February 8, 2022/CSL Research

The resilient demand for cement despite the significant increase in prices was the major theme that distinguished 2021 from recent years. Unlike in 2020, where volume was the major driver of revenue performance, the double whammy of inflationary pressures and FX depreciation in 2021 created the opportunity for the Nigerian cement players to increase prices, which helped them to deliver robust earnings. While DANGCEM also increased prices, better realized prices anchored the topline growth of Lafarge and BUA as of 9M 2021. Some aspects of the year were originally as we had expected, however, what we did not expect was the significant premium between ex-factory and retail prices that was seen in 2021. This in our view, was due to the high logistics costs incurred, and supply chain challenges faced by distributors and retailers which were priced in.

For cement GDP growth, the first quarter (Q1: +11.20%) showed significant growth. While Q4 data is yet to be released as of time of writing, it is certain the cement sector will close the year positive, benefitting from catalysts such as the low interest rate environment, and resumption of delayed construction activities. Similarly, related sectors such as the real estate and construction sectors, recorded positive growth in all quarters of the year, an improvement over the negative pattern in the past 5 years (5-year average growth of -4.1%).

We have seen positive signals pointing towards robust earnings for the cement sector players, albeit growth may moderate in 2022. Though the highly ambitious government CAPEX spending proposal in 2022 (N5.5tn) is not sufficient to underscore our positive tone as we do not expect implementation to improve significantly, we highlight a few catalysts driving our positive outlook. The Minister of Works and Housing, Babatunde Fashola, noted that the federal government may extend the implementation of capital projects components in the 2021 budget into 2022. If done, we believe road and rail infrastructure projects bode well for the cement sector amid the gradual shift to cement paved roads.

Also, he hinted on the full completion of the Lagos-Ibadan Expressway alongside the 2nd Niger Bridge in 2022. In addition, the establishment of the PPP Infra-Co to bridge the infrastructural gap in the country bodes well for the cement sector. That said, the main downside risk is that 2022 is a pre- election year and pre-election years are usually characterized by heightened election campaigns which could be detrimental to capital spending. However, we note a variety of factors that can make 2022 better than 2018, and other pre-election years namely; early assent of the 2022 budget (January) unlike 2018 where approval was in June, affecting budget implementation. It is noteworthy to mention that 2022 is the first pre-election year to see the full year budget cycle, the prospects associated with the newly established Infra-Co, the continued involvement of the private sector in federal road infrastructure and the gradual end of President Buhari’s 8-year Administration, which we believe will be a motivating factor to ramp up infrastructure in order to appease the electorate in favor of his party.