nigerian cement industry - proshareng.com · of nigerian cement companies. we maintain our neutral...

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Recommendations and opinions in this report, unless otherwise stated, are based on a combination of discounted cash flow analysis, ratio analysis, industry knowledge, logical extrapolations, peer group analysis and company specific and market technical elements (events affecting both the financial and operational profile of the company). Forecasting of company sales and earnings are based on segmented top-bottom models using subjective views of relevant future market developments. In addition, company guidance and financial guidance is taken into account where applicable. This report is on a stock under “active coverage”. All prices provided within this research report are taken from the close of business on the day prior to the issue date unless explicitly stated. Exotix Partners LLP is authorised and regulated by the Financial Conduct Authority. Please see disclosures on the last page of this document. Required Disclosures: http://www.exotix.co.uk/uploads/exotixpartnersllpresearchdisclosuresib.pdf.

Setting new profit margin levels

In this note, we revise our earnings estimates and target price for our universe

of Nigerian cement companies. We maintain our neutral stance on the sector

on the basis of: (1) a downward revision of our earnings outlook over the

medium term owing to the weak macro backdrop and intense competitive

pressures; and (2) weaker profit margins and RoE trajectories. Moreover, we

think the market has now incorporated what we believe to be a fair premium

over peers for the sector multiples.

Setting new margin levels. Core operating margins have been on a

downward trend, declining 3ppt pa on average since FY12. This, in our view, is

a result of persistent and under-appreciated structural forces, namely: (1)

excess production capacity as companies continues to amass capacity ahead

of the consumption growth curve. For context, consumption has only grown at

a meagre 6% average over the past five years (FY10-FY15), while capacity

has grown at a compounded annual rate of 24% over the same period; (2)

weak selling prices which reflects the tense competitive landscape; and (3)

mounting cost-side headwinds on the back of erratic gas supply and naira

weakness. We expect that, within the context of such structural changes,

margins will remain around their currently depressed levels with little room for

improvement well into the medium term.

But some positives — Recovery in cement consumption. In spite of the

challenging macroeconomic environment and fiscal position, cement

consumption grew 15% yoy in H1 16 by our estimate, driven primarily by a rush

to complete construction in fear of further hikes in building material prices, and

the demand for inflation-protected assets such as real estate properties. We

take the view that a gradual recovery in public sector spending and an

improvement in retail presence could sustain the positive trend in consumption

over the medium term.

We update our key assumptions. We review our earnings estimates in light

of the relatively weak sector fundamentals over the medium term. We cut

sector earnings growth, estimating a 26% decline in FY16f net earnings

(previously -11%) and our medium-term earnings growth estimate to 6% pa

over FY15-FY18f (previously +10%). Similarly, we expect medium-term

operating margins to trend lower at an average of 29.4% over FY15-FY18f,

representing a sharp decline from the five-year historical average of 39.3%.

We remain broadly neutral on cement stocks. Current sector multiples of

11.6x and 7.9x FY17f earnings and EBITDA respectively, are at a justifiable

premium to SSA peers which trades on 8.6x and 6.9x FY17 earnings and

EBITDA respectively. We reiterate our Sell recommendation on Lafarge Africa

(NGN52.00/share TP) and maintain our Hold recommendations on Dangote

Cement (NGN188.00/share TP), Ashaka Cement (NGN21.00/share TP) and

Cement Company of Northern Nigeria (NGN7.00/share TP). If you must own a

Nigerian cement stock, we recommend Dangote Cement, which we believe is

the most resilient to current economic headwinds.

.

NIGERIAN CEMENT INDUSTRY

14 September 2016

MATERIALS

Contact:

Jumai Mohammed

+234 808 811 0302

[email protected]

Contact:

Jumai Mohammed

+234 808 811 0302

[email protected]

Company Ticker Rating Price

(NGN)

New TP

(NGN)

Old TP

(NGN)

ETR Mkt Cap

(NGN'bn)

Dangote Cement DANGCEM NL Hold 173.00 188.00 176.00 13% 2,948,008

Lafarge Africa WAPCO NL Sell 58.00 52.00 66.00 -10% 290,603

CCNN CCNN NL Hold 5.95 7.00 7.8 18% 7,540

AshakaCe ASHAKACE NL Hold 19.95 21.00 22.5 6% 44,677

Nigerian cement companies - equity ratings and target prices (9 September 2016)


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Introduction

The Nigeria cement sector has historically outperformed the broader Nigerian equities

market. Over the last five years the sector returned 67% vs +31% for the broader

market based on the NSE 30 index. This in our view has been a reflection of fairly

resilient sector earnings, and excitement around aggressive sector capacity

expansion and M&A — which have recently reshaped the industry although not

necessarily translated into value creation for investors. With the exception of the noise

around corporate actions, performance has been persistently weak, evident in the

broad-based decline in core operating margins and RoEs, down 7ppt and 11ppt

respectively between FY12-FY15. More recently, however, the sector has

underperformed the broader Nigerian market and Frontier materials alike (see Figures

1 and 2 below), down 22% YTD, as fundamentals prevail and performance begins to

mirror the general economic cycle and the weakness in construction activities.

Notably, the weaker margin trend has become even more pronounced recently,-12ppt

yoy in H1 16.

The key question facing investors today is whether this notable decline in profitability

will persist into the medium to long term. In our view, the industry has now reached a

new mean margin level, with little room for improvement within our forecast period. In

light of this we remain broadly neutral on the industry over the medium term. We

believe the market has now incorporated a fair value for the sector, evident in current

trading multiples of 10.6x FY16f EV/EBITDA which we believe is at a justifiable

premium to SSA peers which trade on a FY16f multiple of 8.8x and to its five-year

historical average EV/EBITDA of 8.1x.

Figure 1: Nigerian cement sector vs market — share price trend

Figure 2: Stock performance, YTD (%)

Source: Bloomberg Source: Bloomberg, Exotix estimates

In this note we evaluate the current themes shaping the Nigeria cement industry and

their likely direction in the medium term. In so doing we find a number of under-

appreciated structural forces which suggest a persistent margin reversal, namely (1)

excess capacity; (2) weak selling prices; (3) mounting cost-side headwinds; and (4)

possible amendment of tax concessions. Accordingly, our analysis highlights a

stabilisation of margins at currently depressed levels.

Subsequently, we provide more detailed discussions on companies in our coverage –

see page 16.

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Nigeria cement SSA Materials Nse 30 FM Materials


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Key themes shaping the industry in the medium

term

The year has proved challenging for cement producers in Nigeria. Latest growth

figures (-2.06% GDP growth in Q2 16) have indicated that the economy is indeed in a

recession, presenting probably the toughest year for cement stocks in the medium

term. This reflects the slump in oil prices and production above all else, but also a

fallout from delays in fiscal and monetary policy response. As a result, growth

expectations for the economy have deteriorated, evident in the IMF’s recent

downward revision of GDP growth estimates to -1.8% in FY16 (previously +2.3%) and

+1.1% for FY17 (previously +3.5%). We anticipate that even under a benign recovery

scenario in H2 16, the Nigerian economy will struggle to realise growth higher than

-0.8% in FY16.

We take the view that the economy will begin to recover in H2 16, and consequently

expect an improvement in fiscal position which will provide support for cement

consumption. However, we consider the sector’s investment case over the medium

term will be threatened by developments relating to: (1) excess production capacity;

(2) weak selling prices; (3) mounting cost-side headwinds; and (4) possible

amendments to tax incentive laws.

Recovery in cement consumption

We have observed an improved trend in cement consumption in recent quarters, up

15% yoy in 1H 16 (by our estimate), despite general economic weakness. In an effort

to better understand the unexpected demand trend, we highlight two lines of demand

for cement produced in Nigeria: (1) volumes consumed locally; and (2) re-exported

volumes (volumes exported by distributors from neighbouring countries who are

favoured by exchange rates and pricing in Nigeria).

