despite the unusual event that characterised 2020, the cement sector grew by 3.9% (2019; 3.1%). We expect the sector’s growth to improve in 2021, as government across most states of the federation accelerate the completion of projects abandoned in the prior year. DANGCEM remains our top pick in the cement universe, and we have a ‘BUY’ rating with a TP of NGN255.54/s. We now consider LAFARGE as a medium to long term play following its return to profitability in 2019 after the divestment from its loss-making South African subsidiary and the successful completion of its debt restructuring programme. We have a ‘BUY’ rating on LAFARGE with a TP of NGN29.53/s. We also initiate coverage on BUACEMENT, with a ‘SELL’ rating and a TP of NGN44.50/s. At current levels, we consider the market pricing of BUACEMENT to be overstretched.
Cement Demand; Compelling Prospects amid Short Term Drags
Nigeria’s cement industry has undergone a rapid transformation to attain self-sufficient status. It is currently poised to become the hub of cement production in Africa. We think the country’s favourable demographics, particularly its youthful population, amid a rising urbanisation rate, are key drivers that will support demand for building and construction materials in the medium to long term. We like the current administration’s drive towards bridging the huge infrastructure deficit across the country. Indeed, the recent establishment of an infrastructure company to be funded mainly by the CBN and NSIA lends credence to this. Having recorded a growth of 3.9% in 2020, we estimate the cement sector will grow by 4.8% (a 2.1x premium to our GDP forecast of 2.7%) in 2021.
Marginal Hike in Cement Prices Inevitable in 2021
Based on historical precedence, periods of devaluation in the local currency are usually followed by an increase in cement prices. With the local currency’s devaluation by 23.9% at the official window in 2020, the ex-factory price per bag rose to N2,259 per bag (+4.5% y/y), based on our estimates. We forecast ex-factory price will increase by an average of 3.0% y/y in 2021E (2020; 4.5%). We believe this will be driven by the need to preserve EBITDA margins from upward pressures on energy cost arising from the local currency’s devaluation.
Competitive Landscape to remain Fierce in 2021
The growing influence of BUA CEMENT has brought fundamental changes in the industry’s competitive landscape. In 2018 when BUACEMENT merged CCNN and Kalambaina Cement, the market share of the enlarged entity (CCNN) rose sharply to 12.5% from 4.0% in 2017. On the flip side, the market share of DANGCEM declined to 64.7% (2017; 69.7%) while that of LAFARGE reduced to 22.8% from 26.3% in 2017. We expect the competitive landscape to be more intense in 2021, given BUACEMENT’s commissioning of its new 3MMT Sokoto line 11 plant scheduled to come on stream in Q2-21.