The sharp recovery in Nigeria's cement consumption post-Covid was impressive, taking both producers and analysts by surprise. The demand was (and still is) so strong that many of the cement distributors (not producers) took advantage to increase cement prices — passing on the effect of increased transport prices to their final consumers. Cement volumes rose 13% yoy to 26Mt in 2020 and this was helped by the lower-than-normal rainfall levels in Q3 20, which typically would be a period of heavy rains that would drench sites, slowing construction and building activity.
In this report, we highlight our positive outlook on Nigeria's cement market. The country's large infrastructure and housing deficits, combined with current low cement consumption per capita, paint a positive picture for the sector. In addition, the major Nigeria cement players (all listed on the local stock exchange) trade at a discount to MEA peers and also pay similar yielding dividends compared to peers (priced in US$). We update our views on our coverage companies — Dangote Cement and Lafarge Africa – and our top pick is Lafarge.
Large infrastructure and housing deficits present growth opportunities for Nigeria cement
According to the National Integrated Infrastructure Master Plan, Nigeria requires US$3trn (US$100bn annually) over the next 30 years to close the infrastructure gap. This is far above the current US$33bn annual investment (2014-18 average). The World Bank also estimates Nigeria has a housing deficit of up to 17mn with annual growth of 20% as at 2016, due to growing population and rural-urban migration. The World Bank also puts the required number of houses to keep up with growing population and urban migration at 700,000 units per year.
Another key highlight of Nigeria’s shortfall in optimum cement consumption is the low cement consumption per capita of 97kg compared to the global average of 304kg (ex-China, 581kg including China) and SSA average of 130kg. To raise Nigeria's consumption to the SSA average level would require a 25% increase in annual consumption, equating to 6.6bn kg or 6.6Mt. This points to the growth potential in the cement sector which the key cement players – Dangote, Lafarge and BUA – are positioning for.
In 2020, consumption increased 13% yoy to 26Mt. The strong recovery from Covid was impressive and aided by less rainfall in the year. We saw the rise in construction activities reflect in the H2 20 GDP numbers, as the construction sector grew 2% yoy on average over the period (H1 20: -15% yoy), while the cement sector spiked 9% yoy (H1 20: -13% yoy). We believe the bulk of cement consumption was driven by the private sector rather than the public sector, as is usually the case. The government, on the other hand, scaled back on fiscal capex plans for the year due to the Covid impact on oil revenues. This resulted in a 20% reduction in the FY 20 budgeted capex with only 53% of capex implemented as at June 2020.
Going forward, we forecast cement consumption will grow by a slower pace of 8% to 28Mt in 2021 and by a 6% CAGR in the next 10 years to 2030. Our forecast assumes a normal weather cycle – the Nigerian Meteorological Agency (NiMet) forecast normal to heavy rains in 2021. We expect growth in both private and public consumption. On the public front, projects such as the 300,000 low-cost housing project, the 1,400km Lagos-Calabar Coastal Railway, 312km Lagos-Ibadan Railway and many others are expected to support increased demand for cement.
A mindless expansion? Maybe...maybe not
Nigeria's current cement demand has been met with 51Mt/annum in production capacity, held by Dangote (32Mt), Lafarge (11Mt) and BUA (8Mt). However, altogether the plants operate at c54% utilistion rate. BUA has the highest utilisation of 62%, ahead of Lafarge (50%) and Dangote Cement (49%). However, despite having 46% of spare plant capacity, the cement players have not put the brakes on increasing cement capacity, as they continue the construction of new cement plants.
In 2019, BUA added 4.5Mt of new plant capacity in Okpella and Kalambaina. In 2020, Dangote increased plant capacity by 3Mt with Obajana line 5. And it does not stop there. In 2021, BUA and Dangote Cement plan to increase production capacity by 3Mt in Kalambaina and 6Mt in Okpella (greenfield), respectively. Interestingly, Dangote's new plant site in Okpella, Edo, comes after the court restrained Dangote from interfering in the disputed Obu-Okpella mines which belong to BUA. Lastly, BUA announced plans to add another 9Mt in Adamawa, Edo and Sokoto states by end of 2022 (but more likely from 2023). Lafarge Africa is the only player yet to announce any plans to add capacity, however, we would not be surprised if any plans are kept under wraps.
According to the two companies' management, the key reasons for the expansion plans are similar:
1. To capture oppurtunities that spring up as Nigeria's cement consumption grows; and
2. To meet growing export markets.
What is certain is that competition among the players will step up a notch as the new plants are commissioned. Upon completion of the new plants, BUA will overtake Lafarge to have the second-largest cement plant capacity in Nigeria with 20Mt.
In our view, a more important factor than just adding new production plants, is where these new plants are located. We think BUA is more strategic in its location choices, going by its announcements, as it seems to target untapped markets where there are fewer cement plants and places its new plants farthest from existing production.