Focusing on local consumption, we observed that the key driver of growth in H1 16

was from demand for the completion of private construction projects hastened by

inflationary pressures; we link this directly to inflationary pressures for two reasons: (i)

we believe there was a rush by home-builders to complete construction in fear of

further hikes in building material prices, and (ii) we suspect that there was an increase

in demand for inflation-protected assets such as real estate properties. Other

supporting factors are: (1) low base effect from weakness recorded in previous years;

and (2) we suspect increased retail penetration could also be a driver, as cement

players deepen route to market in an effort to counter competitive pressures in key

markets, although we do not have enough evidence to support that view currently.

Whereas most of these factors have begun to tail off given recent hikes in prices, our

view is that the impact of an improvement in retail presence could be sustained in

the coming periods. In addition to this, we expect a gradual recovery in public

sector demand.

Improving retail penetration

Local cement producers have become more proactive in deepening their RTM in a bid

to counter aggressive competition and have adopted unique approaches in doing so.

Lafarge’s approach has been to diversify its regional capacity to under-penetrated

markets in the south-south through Unicem, and the north-east through Ashaka

Cement. Dangote Cement, on the other hand, has recently revamped its distribution

channels by initiating key distributor schemes and increasing its retail outlets. This is a

strong positive for the company, in our view, given that there wasn’t much of a

relationship with its distributors in the past, which became evident when the company

incentives such as price cuts never reached the end-users as intended.

Even so, we believe Dangote’s approach of transporting cement over hundreds of

kilometres to depots or directly to end-users in other regions from the south, where it


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has amassed capacity, may not be sustainable into the long term due to high

transport costs. We believe that regional players will increase capacity, thereby

enabling them to dispatch cement to such markets at lower cost.

Recovery in public sector demand

We expect the government to increase its spending on construction in H2 16 in a bid

to remedy waning economic growth. While we expect the implementation of capital

projects to be low at just 50% as a result of the government’s poor fiscal position, we

are of the view that this level will still result in an improvement from the last 12-18

months which saw a near stand-still in construction activities.

Our estimate for total public sector consumption in FY16f is 2.5mt, significantly higher

(+109% yoy) than public sector consumption in FY15, although FY15 was a low base.

Our estimate is based on the following conservative assumptions: (1) 50%

(NGN794bn) of capital expenditure allocations is released and spent; given that

NGN400bn has been released so far; (2) cement accounts for c9% of the total project

costs in Nigeria according to the National Bureau of Statistics; and (3) cement prices

will average NGN28,400/tonne in FY16f. However, we note that the public sector

accounts for c15% of total demand, and highlight that we expect growth from the

private sector to slow due to increased constraints on consumer spending and higher

cement prices.

Cement volume outlook - we estimate 10% pa over the medium term

Accordingly, we estimate that cement volumes will begin to recover at 10% pa on

average over the medium term (FY15-FY18f) to 28.0mt by FY18f, slightly higher than

our previous medium-term average of 8% pa due to better than expected growth in

FY16f. Although we note that this contributes marginally to cement per capita

consumption (PCC), which grows marginally to 144kg by FY18f vs similar middle

income countries where consumption is expected to average 265kg per capita.

Figure 3: Nigeria - capital expenditure budget vs spend Figure 4: Nigeria Cement - cement consumption and PCC

Source: National planning commission, Exotix estimates Source: Company filings, Exotix estimates

Excess cement production capacity

At an effective size of 41.3mt, production capacity for the Nigerian cement industry

widely outpaces consumption (see Figure 5 below). The gap between capacity and

demand has been widening since 2011 as cement producers continued to amass

capacity ahead of the growth curve. To put this into perspective, we highlight that

while capacity has grown at a compounded annual rate of 24% over the past five

61%

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2009

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2016F

2017F

TOTAL EXP (actual) CAPEX budget (NGN'bn)

CAPEX release (NGN'bn) Budget implementation (%)

15 16 17

18 21 21 21

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26 28

31 34

97 101 107 111

127 123 119 123

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Local consumption PCC (Kg), RHS


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years (FY10-FY15), consumption has grown at a meagre 6% average over the same

period. Based on our conservative capacity assumption of 44.1mt by 2018, cement

consumption will have to grow 19% pa in the medium term, ahead of our 10%

forecast in the same period, for local production capacity to achieve 80% utilisation.

This is unachievable, in our opinion, given the challenges the industry faces which are

discussed in a later section of this note. We narrow the core drivers of excess

capacity to (1) latent demand, which remains untapped due to lack of commitment on

the part of government to infrastructure development, and to a lesser extent higher

price of building materials; (2) government protectionism and incentives in form of

import bans and tax holidays; (3) cheap Chinese funding for plant construction in an

effort to divert capital from its local over-invested industries; and (4) poor delivery by

the cement companies on their export strategies.

Figure 5: Nigeria Cement - production capacity (mt), dispatches (mt), utilisation rates (%)

Figure 6: Nigeria Cement - actual PCC vs capacity implied PCC, kg

Source: Exotix estimates and company data Source: Exotix estimates and company data

The fallout of such excesses has manifested in increasing competition, the resultant

volatility in cement prices and higher marketing costs to grow market share.

Consequently, profitability measured by return on assets (RoA) has shown a

downward trend. In the period between 2011 and 2015 RoA dropped 6ppt on average

annually to 8.7% in 2015. We see little room for improvement in efficiency over the

medium term; as such we forecast an average RoA of 7.4% over FY15-FY18f, a

notable drop from the five-year historical average of 13%.

Our estimate of 44.1mtpa capacity by FY18 includes existing infrastructure as well as

expected capacity which we believe has been reasonably funded. Local cement

producers, on the other hand, are more optimistic on bringing more capacity to the

market by 2018, which worsens the investment case for the industry. The only cement

companies we realistically see bringing on additional capacity before the end of 2018

are UNICEM, which is at quite an advanced stage of its 2.5mtpa expansion, and

Ashaka Cement, via a debottlenecking programme on existing plant.

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Production capacity (mt) Utilization rates (%)

Consumption (mt)

94 91

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176 172

219 231 225 233 227

97 101 107 111 127 123 119 123

136 144

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Capacity implied PCC (kg) PCC (kg)


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Table 1: Nigerian cement industry - local production capacity builds (2008 - 2018)

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Existing capacity

Dangote Cement (Obajana & Gboko) 8.0 - - - - - - - - - -

Lafarge Africa (WAPCO) 2.9 - - - - - - - - - -

CCNN 0.5 - - - - - - - - - -

BUA Group (Edo cement) 0.3 - - - - - - - - - -

Purecem 0.1 - - - - - - - - - -

Atlas 0.1 - - - - - - - - - -

UNICEM - 2.5 - - - - - - - - -

Lafarge Africa (Lakatabu) - - - 2.5 - - - - - - -

Dangote (Ibese) - - - 6.0 - - - - - - -

Dangote (Obajana) 5.3 - - - - - -

Dangote (Gboko) - - - - - 1.0 - - - - -

Dangote (Ibese) - - - - - - 6.0 - - - -

Dangote (Obajana) - - - - - - 3.0 - - - -

BUA Group (Edo cement) - - - - - - - 3.0 - - -

Total existing capacity 11.9 14.4 14.4 22.9 28.2 29.2 38.2 41.2 41.2 41.2 41.2

Additional funded capacity

CCNN - - - - - - - 0.1 - - -

UNICEM - - - - - - - - 2.5 - -

AshakaCem (via debottlenecking) - 0.1 0.1 0.1

Existing+ funded 11.9 14.4 14.4 22.9 28.2 29.2 38.2 41.3 43.9 44.0 44.1

Average utilisation 52% 56% 71% 53% 56% 70% 53% 50% 58% 62% 68%

Announced (yet to be funded)

CCNN 1.5

BUA Group (Edo cement expansion) 3.0

Dangote (Okpella) 3.0-6.0

Dangote (Itori) 3.0-6.0

Lafarge Africa (AshakaCem) 2.5

Lafarge Africa (Wapco) 2.5

Existing + funded + announced 59.6-65.6

Source: Company presentations, Exotix Research estimates

Weak selling pricing remains a key risk

We continue to think that the weak pricing trend represents a significant downside risk

in Nigeria over the medium term. As cost pressures intensify, we doubt that prices

could increase enough to counter the effects, implying that margins remain at risk.

