The move by the Federal Government to increase the capital expenditure side of the budget by N700 billion in 2016 is seen as boosting the revenues of cement makers that have been grappling with a softer market this year.
The potential fiscal stimulus is expedient as feeble cement demand in recent times have weakened the growth potential of cement companies in Nigeria, with key players relying on foreign markets for revenue accretion.
“We opine that increased capital expenditures from government will have a two-fold impact. First, we anticipate increase in demand for cement, as the government embarks on infrastructural development. This will directly affect the top line of key cement producers like Dangote cement (DANGCEM) and Lafarge Africa (WAPCO),” said Adetutu Adegbayibi, an industry analyst at investment firm Meristem Securities, in response to questions.
Adegbayibi also added that they expect an increase in consumer spending on the back of enlarged government expenditure (from payments made for services rendered and materials used), which would help to increase money in circulation and possibly demand for cement by extension.
In order to stimulate an economy struggling with more than 60 percent fall in the oil price, the Federal Government is planning to increase spending in the 2016 fiscal budget by 81.88 percent to N8 trillion, from N4.4 trillion last year.
Vice President Yemi Osinbajo revealed that the Federal Government was proposing a capital expenditure of N2 trillion next year, up from N1.3 trillion in 2015, representing a N700 billion increase.
“Nigeria needs to stimulate the economy by investing in infrastructure that will help the nation avoid recession,” said Kemi Adeosun, minister for finance, during the ministerial screening.
Analysts say such economic stimulus will help the country plagued by huge infrastructure deficit catch up with the BRIC countries in terms of cement production.
The BRIC, an acronym invented by Jim O’Neil, an investment banker with Goldman Sachs, comprises of Brazil, Russia, India, and China.
Cement production per capital in Brazil and Russia is 349kg and 480kg, respectively, according to the US Geological Survey (USGS) data, compared with 112kg for Nigeria.
“This indicates that Nigeria’s cement production per capita has to expand at a CAGR of 12.0 percent and 15.6 percent over the next 10 years for the country to meet the current production per capital of Brazil and Russia respectively,” said analysts at Chapel Hill Denham.
The country needs as much as $300 billion (N60trn) within the next 30 years to close its housing deficit.
According to the United Nations, Nigeria’s urbanisation rate was estimated at 51 percent in 2012, which suggests that over 80 million people live in the cities; the UN estimates that this number is growing at an annual rate of 3.5 percent.
While immense spending will boost revenue of cement markers, shortage of gas, scarcity of cheap alternative energy such as LPFO and high borrowing costs may hinder the stimulus from trickling down to the bottom lines of these firms.
“While the news of increased CAPEX suggests a positive outlook for the industry, we believe rising operating, administrative and financing costs remain major drags to margins and bottom-line growth,” said Adegbayibi.
Data compiled by BusinessDay showed the cumulative operating expenses of four dominant cement manufacturers: Dangote, Lafarge, Ashaka and Cement Company of Northern Nigeria (CCNN) increased by 33.94 percent to N80.78 billion.
The 2015 third quarter earnings update of cement makers quoted on the NSE showed that bellwether company Dangote had sales increase by 17.80 percent to N365.40 billion; boosted by its operations in other African countries such as Senegal, Cameroon and Ethiopia.
Net income increased by 12.40 percent to N158 billion.
For the first nine months through September 2015, Lafarge Africa’s sales increased by 5.50 percent to N168.14 billion.
Ashaka cement’s sales fell by 15.83 percent to N14.54 billion, while
Cement Company of Northern Nigeria (CCNN) revenues dipped by 6.30 percent to N6.30 billion last year.
“Nonetheless, we note that 2 consecutive years of negative stock market returns has significantly depressed stock prices- cement tickers inclusive, hence a number of the sector stocks have considerable upside potentials at the moment, “ said Adegbayibi.
BALA AUGIE
