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A curious thing is happening to Nigerian Cement makers. While revenues are surging, profits are dropping, signalling falling margins and higher tax expenses.
The firms analysed by BusinessDay are Dangote Cement Plc, Cement Company of Northern Nigeria (CCNN) Plc and Lafarge Africa Plc, which control about 90 percent of the Nigerian cement market.
Cement maker’s revenues surged to a five year high in 2017, however profits (net income) are down from the highs of 2013 largely as a result of a dominant player in the sector (Lafarge Africa) recording a loss, and expiration of pioneer tax credits.
Lafarge Africa profits were juiced in 2016 by an income tax credit of N39.7 billion, while Dangote Cement received tax credits of N5.69 billion the same year (2016) and N10.43 billion in tax credits for 2013.
The cumulative combined sales of the three largest producers of the building material hit N1.12 trillion in December 2017 as against N607.56 billion recorded in 2013 as they leveraged a hike in the price of products and Nigeria’s infrastructure deficit.
However, combined profits for the firms fell to an all-time low of N172.87 billion as at December 2017 from a profit of N263.71 billion recorded in 2013.
Combined profits for the 3 firms was N196.08 billion in 2014, N209.52 billion in 2015 and N204.77 billion in 2016.
Investors and shareholders will be bemused at industry performance in spite of the fact that the market is largely an oligopoly.
Dangote Cement with a market capitalisation of N4.4 trillion has gained 13 percent year to date and trades at a price to book ratio of 5.4xs, according to Bloomberg data.
Lafarge Africa has a market capitalisation of N385.96 billion, has returned -0.87 percent ytd, and trades at a price to sales ratio of 0.87Xs.
Data gleaned by BusinessDay shows the major drag on industry profit growth is Large Africa Plc, a company grappling with rising costs and leverage that eroded margins.
For the year ended December 2017, Lafarge Africa posted a loss after tax of (N34.60 billion) from a profit position of N16.89 billion the previous year, the lowest in five years since BusinessDay started compiling data.
Lafarge profits for 2014, 2015 and 2016 were N34.66 billion, N26.98 billion and N16.89 billion respectively.
Lafarge had finance costs or interest expense of N43.02 billion for the period, the highest in 7 years, brought on by interest on borrowing incurred while paying the loans of subsidiary company, UNICEM.
A breakdown of the combined profit in the period under review (2017) showed Dangote Cement Plc, the largest producer of the building material recorded net income of N204.24 billion, flat from the N201.19 billion recorded in 2013.
Dangote’s 2014, 2015 and 2016 profits were N159.50 billion, N181.52 billion and N186.62 billion respectively.
CCNN’s profit after tax stood at N3.22 billion as at December 2017, representing a 106.50 percent surge from the N1.56 billion recorded five years ago.
Industry experts are upbeat that economic growth underpinned by an increase in crude oil price and production and the introduction of foreign exchange system that help curb the crippling dollar shortage will boost future earnings of firms operating in the sector as they expect an uptick in the demand for building materials.
The gross domestic product of Africa’s largest oil producer expanded for three straight quarters last year after a 1.6 percent contraction in 2016, with year-on-year growth reaching 1.9 percent in the final three months of 2017.
The International Monetary Fund (IMF) has projected that Nigeria’s economy will grow by 2.1 percent in 2018.
The forecast which represents 0.2 percent increase from the 1.9 percent projected in October 2017.
“We expect revenue growth to be sustained amid a faster recovery in Nigeria, thanks to increased government infrastructure spending ahead of the 2019 general election notwithstanding stiff competition,” said analysts at United Capital.
President Muhammadu Buhari has presented a record budget of N8.60 trillion to the National Assembly for 2018.
Out of the total budget figure, N2.4 trillion has been earmarked for capital spending.
Nigeria has infrastructure deficit of $2 trillion, according to the Africa Finance Corporation.
Also, the 17 million housing deficit is a low hanging fruit for cement makers to grow sales volume.
“We estimate that an additional two million housing units by 2020e from the public sector alone (as highlighted in the economic recovery plan), will unlock about 20-24 million tonnes (mt) of cement over 2018e-2020e,” said analysts at RMBNS, in a recent report on Nigeria’s cement industry.
Lafarge Africa is spending more to produce each unit of product as cost to income ratio increased to 83.03 percent, the highest in 5 years; driven by the construction of Mfamsong evacuation road at UNICEM in Calabar which failed as well as a full impairment taken on a Pre-heater project in ASHAKACEM which the cement maker hinted it has discontinued.
The company is working to reduce energy and transportation costs as part of a turnaround plan, according to Michel Puchercos, the Chief Executive Officer of Lafarge Holcim Plc.
BALA AUGIE