We point to three observations in support of this: (1) deteriorating price-cost spread

(see Figure 7), suggesting that cement prices more recently reflect the tense

competitive landscape as opposed to input cost movements which they historically

mirrored; (2) disruptive forces owing to aggressive capacity build despite large under-

utilised capacity; and (3) recent rising volatility in cement prices which indicates that

the likely direction of prices in the medium term will be downwards. We estimate a 2%

average yearly decline in prices over the medium term to NGN28,345/tonne by FY18f.

H1 16 results indicate that cement prices have already declined by 24% yoy. We

however expect that prices will start to inch upwards in H2 16 following recent price

hikes (NGN100/bag in March, NGN50/bag in May, NGN50/bag in June and

NGN600/bag in August). While we expect these increases to partly offset the low

levels of H1 16, we also note that there could be an impending reduction in prices

later in the year in the event of the following: (1) Unicem beginning to operate its new


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2.5mt line, likely in October, and/or (2) Dangote completing its coal conversion and

milling plant which is due in November 2016. In summary, prices will remain volatile

but with a clear downward trend, and we therefore forecast a 5% decline in prices in

FY16f to NGN28,400/tonne and a 2% average decline over the medium term to

NGN28,345/tonne in FY18f.

Figure 7: Nigeria Cement – price/cost spread (indexed) Figure 8: Nigeria Cement- average selling price (NGN’tonne)

Source: Company presentations, Exotix Research estimates Source: Company presentations, Exotix Research estimates

Mounting cost-side headwinds

Input cost pressure — Input costs have risen sharply in recent quarters, and will

continue to do so in the next 12-18 months, in our view. For context, Nigeria’s

headline inflation accelerated for the seventh consecutive month in July, reaching

17.1% yoy. The core sub-index (housing, water, electricity, gas and other fuels)

accelerated even more rapidly by 31% yoy to 16.9% in July. Input costs will continue

to rise this year and next as producers realise the full extent of currency depreciation,

down 56% YTD. Bear in mind that the currency was only floated in June, half-way

through the year. The re-emergence of militant attacks on oil installations which has

led to erratic fuel supply, particularly of gas, to companies has further compounded

cost challenges. As a result, companies reported an unfavourable fuel mix towards

more expensive alternatives in H1 16 and periods of production stoppage in some

extreme cases.

Exchange rate volatility - this represents one of the most significant downside risks

to company earnings, which typically rely heavily on US dollar-linked cost

components. Following the floating of the currency in June, the exchange rate has

been volatile, leaving cement companies vulnerable to the depreciation of the naira.

We estimate that cement producers went from settling the majority of their cash cost

at NGN200/US$ as at end-2015 to NGN282/US$ as at end-Q2 16, and even higher at

NGN315/US$ currently. Compounding issues further is the low dollar liquidity in the

FX market which could imply: (1) further depreciation of the currency; (2) inability to

mitigate FX impact by stocking raw materials and fuel ahead of unfavourable FX

movements; and (3) increasing dollar payables. It is due to these setbacks that we

see a tick-up in cash costs, even under the assumption that gas supply stabilises from

H2 16.

Beyond the negative impact on costs, we expect the net impact of the depreciation of

the naira to be positive in FY16f for some stocks within our coverage. This is due to

exceptional gains that we expect them to record in the year from the revaluation of

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8

their dollar assets. However, we highlight that these gains might not be sustained in

subsequent periods, depending on exchange rate movements. At the winning end of

the spectrum is Ashaka Cement, whose fuel mix has gradually been enhanced by the

use of local coal which could improve further by 2018. Dangote also stands out as a

beneficiary of the naira devaluation, albeit to a lesser degree than Ashaka, due to the

scale of its local operations, balanced pan-African spread and a relatively low US$

loan exposure. Conversely, producers with weak operating leverage such as CCNN

and Lafarge Africa are negatively impacted by further devaluation. Lafarge Africa will

be further pressured by its considerable dollar loan exposure.

Re-emergence of militant groups: Energy supply in Nigeria has always been erratic

due to poor infrastructure, however in the past six months this challenge has further

intensified following several attacks on oil installations by new militant groups.

Domestic gas supply dropped 15% yoy in June to a multi-period low (see Figure 9).

As a result, cement producers have recorded an unfavourable fuel mix as the use of

expensive alternatives rose. While producers were able to pass on cost pressures

historically, we believe that they will have to shoulder the brunt going forward due

primarily to increasing competitive pressures.

Figure 3: Nigeria - domestic gas supply (mmscf), mom change (%)

Figure 4: Nigeria Cement - energy cost profile (NGN per tonne)

Source: NNPC Source: Company accounts, Exotix research estimates

Greater operating costs as companies deepen their route to market and continue

to spend their way to defend market share and strengthen their brands in an

increasingly competitive landscape. We estimate marketing and distribution costs to

sales will increase by an average of 4% pa over FY15-FY18f for the companies in our

coverage universe.

Possible amendment to tax incentive laws

In August 2016, the federal government set up a committee for the review and update

of the national tax policy, supporting our view that there is considerable downside risk

that the current administration will review the law granting tax concessions to cement

producers who have over-invested in new capacity. We hold this view in light of

pressing fiscal challenges and on the basis that the objective of such incentives,

which was to spur local production, has been met. Contrary to our expectations,

however, local cement producers are of the opinion that tax policies will remain

unchanged.

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Domestic gas supply (mmscf) % change (RHS)

7,576 8,269 8,541

8,144 8,710

9,891 9,311

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2011 2012 2013 2014 2015f 2016f 2017f


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Changes to our earnings estimates and outlook

In our last sector note (Nigeria Cement Industry - losing its charm over the medium

term), we had forecast a considerable deterioration in the earnings of the companies

in our universe over the medium term. The sector has however shown a weaker trend

in recent quarters than anticipated, which highlights the pressures of a more

challenging environment - we discuss this in greater detail later in the note. In light of

the relatively weak sector fundamentals over the medium term, we cut sector earnings

growth, estimating a 26% yoy decline in FY16f net earnings (previously -11%) and our

medium-term earnings growth estimate to 6% pa over FY15-FY18f (previously +9%).

Table 2: Nigerian cement companies – changes to net income estimates (NGN bn)

FY16f FY17f FY18f

New old % New old % New old %

Dangote Cement 181,110 171,333 6 205,732 184,053 12 233,628 222,359 5

Ashaka Cement 2,601 2,504 4 2,095 3,332 (37) 2,859 4,462 (36)

Lafarge Africa (22,710) 24,695 nm 30,366 26,608 14 20,832 31,009 (33)

CCNN 1,045 1,352 (23) 1,205 1,097 10 1,088 1,192 (9)

Source: Exotix estimates

Similarly, margins have been on a downtrend, stemming from increasing competition

ahead of gains in efficiencies. We forecast a sharp decline in industry operating

margin to 24.2% in FY16f, vs 33.6% in FY15, following the trend seen in H1 16 where

margins declined 12ppt vs H1 15. In the same vein, we expect medium-term

operating margins to hover at 29.4% over FY15-FY18f, representing a full 10ppt

decline from the five-year historical average of 39.3%.

Figure 11: Nigeria Cement - quarterly sector operating margins (%)

Figure 12: Nigeria Cement - margins (%)

Source: Company reports, Exotix estimates

Source: Company reports, Exotix estimates

On our estimates, the weakest performers from an earnings perspective over the

medium term will be Lafarge Africa and CCNN, -10% pa and -3% pa respectively

between FY15-FY18f due largely to their relatively high vulnerability to the changing

competitive environment, cement prices and naira depreciation. Coincidentally, these

represent areas that pose the greatest downside risk over the medium term, in our

view. In Tables 3 and 4 below, we present the sensitivity of cement companies in our

coverage universe to changes in prices and the exchange rate. We observe that both

Lafarge Africa and CCNN fall within the bottom tier on operating leverage vs the rest

of our universe. In addition, we note that Lafarge has a sizeable US dollar debt

34.7

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16.5 21.5

31.9

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-23.5

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80

2Q12 4Q12 2Q13 4Q13 2Q14 4Q14 2Q15 4Q15 2Q16

30.1

42.6 40.8

42.3 39.0

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2009 2010 2011 2012 2013 2014 2015f 2016f 2017f 2018f

Operating margin Net margin


10

exposure which magnifies its losses. Conversely, Dangote Cement’s relatively large

scale helps it absorb some of the pressures, and also it enjoys a net positive impact

from FX exposure due to its diversified regional exposure.

