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.
If you have any questions or comments regarding this report, please contact Temilade Aduroja.
Fidelity Bank Plc must cover the chink in its curtains to keep rising
Fidelity Bank Plc follows the narrative of top tier-2 banks, which have had better or easier years.
The Nigerian banking sector has consistently been one of the most profitable sectors in the Nigeria Stock Exchange market. However, in 2020, Deposit Money Banks (DMBs) have faced a flurry of impediments, which may have affected their solidity.
With reduced income from fee and commission implemented at the start of the year by the Central Bank of Nigeria, the paucity of foreign currency for international transactions, the resulting economic contraction from dire effects of the coronavirus pandemic, and the consequent operational constraints of keeping employees safe, 2020 is obviously fraught with numerous disorders for banking institutions.
For most, it hasn’t exactly been a year for growth at all, more like a walk in the woods, where improvements to bottom-line is almost unexpected. This period, many banks seem content with simply surviving and fundamentally matching their previous feats.
Fidelity Bank Plc follows the narrative of top tier-2 banks, which have had better or easier years. The bank generated a 2020 9M PAT of N20.4billion, rising 7.08% from the corresponding figures last year, but drilling solely into its results in Q3’2020 and its exact comparative period in 2019, the bank suffered reduced interest revenue, reduced fees and commission, reduced profit before tax, and reduced after-tax profit.
Fidelity Bank Plc concluded Q3 with a profit position of N9.1billion, 13.7% decline compared to its position in 2019 y/y. PBT reduced by 12.9% from N10.8billion in 2019 to N9.4billion this year. Gross earning in Q3 was only N49billion as against N57billion in 2019 – plummeting 14%.
The Group Chief Executive Officer of the bank, Mr. Nnamdi Okonkwo, commenting on the result said: “Our 9 months results reflect our resilient business model, particularly in a very challenging operating environment. We worked closely with our customers to gradually recover from the economic impact of the pandemic and the attendant effect of the lockdown. The drop in gross earnings was due to the decline in interest and similar income, caused by lower yields and drop in fee income.”
True cause of the reduction in earnings
DMBs generate gross earnings under three primary subheads: Interests earned, Fees and commission, and Other operating income. Fidelity Bank Plc generated a combined total of N150.8billion for the period ended September 2020 from these three categories, compared to the N158.5billion in the corresponding period last year.
Deeper analysis reveals that this rising tier-2 bank has seen more deficit in revenue from fee and commission compared to the other aforementioned gross-earnings’ generating-sources within this period. Interest earned dropped by a difference of N4.3billion, while revenue from fee and commission saw a decline of N4.8billion from N14.5billion in 2019 to N19.3billion YoY.
Fee and commission as a component of gross earnings
Card maintenance fees, account maintenance fees, commission on remittances, collect fees, telex fees, electronic transfer fees, amongst others, represent the plethora of channels that makes up income from fee and commission.
The real insight this particular component of gross earnings provides is that a spike in revenue generated indicates increasing/increased customer account activity. The more a customer maximizes the usage of an account’s product and facilities, the more the revenue earned from this segment. Thus, earnings from fees and commissions are so overriding due to their apparent controllability.
For example, a bank could make the decision to purely pursue and aggressively drive the usage of its ATM debit card and promptly see the revenue from commission rise. Furthermore, an increased rate of card production and collection necessitates usage and consequently means more money is earned as card maintenance fees.
The fact that gross earnings reduced mostly from fees and commissions should be a telling concern for the Management of Fidelity Bank Plc. Post covid-19 would birth the dawn of a new era for business processes. The management must guarantee the usability of its electronic banking channels, promotion of its cards, and with urgency, implement improved service delivery mechanisms to ensure that it is the first port of call to customers for general payments and remittances.
These measures are of grave significance in the bid to bridge its widened fee and commission income gap.
Holistically, in the 9 months ended September, it is worthy of note that the bank made certain advancements. Customer Deposits, Net Loans and Total Assets all grew in double digits. Customer Deposits grew by 22.3% from N1.2billion to N1.5billion, Total Assets also rose by 21% from N2.1billion in 2019 to N2.5billion, and Net Loans rose by 12.9% to N1.3billion from N1.1billion.
Airtel is paying up its debts
Airtel’s annual report revealed that the company has a repayment of $890 million due in May, as well as, an installment of $505 million due in March 2023.
Airtel’s presence in 14 countries from East Africa to Central and West Africa would have been impossible without relevant financial investments. But, while the funds have been key to its growth in the past few years, many of its financial obligations are starting to mature quickly.
The Covid-19 pandemic has had negative economic effects on different sectors of the economy; however, the resilience of the telecom sector is evident in an increase in Airtel’s income. The overall performance of Airtel increased with a revenue growth in constant currency of 19.6% in Q2 compared to 16.4% recorded in Q1, while revenue on reported basis increased by 10.7% to $1.82 billion, with Q2 revenue growth of 14.3%.
Unilever Nigeria Plc: Change in management has had mixed impact
9 months into the change of management, Unilever Nigeria Plc’s performance in Nigeria has been largely underwhelming.
Change in the management of a company is never a walk in the park. Transitions usually take time to yield the desired results. Organizations can look to past successful managerial transitions for inspiration, but not for instruction because there is no defined playbook. The decision to replace Mr Yaw Nsarkoh, who served as the Managing Director of Unilever Nigeria Plc until the end of 2019 was plausible, but adjustments were never going to be an easy task.
Mr Nsarkoh had served as Managing Director of the company for 5 years and steered the course of its proceedings with remarkable skill up until the financial performance disaster which culminated in his resignation on November 28th, 2019.