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Nigeria Cement Sector - FY'16 Earnings Preview

2016 was quite a tough year for the cement industry. Whilst cement consumption remained resilient despite the harsh economic terrain (up c.12% at 9M’16), earnings came under pressure amidst a number of challenges. The persistent attacks on oil installations in the Niger-Delta region, the unstable operations of the local petroleum refineries, as well as the scarce dollar supply (for imported LPFO) were critical challenges for most gas and LPFO dependent cement producers in 2016 as it ultimately led to shortages in energy supply – disrupting production.

As a result, gas dependent producers had to switch to more expensive fuel mix - LPFO (3.0 to 5.0x) and imported coal (1.5 to 2.0x) - to keep up with production. For LPFO users, plant shut down was quite frequent over the course of the year amidst LPFO shortages. Pressured by the energy challenges, coupled with the impact of naira devaluation on FX-priced input materials and dollar-denominated liabilities, operating margins shrunk significantly across the industry as at 9M’16.

Although these pressure points persisted in Q4’16, we note that the severity of some reduced slightly particularly on the key producers who executed a couple of restructuring moves prior to and during the quarter. Overall, FY’16 earnings are not expected to be impressive. Save for DANGCEM, most of our coverage cement companies are expected to report a severe fall in bottom-line. Thus, we do not expect attractive dividend for the period. We expect shares of coverage companies to trade sideways with a bearish bias following earnings release.