Table 3: Nigeria Cement Companies — earnings sensitivity to changes in FY16f prices

% price change -15% -10% -5% 0% 5% 10% 15%

Dangote Cement -33% -22% -11% 0% 11% 22% 33%

Ashaka -94% -63% -31% 0% 31% 63% 94%

Lafarge Africa -110% -73% -37% 0% 37% 73% 110%

CCNN -131% -87% -44% 0% 44% 87% 131%

Source: Exotix Research estimates

Table 4: Nigeria Cement Companies — earnings sensitivity to changes in exchange rate in FY16f

Average exchange rate 200 225 250 275 300 325 350

Dangote Cement -5% -2% 0% 2% 5% 7% 9%

Ashaka -11% -5% 0% 5% 11% 16% 22%

Lafarge Africa 97% 48% 0% -48% -97% -145% -194%

CCNN 103% 52% 0% -52% -103% -155% -206%



11

Valuation - Maintain neutral view on the sector

More recently, cement stocks have lagged the market, due to recent weakness in

earnings and muted construction activities, in our view. The cement aggregate index

has significantly trailed both the broader market and material peers during the year,

bucking historical trends (down 22% YTD vs NSE 30, down 4% YTD and MSCI

frontier materials, down 3% YTD). Based on our estimates, we believe that the market

now values the Nigerian cement sector fairly, as evidenced by the current trading

multiples of 10.6x FY16f EV/EBITDA, despite a de-rating since the start of the year

(-22% YTD). Current multiples represents a justifiable premium to SSA peers which

trade on a FY16f multiple of 8.8x and to its five-year historical average EV/EBITDA of

8.1x. We feel the premium is justified owing to the better cash generation of the

Nigerian cement sector. We would be unable to justify a much greater premium.

Figure 13: Historical price trend, Cement stocks vs NSE 30 vs FM Materials

Source: Bloomberg

Recently, there has been a deviation in PE and EV/EBITDA multiples. EV/EBITDA

multiples were elevated until the start of the current year due to the depressed core

operating performance of the cement companies. PE multiples, on the other hand,

peaked in mid-2014 and have appeared cheap since then, reflecting market-positive

sentiments around corporate actions. More recently, however, sector multiples have

hovered closer to their historical average, as fundamentals prevail and performance

begins to reflect the general economic cycle and the weakness in construction

activities.

In valuing companies in our universe using relative valuations, we have placed more

emphasis on the one-year and two-year forward EV/EBITDA due to depressed

earnings, which impair a PE-based valuation approach.

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50

100

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Sep-1

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Lafarge Africa AshakaCem CCNN Dangote cement NGSE30 Index FM Materials Cement sector index


12

Figure 14: Nigeria Cement - one-year forward PE Figure 15: Nigeria Cement - one-year forward EV/EBITDA

Source: Bloomberg, Exotix estimates Source: Bloomberg, Exotix estimates

0

50

100

150

200

250

300

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5.0

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Sector PE+1 5-year average Sector price index

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Sector price index


13

Table 5: Nigerian Cement Companies - comparative valuation (FY) as at 14 September 2016

Price MktCap PE (x) EV/EBITDA (x) EBITDA margin (%) EPS growth (%)

Name Country $ ($mn) 2016f 2017f 2016f 2017f 2016f 2017f 2016f CY15 -

CY18f

Dangote Cement Nigeria 55.6 9,474 13.1 12.9 10.0 8.3 43 46 -2 8

Lafarge Africa Nigeria 17.9 992 -10.9 9.1 12.4 8.0 15 22 nm -16

CCNN Nigeria 1.9 24 5.7 5.6 2.9 2.8 19 19 -13 -3

Ashaka Cement Nigeria 6.3 142 13.6 19.0 17.0 8.3 11 21 -6 1

Bamburi Cement Kenya 158.0 574 13.6 11.4 6.4 5.5 20 21 9 9

Arm Cement Kenya 27.7 137 9.6 6.2 7.8 6.6 27 28 38 27

EAPCC Kenya 24.7 22 -8.1 -8.1 13.7 11.5 9 9 -50 nm

Tanga Cement Tanzania 0.9 1 3.4 3.4 3.7 3.7 26 27 13 5

Tanzania Portland Tanzania 1.1 2 6.2 5.9 5.8 5.5 42 43 11 7

Ciments Du Maroc Morocco 121.9 18 22.6 21.1 9.7 9.3 42 43 -12 0

PPC Ltd South Africa 45.5 239 8.7 7.9 7.5 6.3 30 32 -47 5

Nigeria 5.4 11.6 10.6 7.9 17 21 -6 -1

SSA 7.0 8.6 8.8 6.9 26 28 -4 5

Vicat Cement FRANCE 64.7 2,905 18.5 14.9 7.5 6.7 19 20 16 17

Imerys SA FRANCE 72.0 5,740 14.6 13.3 7.8 7.3 19 19 415 83

Heidelberg Cement GERMANY 92.3 18,308 16.4 13.7 6.8 6.1 19 20 25 21

CRH Plc IRELAND 34.2 28,386 19.8 16.6 9.3 8.4 11 12 77 32

Buzzi Unicem ITALY 21.2 3,980 17.3 14.1 7.9 7.2 20 21 64 33

C. Portland SPAIN 6.7 349 -6.4 -8.6 15.7 13.2 18 19 -21 -41

LafargeHolcim SWITZERLAND 53.7 32,581 22.8 17.0 8.2 7.7 20 22 -195 -217

Vulcan Materials Co US 114.5 15,234 33.0 24.0 16.4 13.1 28 31 109 53

Martin Marietta US 184.6 11,712 25.4 19.3 13.6 11.3 28 30 60 35

Average - DM 18.5 14.9 8.2 7.7 19 20 61 32.2

China Resources C H HONG KONG 0.4 2,637 14.3 11.1 7.2 6.4 18 19 41 26

China Shanshui Cement CHINA 0.8 2,741 -11.6 -57.0 nm 17.0 5 14 -71 nm

BBMG Corp-H CHINA 0.4 6,262 17.8 15.0 7.6 6.8 15 16 35 19

Cementos Argos sa COLOMBIA 4.1 5,467 27.9 24.7 11.9 10.5 20 21 17 17

Misr Cement (Qena) EGYPT 9.3 276 9.2 12.7 13.5 8.8 32 25 -15 5

Arabian Cement Co EGYPT 0.8 290 8.8 7.0 4.5 4.3 31 29 6 16

Ambuja Cements INDIA 4.2 8,291 39.1 28.8 25.9 16.8 19 20 74 47

Ultra tech cement ltd INDIA 61.2 16,808 35.0 26.7 15.9 12.7 21 23 40 33

Holcim Indonesia INDONESIA 0.1 664 29.5 26.6 9.4 8.5 16 16 69 25

Indocement INDONESIA 1.3 4,926 14.5 14.2 8.9 8.3 34 33 3 3

Holcim Maroc MOROCCO 250.6 1,240 22.7 21.5 7.4 7.2 41 41 4 2

Saudi Cement Company SAUDI ARABIA 14.9 2,279 9.6 10.3 9.3 9.9 60 59 -5 -6

Tokyo Cem. Co Lanka SRI LANKA 38.5 12,156 7.6 6.2 3.8 3.2 14 15 21 21

Asia Cement Corp TAIWAN 0.9 3,068 17.9 14.8 15.3 14.8 18 18 11 11

Taiwan Cement Corp TAIWAN 1.2 4,410 20.5 17.8 11.1 10.1 21 22 17 13

Siam cement public

company ltd

THAILAND 15.6 18,666 13.2 12.9 9.4 9.1 18 18 8 4

Akcansa TURKEY 4.5 862 8.8 8.5 6.0 5.8 29 28 2 4

Hatien 1 Cement Jsc VIETNAM 1.2 388 9.3 8.0 6.6 6.1 24 24 25 20

Average - EM 13.8 12.8 10.3 8.9 20 22 9 8

Source: Bloomberg, Exotix research estimates


14

Strategy and changes in target prices

Strategy - Maintain a neutral view on the Nigerian cement industry

We remain broadly neutral on the Cement sector over the medium term on the basis

of earlier discussed headwinds - particularly the weaker earnings outlook. Moreover,

we believe the market has now incorporated a fair value for the sector, and current

multiples as we earlier noted represent a premium to both SSA peers and historical

averages. While we feel the premium is justified owing to the better cash generation

and size of the sector, we struggle to justify a much greater premium, hence our

neutral view.

