Our 2018 outlook for Nigerian cement is predicated on a moderate rise in cement volumes, bolstered by the recovery in the economy, and further supported by government-led infrastructure spend.
We think 2018 could be the inflection point for capex execution, and in a market dominated by Dangote and Lafarge we expect some healthy competition from underdog BUA (unlisted), which appears to be gaining traction. Our concern stems from whether cement prices at $137/t are sustainable. We see Dangote as a quality name but downgrade to SELL (from Hold) on a one-year view, as based on valuation, we think this is a good time to take profits following a strong share price run.
Our TP increases to NGN214 (from NGN201) on rolling forward our valuation model. For Lafarge, we await the rights issue approval from the SEC and completion details, and maintain our NGN48 TP and SELL rating.
A lagging indicator
Historical trends show that Nigerian cement growth lags GDP, with our analysis suggesting a 9- to15-month lag. Given the economy exited recession in 2Q17, we estimate that the cement market has bottomed and will recover in 2018, trailing the economy and supporting our positive view.
Could 2018 be the inflection point?
The oversubscription of over $3bn in various bonds for the 2017 capex budget and the scheduled release of c. NGN1.2trn – the highest ever capex release by government – leads us to conclude that 2018 could be the inflection point for capex execution. History tells us that only a fraction of proposed capex spend is ultimately executed, but we believe 2018 could be different because:
1) 2018 is a pre-election year and government tends to spend more;
2) the release of the NGN100bn sukuk bond for the construction of 25 major roads;
3) the release of NGN2bn towards the construction of the 44km second Niger bridge; and
4) the government securing from the Chinese c. $12bn to fund major capex projects.
The underdog appears to be gaining traction
We believe BUA may slowly be joining the exclusive cement party dominated by Dangote and Lafarge. The third-largest cement player by market share is bringing some healthy competition, following the commissioning of its 3mn tpa plant in Okpella, Edo State, close to Dangote’s Obajana plant, and with a further 2.5mn tpa plant scheduled to come on line by year end.
Following clashes between Dangote and BUA on limestone rights, as well as Dangote’s planned 6mn tpa plant in Okpella, we wait to see what strategy these players will employ to increase market share. Given its proximity to Dangote’s plant, we believe BUA may have taken some of the market leader’s volumes. However, while BUA may be gaining momentum, with just a c. 10% market share it cannot move prices or the market significantly, and we think Dangote’s export strategy provides a competitive advantage for its overcapacity.
A promising outlook, but Dangote downgraded to SELL
The physical cement sector appears promising and should benefit from increased infrastructure spend in 1H18, topping out from 4Q18 as the country heads into elections. We expect Dangote’s bottom line to see a positive impact from its sea-based export strategy and tax incentives (from constructing federal roads at a discount). We increase our Dangote TP to NGN214 on rolling forward our valuation model but downgrade to SELL on a one-year view based on valuation. We expect a rebound for Lafarge following a stronger balance sheet from the rights issue.
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