If you are an investor and buying stocks in cement companies is your desire, please before you do, take into consideration the availability of gas supplies at their factories.
This is because the shortages of gas supplies have shrunken the margins of these firms and to an extent a determinant of profit position in the next quarter.
The cumulative net margins of Dangote Cement, Ashaka, Lafarge Africa and Cement Company of Northern Nigeria (CCNN) reduced to 35.05 percent in the first quarter of 2016 from 35.05 percent the last year.
Net margins measure the profitability and efficiency of a firm. The lower the better and a higher figure signals operational inefficiency.
Also, combined net income was down by 32.40 percent to N51.37 billion in the period under review while cumulative cost of sales jumped to 18.81 percent as bottom lines get beaten down by production costs.
The volatile fuel supplies increased cash costs per ton of cement produced as firms are increasingly seeking an alternative source of energy such as coal. The change of fuel mix will help firms reduce costs, bolster profit and maximise the value of share holders.
Cash cost is a cash basis accounting cost recognition process that classifies costs as they are paid for in cash, and is recognized in the general ledger at the point of sale.
Based on Dangote’s cash cost breakdown (YtD 2016), kiln fuel (gas, coal and LPFO) represents 28 percent of its cash costs, which is the most significant portion of its cost. Check figure 1 for the breakdown and analysis.
Despite the rising costs and the fret of the impact of a further devaluation on cost structure of major operators in the building material industry, the string of mergers and acquisitions and aggressive expansion is seen as driving growth in an tough and unpredictable environment.
The board of Lafarge Africa (Lafarge) approved the acquisition of the balance of 50 percent equity interest in United Cement Company (UNICEM) from Egyptian Cement Holdings BV, a company indirectly held by Lafarge SA.
To conclude the acquisition, Lafarge would have to issue about 413.2 million additional shares to bring its share count to almost 5.0 billion shares.
Dangote has added new factories in Cameroon, Ethiopia, Senegal, South Africa, Tanzania and Zambia in the past two years and will open a plant in the Republic of Congo later this year.
Such aggressive expansion with a view to increasing share of the market explains why the stock of dominant cement makers is on an upward swing.
Dangote Cement share price rose 1 percent to N167.01 as at 1:30 pm while Lafarge increased by 3.40 percent to N76 on the floor of the exchange.
“From a cash-cost perspective, and its inevitable impact on EBITDA margins, we believe the key to the remainder of the year will be managing the fuel mix for Dangcem and managing volumes for Lafarge Africa,” said Seki Mutukwu, equity research analyst at Renaissance Capital.
“Given the well flagged effective 7% increase in realised cement prices at the end of March 2016, EBITDA margins are likely to be higher QoQ assuming no change in the naira/dollar exchange rate and no QoQ cost inflation greater than 7%,” said Mutukwu.