However, should investors be inclined to hold a stock in the Nigerian cement sector,

our preferred company is Dangote Cement. This is because the group has proven

more resilient and adaptable in a challenging environment than local peers. We have

therefore become more confident in its medium-term growth outlook as we believe

that the group is poised to deliver high single-digit EPS growth over the medium term,

towering above peers, although it is unlikely to accomplish this in FY16 (especially

with cost headwinds). Furthermore, we think Dangote Cement continues to present an

attractive dividend story.

Summary of changes in target prices

Below we present the companies in our universe in Nigeria along with our investment

case. We maintain our previous recommendations on the stocks although at revised

target prices.

Table 6: Nigerian cement companies - equity ratings and target prices (9 September 2016)

Company Ticker Rating

Price

(NGN)

New TP

(NGN)

Old TP

(NGN) ETR

Mkt Cap

(NGN'bn)

Dangote Cement DANGCEM NL Hold 173.00 188.00 176.00 13% 2,948,008

Lafarge Africa WAPCO NL Sell 58.00 52.00 66.00 -10% 290,603

CCNN CCNN NL Hold 5.95 7.00 7.8 18% 7,540

AshakaCem ASHAKACE NL Hold 19.95 21.00 22.5 6% 44.677


Ashaka Cement — we maintain our HOLD recommendation, based on a revised

target price of NGN21.00, implying a +6.1% ETR. Our recommendation is based on

(1) downward revisions of our core operating assumptions following recent earnings

releases - particularly a weak performance in H1 16; (2) its bottom-tier return profile,

below its cost of equity and; (3) relatively rich valuation as it trades at an unjustified

premium to peers. Also we believe low liquidity in the stock could keep its share price

range-bound.

CCNN — we reiterate our HOLD recommendation on CCNN based on a revised

target price of NGN7.00 implying an 18% ETR. Our recommendation reflects

concerns over its (1) weak earnings and RoE outlook over the medium to long term

owing to its high sensitivity to FX and cement price movements; (2) weak operating

leverage due to its uncompetitive cost base; and (3) lack of visibility over planned

capacity expansion. Lastly, we do not believe the current cheap valuations reflect the

weak fundamentals of the company.

Dangote Cement — we reiterate our HOLD recommendation based on a revised

target price of NGN188.00, implying a +13% ETR. Our recommendation is on

valuation grounds, which we consider fair and reflective of normalised returns. We are

now more constructive on the group’s earnings outlook owing to (1) its ability to


15

sustain volume growth and consolidate market share; (2) its proactive cost

engineering; and (3) its relatively superior profit margins and ROE, reflecting its

market dominance and effective cost management. We believe that these will provide

a cushion for the group’s earnings in periods of volatility.

Lafarge Africa — We maintain our SELL recommendation, based on a revised

target price of NGN52.00, implying a -10% ETR, on the basis of: (1) its weaker core

operations impacted by the recent deterioration of the Nigerian operating

environment; (2) lack of a coherent strategy to restructure the business in recognition

of greater industry competition, the need to refinance outstanding dollar-denominated

debt, and capacity expansion requirements; (3) debt overhang; (4) impending dilution

of minority shareholders; and (5) its relatively rich valuations.


16

COMPANY SECTION

17


Trading ahead of fundamentals

We maintain our HOLD recommendation on Ashaka based on a revised

target price of NGN21.00/share (previously NGN22.50/share), implying an ETR

of 6.1% (inclusive of 0.83% dividend yield). Our revision is based on (1)

downward revisions of our core operating assumptions following recent earnings

releases - particularly the weak H1 16 performance; (2) weak ROE profile, below

its cost of equity; and (3) relatively rich valuation. At its current price, Ashaka

trades on 19.0x and 8.3x FY17f PE and EV/EBITDA — an unjustified premium to

SSA peers which trade on FY17f PE and EV/EBITDA 8.6x and 6.9x respectively.

Limited upside owing to low stock liquidity - Ashaka Cement’s free float has

now been reduced to 15% following a voluntary tender offer by Lafarge which

saw an additional 2.5% of minority interest tendered. We fear the low liquidity of

the stock could keep its share price range-bound, as it has been over the last five

months.

We revise our FY16f earnings upwards—we raise our FY16f EPS by 4% to

NGN1.16 (from NGN1.12), representing a decline of 6% yoy, stressing the tough

operating environment in Nigeria. Our upward revision is aided by strong

exceptional FX gains owing to a revaluation of its unutilised letters of credit.

Excluding such gains we expect the company to record an operating loss of

NGN46mn, due to (1) a weaker than anticipated pick-up in cement demand

resulting from the weak economic environment and the slower rebuild in the north

east region following several insurgent attacks; (2) lower price realisation, as

Ashaka struggles to pass on cost-inflation to the market due to the weakness in

the north-east region; and (3) surge in electricity and energy costs in the year,

due to the +45% price hike in power implemented in February and higher diesel

price in the year, +30% YTD.

Our views on FY16f earnings estimates are consistent with the weak operating

performance in H1 16 when the company recorded a loss of NGN575mn.

However, we incorporate a slight improvement in operating profit in H2 16 aided

by (1) an uptick in volumes as the company benefits from a low base effect and

as public sector demand improves; and (2) higher selling prices following recent

selling price hikes (NGN100/bag in March, NGN50/bag in May, NGN50/bag in

June, and NGN600/bag in August) will slightly offset cost pressures.

Medium-term outlook - we forecast EPS growth of 4% (previously 17%) pa over

FY15-18f to NGN1.28, which compares to an average decline of 1% pa

historically over the last five years. Our outlook reflects: (1) a rebound in volumes

coming from a low base and a recovery in regional demand given the improved

security, and (2) energy cost savings as the company continues to invest in

power projects over the period, increasing its use of local coal over expensive

grid electricity, diesel and heavy fuel.

ASHAKA CEM PLC

14 September 2016

MATERIALS

Recommendation: HOLD

Price 19.95 19.95

Target price 21.00 21.00

Expected share price return 5.3% 5.3%

Expected dividend yield 0.8% 0.0%

Expected total return 6.1% 5.3%

Market cap (mn) 44,677 44,677

Market cap (US$mn) 142 142

Avg. daily volume (US$mn) 0.00 0.00

Market performance in NGN

YTD return (%) (19.6)

3-month return (%) (5.1)

1-yr return (%) (10.2)

Share price performance

Contact:

Jumai Mohammed

+234 808 811 0302

[email protected]

Year to 31 Dec 2014 2015 2016f 2017f 2018f

Revenue (mn) 21,134 17,415 16,300 19,683 22,438

Operating profit (mn) 3,984 2,911 (46) 2,172 3,190

Net Income (mn) 4,567 2,765 2,601 2,095 2,859

EPS 2.04 1.23 1.16 0.94 1.28

EPS (Old) 2.04 1.23 1.12 1.49 1.99

DPS 3.20 4.94 17.02 8.28 -

P/E (x) 5.1 10.3 13.6 19.0 13.9

EV/EBITDA (x) 3.4 5.3 17.0 8.3 6.2

Dividend yield (%) 2.3% 0.8% 0.8% 1.2% 0.0%

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Sep-15 Dec-15 Mar-16 Jun-16 Sep-16

NSE ASI AshakaCem

ASHAKA CEM PLC

18

Weak return profile. With regard to RoEs, Ashaka has historically reported the

lowest within our universe due to its high cash position, averaging 9% pa

between FY10-15 vs the SSA peer average of 20% in the same period and

notably below its cost of equity of 15.4%. We anticipate that this will decline over

the medium term, averaging 5% pa, due to weaker earnings and as its cash

balances grow. A caveat will be that management could deploy the cash on its

books to increase capacity investment which should increase its operating

leverage in the long term. In the event that capacity cannot be increased,

perhaps due to escalated security challenges in the region, management could

consider paying out excess cash as dividends to shareholders.

