By Temilade Aduroja and Adedayo Ayeni
THUR, FEBRUARY 9 2017-In this note we look at the trends in and outlook for the Nigerian cement market. We focus on the two major players, Dangote Cement and Lafarge Africa, which historically have had market shares of c. 60% and c. 30% by volume, respectively. We roll forward our models and make changes to our estimates and valuations post our updates with management. On the back of these changes, we downgrade Dangote to MARKET PERFORM (from Outperform) and reduce our TP to NGN173 (from NGN200); we upgrade Lafarge to OUTPERFORM (from Market Perform) and increase our TP to NGN60 (from NGN54).
A resilient cement market
We find the Nigerian cement market attractive, with a small number of large players with well-defined market shares. Market share by volume has historically been split 60% (Dangote)/30% (Lafarge)/10% (others); there is an abundance of limestone, a ban on cement imports, no alternative product and an infrastructure deficit. Nigerian cement volumes grew by c. 11% YoY in 2016, even with the 37% devaluation of the naira against the dollar. With cement prices back to pre-devaluation levels in dollar terms, we expect to see EBITDA margins rise back to their peaks. The main challenges we see are difficulties with accessing FX and pressure on margins unless the right kiln fuel mix is achieved. However, most players have addressed the issue of fuel costs by converting their kilns to be compatible with cheaper sources of fuel (coal and alternative fuels [AF]).
Dangote – still a quality name to hold
We think Dangote is a quality name in Nigeria, but at current prices and given the FX situation in the country, we see limited upside potential in the stock and believe that most is already priced in; we therefore downgrade it to MARKET PERFORM (from Outperform). In addition, it is also seeing price and margin pressures in South Africa, Zambia and Tanzania. Dangote is the dominant player in Nigeria, with a 60% market share, and remains the lowest-cost producer in Sub-Saharan Africa (SSA), with the power to move prices. We estimate a 26% 2016 RoE for Dangote, at a premium to the frontier market peer RoE of 15%. On EV/EBITDA and P/E multiples, Dangote is trading at respective 8% and 16% discounts to its frontier peers, despite superior operating profitability and a favourable market structure.
Lafarge – upgrade to OUTPERFORM
Given the recent de-rating of the stock, we upgrade Lafarge to OUTPERFORM (from Market Perform); our upgrade is based on what we view as a more attractive valuation following share-price weakness, and improved cement pricing. On EV/EBITDA and P/E multiples, Lafarge is trading at respective 5% and 33% discounts to its frontier peers. We believe 2016 was a tough year for Lafarge, due to gas shortages, significant dollar debt and flooding. However, following the introduction of its Unicem line II, its kiln conversion and the change of dollar debt to an equity-like instrument, in 2017 we think Lafarge will regain market share, reduce operating cost and eliminate the P&L volatility associated with FX fluctuations. However, Lafarge’s cement prices and EBITDA margin continue to remain highly dependent on Dangote’s pricing strategy.
Aduroja and Ayeni are respectively analyst, Sub-Saharan Africa Materials/Oil & Gas and Sub-Saharan Africa, Consumer and Industrial analyst at Renaissance Capital on the Nigerian Cement market.