To give some context, in 2018, BUA commissioned the new 4.5Mt plants in Sokoto (North) and Edo States, after the 0.5Mt Sokoto plant operated at almost 100% capacity. This increased BUA's market share by 7ppts to 19% in 2019, from 11% in 2017. On the other hand, the impact of Dangote's addition of 3Mt with the Obajana line 5 was almost unnoticed in 2020, as the market share was unchanged at 60%, by our estimates.
While Dangote has an impressively wide distribution network that brings cement closer to these 'untapped' markets, BUA's plant location in these markets makes the pricing more favourable as lower distribution costs are incurred. BUA also has the least revenue per ton compared to Dangote and Lafarge. And while BUA's pricing could be keeping them from improving gross margin (46%), which is lower than Dangote's 58% but higher than Lafarge's 29%, the favourable pricing along with the high cement quality (based on distributors' feedback) is likely to favour BUA's market share capturing.
In addition, BUA's plant locations in Sokoto share borders with neighbouring countries like Niger, and the new plant situated in Adamawa shares borders with Cameroun, which could position them for exports via the road networks. These show strategic positioning targeting export markets.
The growing export market
The Nigeria cement market has evolved over the past decade, from being a net importer of cement to now, a growing net exporter. As we highlighted, the increasing spare capacity from the cement plants are to be channelled towards meeting the growing export market. Dangote and BUA are at the front of this export strategy. Lafarge is yet to announce any plans to commence export, however, management mentioned on their previous calls that there were plans to sell to sister Lafarge companies across Africa. Again, we would not be surprised if Lafarge is just being discreet with its plans.
The closure of the land borders in 2019 led to a 60% drop in cement exports to 0.38Mt in 2020, compared to 0.6Mt in 2018. However, in H2 20, the government granted the two producers export permits for limited exports via the road borders, before fully reopening the borders in December, just before the commencement of the AfCTA agreement in January. Asides from road channels, Dangote’s recent launch of the two port terminals in Apapa and Onne lessens the risk for the company. That said, we did see Dangote’s export decline in Q4 20 (103kt vs 215kt in Q3 20). According to the company management, the lower export in Q4 20 was due to strong local demand as well as plant maintenance, bad roads and the #ENDSARS protest which limited available capacity for exports.
The African Continental Free Trade Area (AfCTA) agreement is expected to improve trade among 1.3 billion people and across 54 of 55 African Union (AU) countries with a combined GDP valued at US$3.4 trillion, according to the World Bank. It aims to eliminate tariffs between members on 90% of line items over the next five years and to reduce non-tariff barriers on both goods and services. Removing the trade barriers makes for a smoother export strategy for the cement players to export cement/clinker to neighbouring countries that have fewer limestone resources than Nigeria.
The deep discount and attractive dividend yield from Nigeria Cement producers
Overall, we are quite positive on the outlook for the Nigeria cement sector, as the three key players position to capture both the growing local demand and increasing opportunities in export markets. On a multiples basis, the Nigeria cement sector is discounted compared to MEA peers. The median P/E and EV/EBITDA of 13x and 10x are a discount to the MEA peer median of 22x and 12x. In addition, the three major cement players are all dividend-paying stocks with a median dividend yield of 4.6%, similar to MEA’s median of 4.8%. These make viable cases to buy into Nigeria cement players, when looking to Nigeria equity exposure.
We update our views on Dangote and Lafarge – the two companies within our coverage (more detail below). We have a Buy rating on Lafarge and a Hold on Dangote. For BUA, the stock trades at NGN72.7, almost twice the Bloomberg consensus TP.
Among the three players, BUA has the most expensive multiples, with P/E and EV/EBITDA of 35x and 28x, respectively, and ROE of 19%. Dangote trades at 13x and 10x to Lafarge’s 11x and 4x, respectively, which is justified in our view, given Dangote's superior ROE of 31% vs Lafarge's 5%. Dangote also paid the highest yielding dividend in 2020 at 7% compared to BUA (3%) and Lafarge (5%).
Dangote Cement (TP: NGN230, Hold)
We update our Dangote cement model and increase our TP to NGN230 (previously NGN211), which translates to a Hold recommendation on the stock. Our update largely reflects: (1) our optimism on Nigeria volumes which stems from increases in both domestic and export sales; and (2) increase in cement prices (a key upside risk we previously highlighted). Our target price also takes into account the 40.2mn share buyback (0.24% of outstanding shares) in December 2020, which had minimal impact on our TP. We project Dangote could grow adj. EPS by 13% yoy to NGN17.3 in 2021, which translates to a forward FY 21 P/E and EV/EBITDA at 13x and 7x — a discount to the respective 5-year averages of 15x and 10x. We expect an unchanged dividend of NGN16/share in FY 21, which yields 7% at the current market price.