Figure 5: Ashaka Cement - earnings outlook vs select peers (FY15-FY18f), %

Figure 6: Ashaka Cement - RoAE vs select peers (FY16f), %

Source: Company accounts, Bloomberg, Exotix research

estimates


Table 7: Ashaka Cement - changes to estimates (NGN bn)

FY16f FY17f FY18f


Revenue 16,300 18,139 (10) 19,683 21,114 (7) 22,438 25,337 (11)

EBITDA 1,765 4,254 (59) 4,065 5,740 (29) 5,391 7,623 (29)

PBT 2,827 2,911 (3) 2,793 4,628 (40) 3,812 6,375 (40)

Net Income 2,601 2,504 4 2,095 3,332 (37) 2,859 4,462 (36)

Net Asset 53,376 55,683 (4) 55,081 58,639 (6) 57,416 62,269 (8)

EPS (NGN) 1.2 1.1 4 0.9 1.5 (37) 1.3 2.0 (36)

DPS (NGN) 0.2 0.2 4 0.2 0.4 (37) 0.4 0.6 (36)

EBIT margin % 10.8 13.5 20.7 17.1 24.0 21.3

Net margin, % 16.0 13.8 10.6 15.8 12.7 17.6

Source: Company accounts, Exotix Research estimates

Rich valuations – on our estimates, the company’s valuations are relatively rich:

currently trading on 2017F EV/EBITDA of 8.3x, which represents a considerable

premium to the SSA peer average of 6.9x and its historical averages of 4.0x. We

consider the premium unwarranted noting its weak profitability trend.

51.0

8.9 8.4 8.1 6.6 4.5 4.2 2.0 1.1

(0.0) (3)

(16) -20

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NN

Lafa

rge A

fric

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29.3

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(4.8

)

(17.0

)

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Ashaka

EA

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Lafa

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fric

a

ASHAKA CEM PLC

19

Valuation

We continue to use a combination of a DCF and relative valuation methodology,

applying equal weightings to both. Our DCF yields a TP of NGN25.70/share, while our

relative valuation based on one- and two-year forward PE and EV/EBITDA yields a

TP of NGN16.61/share.

Table 8: Dangote Cement - target price derivation (NGN)

DCF 25.70

Relative valuation 16.61

Target price (weighted average) 21.15

Source: Exotix research estimates

Risks to our valuation

Key risks to our forecasts, valuation and recommendation include:

Greater than expected competition, resulting in greater than anticipated volume

and pricing pressures.

Heightened security challenges which could cause further delays in returning

things to normality in the region.

Sooner-than-anticipated delivery on expansion plans, which could be a driver for

higher RoEs for the company.

Sensitivity analysis

In the table below, we present a sensitivity analysis of Ashaka Cement’s FY16f

earnings to changes in the NGN/US$ exchange rate and changes in cement prices

beyond our FY16 estimates.

Table 9: Ashaka Cement - sensitivity of FY16f EPS to changes in FX rates and cement prices

Changes in US$/NGN exchange rate

% change in rate 20% 10% 0% -10% -20% -30%

Average exchange rate 200 225 250 275 300 325

Pri

ce c

ha

ng

es in

Nig

eri

a (

2016

f)

15% 83% 89% 94% 99% 105% 110%

10% 52% 57% 63% 68% 73% 79%

5% 21% 26% 31% 37% 42% 47%

0% -11% -5% 0% 5% 11% 16%

-5% -42% -37% -31% -26% -21% -15%

-10% -73% -68% -63% -57% -52% -46%

-15% -105% -99% -94% -89% -83% -78%


ASHAKA CEM PLC

20

Table 10: Ashaka Cement - financial summary

Income statement (NGN mn) FY14 FY15 FY16f FY17f FY18f

Year-end: December

Revenue 21,134 17,415 16,300 19,683 22,438

EBITDA 5,744 4,513 1,765 4,065 5,391

Operating income 3,984 2,911 ( 46) 2,172 3,190

Pre-tax income 5,251 3,209 2,827 2,793 3,812

Post tax income 4,567 2,765 2,601 2,095 2,859

Net income 4,567 2,765 2,601 2,095 2,859

Balance sheet (NGN mn) FY14 FY15 FY16f FY17f FY18f

Cash and equivalents 11,053 6,923 4,436 4,441 6,554

Current assets 21,693 19,989 18,971 19,856 22,685

Non-current assets 49,834 50,387 52,651 55,088 54,682

Total assets 21,693 19,989 18,971 19,856 22,685

Current liabilities 8,129 7,397 8,282 9,899 9,987

Non-current liabilities 12,137 9,964 9,964 9,964 9,964

Long-term debt - - - - -

Minorities interest - - - - -

Shareholders' equity 51,262 53,015 53,376 55,081 57,416

Net debt/(funds) (11,053) (6,923) (4,436) (4,441) (6,554)

Change in working capital (5,024) (5,019) (584) 738 (628)

Cash flow statement (NGN mn) FY14 FY15 FY16f FY17f FY18f

Funds from operating activities 190 (1,542) 955 4,105 3,810

Funds from investing activities (1,536) (1,173) (3,106) (3,709) (1,173)

Funds from financing activities (941) (1,008) (336) (390) (524)

Operating free cash flow (2,616) (4,065) (3,120) (226) 2,015

Net increase/(decrease) in cash (2,286) (3,723) (2,486) 5 2,113

Key metrics FY14 FY15 FY16f FY17f FY18f

HEPS (NGN) 2.0 1.2 1.2 0.9 1.3

DPS (NGN) 0.5 0.1 0.2 0.2 0.4

BVPS (NGN) 22.9 23.7 23.8 24.6 25.6

Revenue growth (%) (3) (18) (6) 21 14

EBIT growth (%) 126 (27) (102) (4,777) 47

HEPS growth (%) 62 (39) (6) (19) 36

Margins and returns (%)

EBITDA margin 27 26 11 21 24

EBIT Margin 19 17 - 0 11 14

Pre-tax margin 25 18 17 14 17

Net margin 22 16 16 11 13

ROIC 8 5 - 0 4 6

ROE 9 5 5 4 5

Valuation and leverage metrics

P/E (x) 5.1 10.3 13.6 19.0 13.9

EV/EBITDA (x) 3.4 5.3 17.0 8.3 6.2

EV/Capacity (USD) 146 146 130 118 108

Net debt/ equity - - - - -

Source: Company annual reports, Exotix research estimates

21


Attractive valuations but weak fundamentals -

maintain Hold

In this note we reiterate our HOLD recommendation on CCNN based on a

revised TP of NGN7.00 (previously NGN7.80) implying an 18.0% ETR —

inclusive of 1.3% dividend yield in FY16f. Although its current valuation seems

attractive at 5.6x FY17f earnings and 2.8x FY17f EV/EBITDA vs SSA peers

which trade on 8.6x FY17f earnings and 6.9x FY17f EV/EBITDA, we are not

convinced that the company’s fundamentals are robust enough to warrant a Buy,

mainly on concerns over its (1) weak earnings and RoE outlook over the medium

to long term owing to its high sensitivity to FX and cement price movements; (2)

weak operating leverage due to its uncompetitive cost base; and (3) lack of

visibility over planned capacity expansion.

