WED 29 DEC, 2021-theGBJournal- The earnings of cement players have been very impressive since Q3-21 when lockdown restrictions were eased.
‘’Heading into 2022, we expect the momentum in earnings growth to slow down due to a number of factors. Firstly, we expect the pent-up private sector demand that has buoyed revenue performance to slow down,’’ Cordros Research said in their 2022 outlook note.
They also expect public sector demand for cement to be impacted by pre-election activities particularly in the second half, in line with historical trends. Business investment in gross fixed capital formation is also likely to be impacted by election uncertainties in H2-22.
That said, we also envisage that the knock-on effects of a possible interest rate hike by the monetary policy committee would result in higher mortgage rates, undermining activities in the real estate sector. In addition,
Again, the impact of the significant price increment implemented in 2021is expeced to begin to thin out as industry players become wary of further hike in prices to avoid hurting sales volumes.
Meanwhile, we expect the upward pressure on input cost to persist given our expectation that the local currency may be devalued further. In the absence of significant price adjustment to counteract this, we expect margin compression to prevail. Considering our benign outlook on the sector, we believe companies that are able to maintain operational efficiency and optimize plants to enhance fixed cost absorption will be better placed in delivering decent earnings in 2022.
Cordros Valuation Valuation: ‘’We valued our coverage names using a blend of Discounted Cash Flow (DCF) and Relative Valuation (RV) methodologies in a ratio of 60:40. Although, DANGCEM remains our top pick within our coverage universe, we note that the upside potential is limited given our fair value estimate of NGN272.55 compared to the market price of NGN255.00. Nonetheless, we rate the company highly given its market leadership position (market share of 64.2% as of 9M 2021), strong distribution network, efficient production techniques and ability to influence market prices in enhancing profitability. We see room for upside in Lafarge Africa, thus, we maintain our ‘BUY’ recommendation with a TP of NGN34.44. We believe the impact of soft industry on LAFARGE’s earnings will be partly neutered by gains from its deleveraged balance sheet. We maintain our ‘SELL’ rating on BUACEMENT with a Target Price of NGN44.50, given the sizeable discount to its current market price of NGN74.50.’’
Meanwhile, as was the case in 2020 when cement producers were the star performers in terms of earnings delivered, a similar outcome played out in 9M-21. However, unlike the volume-induced expansion in top-line that drove earnings in 2020, price increments have played a greater role in 2021.
It is generally believed that the substantial increment in prices were necessitated by the need to partly offset the negative impact of elevated energy costs on margins given the devaluation of the currency. Notwithstanding, we observed double-digit growth in PBT in the first nine months of the year for the cement companies under our coverage – DANGCEM (+49.1% y/y), WAPCO (+28.0% y/y) and BUACEMENT (+25.7% y/y).
Market reaction has been positive as the Industrial goods index returned 1.6% YTD (as at 14 December 2021) compared to the ASI (+5.1%)
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