Our FY21f EPS of NGN16.7 is driven by 15% growth in revenue to NGN1.2trn, supported by 17% growth in Nigeria and 12% in Pan Africa markets. In Nigeria, we project 3Mt of the new 6Mt Okpella plants will come on board in 2021 and the rest in 2022. We expect both domestic (16.9Mt) and export (0.7Mt) volumes will increase 10% yoy to 17Mt (50% utilisation), while Nigeria prices increase 4% over the year to NGN47,000/ton. Management stated that there was a slight increase in cement prices in December 2020 due to increased logistics and production costs.
Across the Pan Africa (PA) businesses, we expect resilience across markets to persist, particularly in Ethiopia, Congo, Senegal, and Cameroon. This is expected to drive a 4% increase in volumes. It is also worth adding that c7Mt of new plant capacities is in the works across the PA businesses — 1.6Mt in Niger (2022), 1.5Mt in Togo (scheduled for FY 2020, yet to be commissioned), 1.1Mt in Gabon (2021) and 3Mt in Cote d'Ivoire (2022). However, we are yet to incorporate these in our forecast as the dates for commissioning are still unclear.
Beyond revenue, we expect direct and operating costs to rise 11% and 13% respectively in FY 21, reflecting rising inflationary and FX pressures in Nigeria. We also project an increase in net finance costs as we expect Dangote will increase the debt book this year (+16% to NGN562bn) while the effective rates could rise 100bps to 10% mirroring the increasing rates in Nigeria.
Dangote recently announced the board approved the issuance of a NGN100bn bond — the second series of the NGN300bn bond purchase programme which began in 2020 (a total of NGN200bn issued so far). Considering the company’s capex plans for the year and the upward trajectory in yields, we project the programme could be completed this year, as we have incorporated in our model. This will likely increase Dangote’s debt to capital ratio by 4ppts to 39% and interest coverage will likely dip 50bps to 8.3% by the end of the year.
On the share buyback programme, management highlighted the expiration of the buyback programme on the conference call (as per SEC rules, the programme had a 1-year span until Jan-2021). Thus, we believe the 0.4% outstanding shares repurchased in a ‘tranche 1’ buyback in December 2020 may be all we can expect from the highly anticipated share buyback programme. As mentioned earlier, this was barely made an impact on our FY 21f EPS and TP.
The key upside risks to our forecasts for Dangote is:
Better-than-expected turnout in exports than our forecast of 700kt in 2021 and 10-year CAGR of 27% to 3.8Mt in 2030;
Higher than expected increase in revenue per tonne.
The downside risks include:
Lost market share from the tussle among the three cement players – mainly between DANGOTE and BUA; and (2) the impact of further NGN devaluation on cash cost.
Lafarge Africa (TP: NGN32, Buy)
We increase our TP on Lafarge to NGN32 from NGN29, which translates to a Buy rating given a total expected return of 54% — a share price return of 49% and a forward FY 21 dividend yield of 5%. The increase in our TP reflects: (1) our upbeat view on the Nigerian cement market in 2021; and (2) an increase in cement prices.
Despite growing FY 20 EPS by almost 100% to NGN1.91 owing to increased revenue and lower finance costs, Lafarge maintained its NGN1 dividend (the same as in 2019) to our surprise. This equated to a 52% payout compared to the 104% payout in 2019. While management stated that it may be too early to give projections on dividend, we believe this could be in line with the company’s strategy to employ retained earnings to the company’s capex plans, rather than borrow.
Going by its recent history of troubles with high finance costs and leverage — which have dropped 74% and 46ppts to NGN9bn and 10%, respectively since selling LSAH in mid-2019 — we think this is a better strategy to boost long-term growth and avoid a relapse. Going forward, we estimate Lafarge could maintain the current 50% payout ratio in 2021 — similar to the payout ratio in 2014-16 which averaged 43%.
In 2021f, we estimate the company’s adjusted EPS will grow by 7% to NGN2.1. This will be largely helped by a 10% increase in revenue to NGN253bn. We project volumes could increase 6% in the year to 5.5Mt. Similar to Dangote, we confirmed Lafarge also increased prices in December slightly, thus we estimate a 4% increase in price to NGN46,000 (similar to Dangote) over FY 21.
The upside risks to our estimates include:
Lower energy costs from the renegotiated gas price contracts utilised by the 5Mt Mfamosing plants (50% of operational capacity) as well as the company's plans to increase use of alternative fuels and completion of the Ashaka captive power plant.
Higher than expected increase in cement prices.
On the downside:
Lost market share from the tussle between Dangote and BUA. More so as Lafarge is yet to announce any plans to increase capacity.
Impact of further NGN devaluation on cash cost.
Management plans to resume capex plans which were put on hold due to Covid. The debottlenecking of the Ashaka cement plant and the construction of the captive power plant are expected to be completed this year, or by Q1 22 at the latest.
A further positive is that management stated that the gas price contract (based in US$) on the Mfamosing plant lines have been renegotiated. While we were unable to get the details on the new gas pricings, we see this as highly positive for Lafarge as it will reduce energy costs, which make up 30% of cash cost. However, the net benefit of the new gas prices could be lessened by the impact of the naira devaluation.