We cut our EPS estimate for FY16f by 23% to NGN0.83 (previously NGN1.08),

representing a decline of 16% yoy to reflect a poor FY16f trend (-49% yoy in H1

16), broadly in line with local peers during the same period, and driven largely by

weak volumes and pricing, underpinned by an adverse macro backdrop and

increasing competition, although partly offset by a positive trend in operating

costs in H1 16. Our adjustments to earnings capture such headwinds and our

views are broadly consistent with H1 16 results. where we observed: (1) weak

volumes and weak price realisation suggested by the 24% yoy decline in

revenue, which more than offset price increases in the period; (2) issues relating

to sourcing for fuel, as a result of disruptions to local production of LPFO that

occurred in H1 16, and high costs of importing the fuel using funds sourced at the

much weaker unofficial FX market; and (3) poor operating cost management.

There was also a continued margin contraction, most notably gross margin which

dropped 8ppt to 29.1% in H1 16.

Medium-term (FY15-FY17f) earnings and RoE outlook — we forecast a

relatively weak earnings growth and RoE trajectory over the medium term,

averaging -3% and 11% pa respectively over FY15- FY18f, placing CCNN in the

bottom-tier of our universe of Nigerian cement companies. This also represents a

significant deterioration relative to its historical average (FY10-FY15) EPS growth

and RoE of -1% and 23% pa respectively. Headwinds driving our medium-term

outlook are (1) lower cement prices, as we observe a declining trend across the

industry on the back of increasing completion; although we expect it to command

a premium over local peers; (2) vulnerability of its earnings to weakness in the

naira, given its relatively large dependence on a single fuel source, LPFO, which

is indirectly linked to the dollar. The company’s insufficient operating leverage

(discussed below) magnifies the impact of the aforementioned costs on earnings

relative to peers. Notably, a 5% decline in our FY16f forecast for cement prices,

all other things remaining unchanged, results in (continued overleaf)

CEMENT CO. NORTHERN NIGERIA

14 September 2016

MATERIALS


Price 6.00

Target price 7.00

Expected share price return 16.7%

Expected dividend yield 1.3%

Expected total return 18.0%

Market cap (mn) 7,540

Market cap (US$mn) 24

Avg. daily volume (US$mn) 0.00


YTD return (%) (35.0)

3-month return (%) (14.8)

1-yr return (%) (27.9)


Contact:

Jumai Mohammed

+234 808 811 0302

[email protected]

Year to 31 Dec 2014A 2015A 2016f 2017f 2018f

Revenue (mn) 15,119 13,038 11,704 13,389 14,139

Operating profit (mn) 2,749 1,889 1,659 1,902 1,603

Net income (mn) 1,918 1,201 1,045 1,205 1,088

EPS 1.53 0.96 0.83 0.96 0.87

EPS (Old) 1.53 1.70 1.08 0.87 0.95

DPS 0.70 0.35 0.09 0.29 0.30

P/E (x) 2.1 4.0 5.7 5.6 6.2

EV/EBITDA (x) 1.3 2.1 2.9 2.8 3.2

Dividend yield (%) 11.7% 5.8% 1.3% 4.8% 5.1%

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22

a 44% decline in FY16f earnings vs local peers, whose earnings will likely decline

26% on the same movement in cement prices on average. Similarly, a 5%

weakness in the naira higher than our NGN250/$ average exchange rate forecast

in FY16f would result in a 77% decline in earnings, making CCNN the most

vulnerable company to FX risks in our universe.

Figure 7: CCNN - earnings outlook vs select peers (FY15-FY18f), %

Figure 8: CCNN - RoAE vs select peers (FY16f), %


estimates


Table 11: CCNN - changes to earnings estimates (NGN bn)

FY16f FY17f FY18f


Revenue 11,704 15,009 (22) 13,389 16,398 (18) 14,139 17,218 (18)

EBITDA 2,175 2,547 (15) 2,502 2,166 16 2,201 2,274 (3)

PBT 1,349 1,931 (30) 1,607 1,568 3 1,451 1,703 (15)

Net income 1,045 1,352 (23) 1,205 1,097 10 1,088 1,192 (9)

Net asset 10,775 10,772 0 11,619 11,261 3 12,326 11,960 3

EPS (NGN) 0.8 1.1 (23) 1.0 0.9 10 0.9 0.9 (9)

DPS (NGN) 0.1 0.5 (81) 0.3 0.4 (27) 0.3 0.4 (29)

EBIT margin % 14 14 14 10 11 10

Net margin, % 9 9 9 7 8 7


Weak operating leverage. We make three observations in support of this view:

(1) the company‘s relatively low production capacity – 0.6mtpa, which limits its

ability to generate greater operating leverage to offset fixed costs. This is largely

the cause of its relatively greater sensitivity to changes in cement prices; (2)

CCNN has the highest production cost profile among its Nigerian peers due to its

heavy reliance on expensive LPFO at 69% of total cash cost, compounded by

high haulage costs given its lack of proximity to cheaper energy sources or

petroleum product depots in its region; and (3) the company pays the highest

technical and support fees in the industry, at 4.1% of sales vs an industry

average of 2.4% of sales (FY15) to its technical and management partners (Bua

Group and its subsidiary, Damnaz cement Nig.). Still on production costs,

CCNN’s input costs were 39% higher than the industry average as at FY15, with

no indications of an improvement in sight as a result of a lack of investment to

enhance production efficiency. We however note that costs have risen for

CCNN’s competitors in the year owing to the impact of gas supply disruptions.

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23

Uncertainties over capacity expansion. Further compounding CCNN’s

medium-term challenges is the production capacity constraint it currently faces.

We believe the company will have difficulty increasing volumes in the medium

term as we expect that capacity will be maxed out by FY18, impairing its ability to

defend its market share and to enjoy benefits from greater economies of scale.

Bear in mind that the company recorded a capacity utilisation of 81% in FY15.

Management had previously discussed the rollout of an additional 1.5mtpa

capacity expansion by 2017, but we are yet to see progress on this front. We

believe that additional capacity at CCNN could be a positive catalyst for the

stock, should management deliver on its plans. It could support a consolidation of

the company‘s foothold in north-west Nigeria.

Valuations do not reflect fundamentals— trading on a FY17f PE and

EV/EBITDA of 5.6x and 3.8x respectively representing a discount vs its SSA

peers which trade on a FY16f PE and EV/EBITDA of 8.6x and 6.9x, CCNN may

seem attractive. In our view, its valuations fairly capture its weak fundamentals

tracking reasonably close to its historical average. As shown in Figure 3 below,

the forward EV/EBITDA multiples have historically traded at a considerable

discount to the industry average, mirroring its relatively weak performance vs

peers and we see no justification for a divergence now

Figure 9: One-year forward EV/EBITDA trend (x) CCNN vs sector average


Valuation

We maintain our DCF methodology (which yields a TP of NGN6.40) and relative

valuation using forward PE and EV/EBITDA multiples (which yields a TP of

NGN8.70). We use a 60:40 weighting in favour of DCF as we believe it better

captures normalised long-term returns of the company given that earnings are

currently depressed. Our relative valuation model also incorporates a discount for

weak fundamentals around profitability and inefficiency as discussed earlier.

Table 12: CCNN — target price derivation (NGN)

DCF 6.40




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2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

Sep-1

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Dec-1

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Mar-

12

Jun-1

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Sep-1

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Dec-1

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Jun-1

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Sep-1

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Sep-1

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Sep-1

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Jun-1

6

CCNN EV/EBITDA+1 Sector EV/EBITDA+1 5-year mean


24



A stronger/weaker than anticipated improvement in Nigeria‘s economic

landscape, which could impact profitability significantly.

An increase in the competitive intensity on pricing among local cement producers.

A significant increase/decrease in cost and operating efficiency.

Further weakening of the naira beyond our expectation, which could further

pressure earnings.

Onboarding of planned capacity represents an upside risk.


In the table below, we present a sensitivity analysis of CCNN’s FY16f earnings to

changes in the NGN/US$ exchange rate and changes in cement prices beyond our

FY16f estimates. As noted earlier, these represent some of the most significant

downside risks to company earnings in the year.

