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Nigerian Cement Sector - Still room for strategic selection

• In line with the capacity expansion in Nigeria, the stage for competition has become far wider with price likely to be the new play. In this report, we update our views on the Nigerian cement sector with a more sanguine outlook on consumption following the industry wide volume growth over H1 18 and the more convincing growth in government capital expenditure (capex) – with a multiplier impact on private consumption. Thus, we forecast volume growth of 16% to 21.6 million tons (Previous: +14.7% to 21.3 million tons) in 2018. Over the next five years, we estimate a more aggressive capex implementation by the FGN and even a more faster infrastructure development across the federating units, which necessitated our five-year compounded annual volume growth of 9%.
• Accompanying our optimistic volume growth in the sector is a robust gross margin expansion and EBITDA growth over the same period. Our sense of margin and EBITDA expansion is anchored on the improved energy and cost efficiency across the sector. For context, after deviating from average of 43% (between FY 13-15) to 32% in FY 16, the energy diversification and price increase across the sector supported a 610bps expansion in gross margin to 37% in FY 17. On operational efficiency, despite the average higher cost per tonne (+41% YoY to N27,380) across the industry in 2017, sector EBITDA to sales still expanded 372bps YoY to 37.6%. In the years ahead, we expect increased utilisation of locally produced coal and better efficient utilisation of the diversified energy sources to have more compelling impact on margins.
• We believe that our coverage cement companies are trading cheaper on respective FY 19E valuation basis with PE and EV/EBITDA of 15.8x and 9.1x relative to Bloomberg averages of 18.7x and 9.0x for Middle East and African peers. However, within our coverage companies, we prefer DANGCEM as we believe it is attractively priced and presents a higher upside potential relative to peers. Beyond valuation, DANGCEM offers the best opportunity to play the cement sector in Nigeria, given its reducing revenue concentration, defensive earnings quality, ability to determine industry margin and, limited risks to forecast and earnings surprise.