September 4, 2024/Cordros Report
In this report, we update our views on Nigerian cement producers. We believe the strong rebound in sales volume witnessed in H1-24 indicates a full recovery from last year’s downturn, and we expect robust topline expansion for all the major players for 2024E. However, given the ongoing challenges posed by exchange rate fluctuations, rising inflation, interest rates, and energy costs, we expect earnings growth to be further constrained. Consequently, we are neutral on the sector. Across our coverage companies, Lafarge Africa Plc (WAPCO; “BUY”, NGN57.03/s) remains our top pick as we expect EPS growth (+14.5% y/y to NGN3.63) to be supported by solid revenue print (+38.6% y/y), some recovery in cost control, and no further FX losses for the year due to settlement of all FX liabilities. Whereas, we recommend a “HOLD” rating for Dangote Cement Plc (DANGCEM; NGN481.19/share), considering the current premium market price of NGN532.00/share. Meanwhile, we reaffirm our “SELL” recommendation on BUA Cement Plc (BUACEMENT; NGN50.71/s) due to the company’s stretched valuation—reflecting an elevated stock price relative to fundamentals and growth prospects—as well as cost pressures that have historically impeded performance and are expected to persist into 2024E.
Healthy domestic demand to drive sales volume amid rising cement prices
The local cement market continues to exhibit robust demand, fueled by increased construction activities from ongoing housing developments and road infrastructure projects, driven by significant public and private sector investments. Concurrently, domestic cement prices have been rising, with retail prices ranging between NGN8,000.00 and NGN9,500.00, reflecting the broader macroeconomic challenges, including escalating energy costs, import levies on mining equipment, and an unstable FX rate. Although the FG has raised concerns about elevated cement prices, particularly as it inflates the government’s infrastructure budget, a price reduction in the near term seems unlikely. Nevertheless, our outlook on domestic demand remains buoyant, bolstered by the FG’s increased capital expenditure allocation of NGN13.77 trillion, with an anticipated implementation rate of 37.8%. Consequently, we project sales volume growth of 3.1% y/y for DANGCEM, 10.4% y/y for WAPCO, and 21.7% y/y for BUACEMENT in 2024E.
Robust topline to support earnings despite margin compression
We expect our coverage companies to capitalise on the anticipated (1) ramp-up in the FG’s capex allocation from the various ongoing construction projects nationwide and (2) investments in private construction activities, especially in urban areas, to grow sales volume coupled with an upward revision in prices. Nonetheless, we note that sticky inflation, unstable currency, and rising energy prices will continue to stoke costs for all three producers. Consequently, we envisage a slowdown in operating margins for all players – WAPCO (-314bps y/y to 28.8%), BUACEMENT (-270bps y/y to 19.1%) and DANGCEM (-396bps y/y to 36.1%). However, we foresee 2024E EPS increasing for all players – DANGCEM (+3.0% y/y to NGN27.27), BUACEMENT (+14.2% y/y to NGN2.34), and WAPCO (+14.5% y/y to NGN3.63).
WAPCO (“BUY”, TP: NGN57.03/s) remains our pick
For 2024E, we project WAPCO’s revenue growth will be sturdy in line with peers. While gross margin (+100bps y/y) expands due to solid revenue print, we expect higher OPEX to cause EBITDA margin (-314bps y/y) to contract. Elsewhere, we expect a 2024E EPS of NGN3.63 (+14.5% y/y) with a DPS of NGN2.21 (dividend yield: 5.9%). On our estimates, WAPCO trades at a 2024E P/E and EV/EBITDA of 10.4x and 2.9x, a noteworthy discount to the MEA peer average of 20.5x and 13.5x, respectively.
