Stellar y/y sales and earnings growth despite near-term pressures
Despite the near-term pressures on demand elicited by weak economic conditions, our Nigerian cement names delivered stellar y/y sales and PBT growth in H1 2017. On the back of favourable pricing (up 73% y/y), sales growth for our Nigerian cement names averaged 43% y/y in H1 2017. While DangCem’s H1 2017 PBT grew markedly by 25% y/y, Lafarge reported PBT of N18.2bn vs. a pre-tax loss of -N30.2bn in H1 2016.
Although we see a reduction in the positive run of base effects with regards to pricing in H2 2017, we still forecast average sales growth of c.37% y/y for our cement names in 2017E. While we forecast PBT growth of 69.9% y/y for DangCem, we see Lafarge Africa’s PBT recovering to N34.3bn from a pre-tax loss of – N22.8bn in 2016.
Positive outlook in the medium to long-term
In the medium term, we expect sector unit volumes to rebound to mid-single digits, driven largely by an acceleration in the federal government’s capital spending and the country’s return to economic growth. Longer-term, we expect increased consumption of cement in Nigeria as the country modernizes its infrastructure. An improved economic outlook, low consumption of cement per capita (c 110kg/ capita) and positive demographic trends (c. population growth of 2.8% y/y) also bode well for the sector’s sustainable growth.
Energy diversification supportive of earnings growth
The major cement producers have largely succeeded in diversifying their energy mix away from Low-pour-fuel-oil and gas to other fuel sources such as coal, biomass and other alternative fuels. Although energy costs were up significantly in H1 in naira terms y/y largely because of dollar-linked costs such as gas, on a US$ basis, the increases on a cost per tonne basis were relatively modest. Going forward, ongoing investments in alternative fuel sources such as coal mines, aimed at de-coupling costs to US$, should help preserve margins and support earnings growth.
Sector trading at a discount to international peers
Our cement names are trading at a significant discount to their emerging market and global peers. On a relative basis, they are trading on an average 2017E P/E multiple of 10.5x and a 2017 EV/EBITDA multiple of 8.6x. These represent average discounts of 46% and 12% to the blended average P/E and EBITDA multiples of 19.4x and 9.8x that their emerging market and global peers are trading on. Taken together with their EPS growth potential (Dangote Cement EPS growth of 13.9% vs. -1.7% for EM and global peers), the Nigerian names are attractive.
Neutral rating despite sizable upside potential
On average, our cement names offer a potential upside of 20.9% from current levels. Despite a sizable upside potential of 33.0%, we have downgraded Lafarge Africa to Neutral in this report due to the potential dilution to earnings that we see from its ongoing capital raise of N131.6bn. For Dangote Cement (also rated Neutral), we see a potential upside of 8.9% from current levels.