RMBN Stockbrokers sees growth in Nigeria’s cement sector

RMB Nigeria (RMBN) Stockbrokers, in its research, has forecast a positive outlook for the nation’s cement sector and believes 2018 could be the beginning of the next growth cycle for cement consumption in the country.

The stockbrokers forecast Nigeria’s cement consumption to rebound at seven per cent year-on-year in 2018 compared with a 17 per cent decline for 2017, especially as Nigeria exits a challenging economic downturn in 2017.Furthermore, the group also expects stronger consumption growth at 12 per cent CGAR over 2018 through 2023.

The Head of Research at RMBNS, Gbenga Sholotan, said there is supportive cement consumption drivers from the emergence of concrete roads and housing deficit, which could unlock 53 metric tonnes (mt) and 24mt respectively by 2020.Besides, government’s commitment and implementation as well as ongoing public-private partnership infrastructure financing initiatives are positives for cement demand.

However, the key risk for the Nigeria’s cement sector, according to the report, in 2018, is the possibility of a price cut based on RMBNS in-house FCF margin-cement price parity model, as the brokers reasoned cement prices could decline by about 12 per cent in 2018 after almost 60 per cent year-on-year increase in 2017. 

“The likelihood of BUA’s 3mt p.a. OBU II plant starting operations in 2018 further supports our view, given that historically, some price cuts have been implemented in the sector when smaller players announce new capacity,” he said.On a stock level, RMBNS recommended that investors Overweight Dangote Cement, setting a 12-month target price of N271 per share and Underweight Lafarge Africa at N49 per share.

RMBNS is of the view that Dangote Cement’s 2018 cement volume could come in higher at 11 per cent year-on-year to 24.5mt, with 2018 FCF growth robust at 55 per cent year-on-year (N296 billion), implying attractive FCF yield of seven per cent on moderate capital expenditure needs. On Lafarge Africa, RMBNS sees limited catalysts, negative excess return estimate of a minus eight per cent, risks of potential operational plant downtime from ageing plants and continued unfavourable market dynamics in South Africa as supportive of its underweight rating.