Nigeria Industrial Goods Sector - Q3'19 Earnings Preview

Q3'19 Earnings Preview                                                       

Coming off a strong 2018, the Nigerian cement market has continued to expand in the first half of 2019, largely supported by private sector demand. However, when compared to the c.11% growth in cement sales in 2018, 2019 kicked off at a slower pace. Cement sales in H1’19 were estimated to be 11.5 million MT, up a mild 3% y/y amidst a dearth of public sector expenditure.                 

We expect weak cement consumption growth to have persisted in Q3’19 amidst still-weak capex disbursement in the quarter as well as the seasonal decline in consumption. Overall, we forecast a 1% q/q decline in Nigeria’s cement consumption to 5.4 million MT.  Furthermore, amid intensifying competition, we forecast a c.2% q/q drop in average revenue/tonne as key producers reduce prices and increase promotion activities (through pricing rebates) in the seasonally weaker Q3. 

Driven by the lower average revenue/tonne, we forecast a q/q drop in operating margins across key producers in Q3. We also expect lower finance charges in the quarter amidst significant deleveraging from key cement producers. Despite this, we still expect Q3’19 PBT to fall mildly across our key producers, driven by lower topline and weaker operating margins across board.                      

In the capital market, sentiment across the Industrial Goods sector has been weak, with the sector closing mildly lower in the third quarter. While sentiment is expected to remain largely tepid for the rest of the year, we highlight that counters in the Industrial Goods sector have become attractive, with many of the key names trading well below their 3-year PE averages and intrinsic valuation.