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Leading stock market and equities performance analyst group, Cordros Securities Thursday published a report detailing corporate performances in the Nigerian cement sector and gave on company basis, activities in market since this year.
The report revealed what Cordros Group saw as promising assessment on volume growth anchored on two factors; The conclusion of the prolonged general election which had hampered sector players volume; and Government aggressive drive in bridging infrastructure deficit.
According to the report, “The underperformance of the Nigeria’s cement sector, since the turn of the year, is not unconnected with the widespread naira asset sell-offs by both foreign and domestic players. The perfect storm of weak economic recovery, benign earning growth and uncertain government policy direction ensured that the Nigeria’s equity market continues to underperform its peers. Irrespective, we still see strong triggers for cement producers in Nigeria, especially in the light of government’s aggressive infrastructure development and growing private sector demand.
“Our top picks are Cement Company of Northern Nigeria (TP: NGN28.71) and Dangote Cement (TP: NGN236.12), both trading at 7.3x and 7.0x 2019E EV/EBITDA respectively, a discount to 11.2x for the Middle East and Africa (MEA) peers. Although, both DANGCEM and CCNN are strongly positioned to take advantage of cement demand growth from infrastructure development in Nigeria and neigbouring countries, CCNN tops our scale of preference, as we believe the company’s proximity to fast growing markets, places it ahead of DANGCEM.
On CCNN, Cordros says ‘Go Big or Go Home’
“From the perspective of users, CCNN’s new cement plant in Sokoto is, the best cement plant in Nigeria, due to the high level of technological configurations which makes end products cure and dry faster. Beyond that, we are encouraged by the company’s potential for margin expansion over the next few years – which should drive EPS growth – as the company is able to optimize energy costs, increase capacity utilization rate, and slightly increase prices.
“Over 2019E, we forecast the company’s EBITDA growth at 95.8% y/y to NGN19.98 billion (2018FY: NGN10.21 billion), but margin declining to 31.1%, from 32.2% in 2018, on higher depreciation expense assumption.
On DangCem, Cordros describes it as the ‘Undisputed Market Leader’
DangCem remains an attractive growth story in the Nigerian cement space, with incrementally larger contribution to gross revenues from its Pan African businesses which provides exceptional portfolio diversification and strong FX earnings potentials. Head and shoulders above competition in terms of installed capacity, we believe the company is also strongly positioned to take advantage of potential cement demand growth in SSA from rapid infrastructural investment expectation. DangCem continues to enjoy superior margin on account of strong energy efficiency and lower maintenance costs. That said, we estimate 2019E group EBITDA of 12.4% to NGN488.25 billion (2018FY: NGN434.28 billion), with projected margin of 50.0%, from 48.2% in the prior year.
On Lafarge, Cordros Securities sees ‘Attractive Entry Price for a Speculative Play’
We like that Lafarge has, recently, decided to discontinue its margin dilutive South African operations. We understand that the company has agreed with an affiliate of LafargeHolcim Group, Caricement B.V., to divest its entire holdings, with an agreed consideration of USD317 million for the wholly-owned subsidiary.
“The company’s management stated that it planned to utilize the proceeds from the deal, together with the proceeds from the recently concluded rights issue, to deleverage its balance sheet by c. NGN246 billion and also fund working capital needs. That said, even as the company posted another loss after tax in 2018, we remain confident that the company will return to profitability in 2019E, when finance burden will be some way lower relative to 2018.
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