Investors in cement stocks could see a return on investment as demand for cement is expected to improve on the back of passage of the budget and relative stability in the foreign exchange market.
Analysts are of the view that the recent rebound in crude oil price has dispelled the fear that government is incapable of funding the 2018 budget. Also, the country’s huge infrastructure deficit is expected to spur the demand for building material.
The 2018 budget allocates N32 billion and N683 billion to the power, public works and housing ministry for recurrent and capital spending respectively. This includes N27 billion for the national housing programme, reduced from N35 billion in the to-ing and fro-ing with the National Assembly.
“The fear of a sudden decline in government’s ability to fund the budget has also been allayed by continued improvement in oil revenues as the outlook for oil prices remains bright,” said analysts at United Capital.
The cumulative net income of three major producers of the building material- Dangote Cement Plc, Lafarge Africa Plc, and Cement Company of Northern Nigeria (CCNN) Plc- that have released half-year results dipped by 14.20 percent to N111.86 billion, from N130.47 billion the previous year.
The drop at the bottom line (Profit) was due to sharp decline in Lafarge Africa’s loss after of N6.10 billion profit in the period under review.
While Dangote Cement and CCNN were able to translate sales to higher profit as evidenced by improved margins, Lafarge Africa has been grappling with deteriorating margins.
Dangote Cement’s cost of sales ratio improved to 40.95 percent in June 2018 from 43.05 percent, which means the firm was able spend less on input cost to produce each unit of product.
Similarly, CCNN’s cost of sales ratio improved to 54.77 percent in the period under review as against 64.42 percent as at June 2017.
However, Lafarge Africa is spending more to product each unit of product as cost of sales ratio increased to 76 percent in the period under review from 71.12 percent the previous year.
The switch in energy mix is responsible for improved cost efficiency as CCNN and Dangote now use coal- a cheap source of energy- to power plants at the factory.
While Lafarge Africa’s alarming leverage is gradually eroding profitability, CCNN and Dangote Cement have been able to curtail debt as evidenced in a low debt to equity ratio.
Lafarge Africa has a debt to equity ratio of 152.25 percent in the period under review, this compares with CNN’s and Danogte Cement’s ratio of 110.10 percent and 0.43 percent respectively.
Cement makers have embarked on aggressive expansion plans with view to increasing to their share of the market and taking advantage of the huge infrastructure deficit.
Dangote, controlled by Africa’s richest man, Aliko Dangote, said last month it’s looking to raise $500 million from a Eurobond sale and will also issue 300 billion naira in local-currency bonds to refinance debt and boost expansion.
Meanwhile, Lafarge Africa, the Lagos-listed unit of Switzerland-based LafargeHolcim Ltd., is seeking to raise about 100 billion naira through equity or debt on top of a rights issue of about N130 billion last year.
BUA Group, the parent company of CCNN launched the $350 million Plant at Kalambaina, Sokoto State.
