TUE 12 APRIL, 2022-theGBJournal | Nigeria’s cement industry has grown at an average rate of 4.5% per annum over the past four years (2018 – 2021) in inflation-adjusted terms.
Not only is this three times the growth rate of the economy overall, it is also much faster than growth in the related construction sector. This begs the question, “Can stock market investors benefit from this?”
Our key point about Dangote Cement’s Nigerian operations is that the company is succeeding in increasing its volume sales in Nigeria, which grew from 15.1 million metric tonnes (mmt) in 2016 to 18.6mmt in 2021, a compound annual growth rate of 4.2%.
This period includes the recession year of 2016 (when volume sales fell) and the closure of land borders in 2019 (which interrupted overland exports and brought a slight fall in volume sales that year).
How many listed Nigerian manufacturers have recorded volume growth of this order over the past five years?
Management executes a strategy of building out capacity far in excess of demand in Nigeria, with the consequence that the company’s capacity utilisation in Nigeria fell from 51.7% to 48.7% over the period from 2016 to 2021.
Yet, remarkably, the commissioning of the 6.0mmt Okpella plant in Edo State last year only led to a slight fall in capacity utiltisation across the totality of its Nigerian plants. Building for future demand appears to be paying off because the market absorbs much of the new capacity.
Having enormous capacity brings a high market share in Nigeria, roughly 60.0%, and with this comes pricing power. Price increases since 2016 have broadly kept up with inflation. When the company combines growing volumes with price increases broadly in line with inflation, the result is sales growth well above the rate of inflation. Economies of scale are developed, and operating margins increase.
The picture in the other African countries is more complicated than in Nigeria (where the company tends not to have a dominant market share) but capacity and volume sales growth is evident there, too.
We initiate coverage of Dangote Cement with a target price of N328.65 per share, implying 20.2% potential upside from last Friday’s closing price of N273.50/s.-With Coronation Research
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