Table 13: CCNN - sensitivity of FY16f EPS to changes in FX rates and cement prices


% change in rate 20% 10% 0% -10% -20% -30%


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es in

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eri

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2016f)

15% 234% 182% 131% 79% 28% -24%

10% 190% 139% 87% 36% -16% -68%

5% 147% 95% 44% -8% -60% -111%

0% 103% 52% 0% -52% -103% -155%

-5% 60% 8% -44% -95% -147% -198%

-10% 16% -36% -87% -139% -190% -242%

-15% -28% -79% -131% -182% -234% -286%



25

Table 14: CCNN - financial summary

Income statement (NGN mn) FY14 FY15 FY16f FY17F FY18f

Year-end: December

Revenue 15,119 13,038 11,704 13,389 14,139

EBITDA 3,239 2,338 2,175 2,502 2,201

Operating income 2,749 1,889 1,659 1,902 1,603

Pre-tax income 2,477 1,550 1,349 1,607 1,451

Post tax income 1,918 1,201 1,045 1,205 1,088

Net income 1,918 1,201 1,045 1,205 1,088


Cash and equivalents 896 1,019 1,177 1,109 1,269

Current assets 7,406 7,025 6,736 7,396 7,845


Total assets 15,780 17,147 17,463 18,459 19,159



Long-term debt 640 1,080 914 656 500

Minorities interest 0 0 0 0 0


Net debt/(funds) 328 353 196 -54 -431

Change in working capital (786) 1,097 130 (256) (79)

Cash flow statement (NGN mn) FY14 FY15 FY16 FY17f FY18f

Funds from operating activities 1,864 2,583 1,752 1,844 1,759

Funds from investing activities (1,787) (2,260) (1,069) (820) (737)

Funds from financing activities (258) 224 (525) (1,092) (861)

Operating free cash flow 63 320 581 906 910

Net increase/(decrease) in cash (181) 546 158 (68) 160


HEPS (NGN) 1.5 1.0 0.8 1.0 0.9

DPS (NGN) 0.7 0.3 0.1 0.3 0.3

BVPS (NGN) 8 8 9 9 10

Revenue growth (%) (1) (14) (10) 14 6

EBIT growth (%) 10 (31) (12) 15 (16)

HEPS growth (%) 23 (37) (13) 15 (10)



EBIT margin 18 14 14 14 11


Net margin 13 9 9 9 8

ROIC 26 16 14 15 12

ROE 22 12 10 11 9


P/E (x) 2.1 4.0 5.7 5.6 6.2

EV/EBITDA (x) 1.3 2.1 2.9 2.8 3.2

EV/Capacity (USD) 61 51 51 51 51

Net debt/ equity 0.0 0.0 0.0 (0.0) (0.0)


26


Most resilient in sector

In this note, we raise our target price to NGN188.00/share (from

NGN176.00/share), representing an ETR of +13% inclusive of 4.5% dividend

yield in FY16f. This reflects an upward revision to our earnings estimates to

capture a stronger than anticipated earnings trend driven by volume growth and

exceptional gains. Nevertheless, we reiterate our HOLD recommendation on

valuation grounds, which we consider fair and reflective of normalised returns. At

current valuations of 12.9x and 8.3x FY17f PE and EV/EBITDA respectively (on

our estimates), Dangote Cement trades at a fair premium to SSA peers which

trade on a FY17f 8.6x PE and 6.9x EV/EBITDA. However, we struggle to justify a

much greater premium, hence our neutral view.

More constructive on the group’s earnings outlook. The last few quarters has

proven, above all else, that Dangote Cement has resilience and dynamism

exceeding that of peers amid a challenging environment. We believe this

provides a strong basis for more optimism over the medium term. As such, we

review our medium-term earnings outlook upwards, growing at 8% pa (previously

4%) over FY15-18f, above the 5% pa peer average over the same period, but

below its 12% pa five-year historical average, due mainly to contributions from its

lower-margin non-Nigerian businesses. Key attributes we like about DCP,

particularly in the context of the current weak macroeconomic backdrop, are: (1)

its ability to sustain volume growth and consolidate market share even as

competition intensifies across SSA markets; (2) its proactive cost engineering -

notably as management embarks on coal conversions and local coal milling (to

be completed end of year) as an alternative to the use of gas, the supply of which

can be erratic; and (3) its relatively superior profit margins and ROE, reflecting its

market dominance and effective cost management. These provide a cushion for

the group’s earnings in periods of volatility. That said, we continue to see

considerable risks associated with: (1) its rather complex intercompany structure

which can lead to forecast errors in estimating exceptional gains/losses; and (2)

delays in the execution of its planned expansion and export strategies.

We increase our FY 16f earnings estimate by 6% to NGN10.63 (previously

NGN10.05), representing a decline of 2% yoy, as continued pricing and cost

challenges result in subdued EPS for the year. Adjustments to our estimates

largely reflect: (1) better than expected volume pick-up in Nigeria, reflecting a

combination of a low base effect, market share gains, better retail presence, and

higher cross-border sales; and (2) higher than anticipated revaluation gains on

intercompany loans following a sharp depreciation of the naira. These more than

outweighed the negative impacts of higher input cost pressures on the back of

currency devaluation, disruptions to gas supply in Nigeria, lower price realisations

and a considerably higher cost base in its non-Nigerian operations.

DANGOTE CEMENT PLC

14 September 2016

MATERIALS


Price 173.00 180.01


Expected share price return 8.7% -2.2%


Expected total return 13.2% 2.3%

Market cap (mn) 2,948,008 3,067,462

Market cap (US$mn) 9,359 9,855



YTD return (%) 6.8 11.2

3-month return (%) 4.8 9.1

1-yr return (%) 6.8 4.7


Contact:

Jumai Mohammed

+234 808 811 0302

[email protected]

Year to 31 Dec 2014 2015 2016f 2017f 2018f

Revenue (mn) 391,638 491,725 594,413 745,351 827,010


Net Income (mn) 160,577 184,994 181,110 205,732 233,628

EPS 9.42 10.86 10.63 12.07 13.71

EPS (Old) 9.42 10.86 10.05 10.80 13.05

DPS 7.00 6.00 8.34 9.66 10.97

P/E (x) 9.7 10.2 13.1 12.9 11.4

EV/EBITDA (x) 7.6 7.8 10.0 8.3 7.6

Dividend yield (%) 4.0% 3.5% 4.5% 5.6% 6.3%

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DANGOTE CEMENT PLC

27

H1 16 results were satisfactory, in our view, as market dominance in Nigeria

and a strong pan-African footprint led to a flat performance against the declining

trend observed with local peers. Earnings were bolstered by robust volume gains

across all regions and material FX gains. Operating profit in Nigeria declined 20%

yoy in the period, further emphasising deteriorating macro fundamentals, intense

competition in the market and other headwinds highlighted above. Non-Nigerian

operations continued to ramp-up successfully, although with negative pass

through to the bottom line as their high cost base further diluted group margins.

Barring one-off currency translation gains, group performance was in fact in line

with general industry weakness, as highlighted by operating profits, -20% yoy in

H1 16.

Figure 10: Dangote Cement - earnings outlook vs select peers (FY15-FY18f), %

Figure 11: Dangote Cement - RoE vs select peers (FY16f), %


estimates


Table 15: Dangote Cement - changes to earnings estimates (NGN bn)

FY16f FY17f FY18f


Revenue 594,413 582,681 2 745,351 698,486 7 827,010 801,702 3

EBITDA 254,075 269,167 (6) 340,054 306,244 11 372,593 355,303 5

PBT 204,041 180,465 13 229,147 207,081 11 265,486 252,681 5

Net Income 181,110 171,333 6 205,732 184,053 12 233,628 222,359 5

Net Asset 586,357 666,407 (12) 627,503 688,218 (9) 674,229 732,690 (8)

EPS (NGN) 10.6 10.1 6 12.1 10.8 12 13.7 13.0 5

DPS (NGN) 8.3 8.0 4 9.7 8.6 12 11.0 10.4 5

EBIT margin % 32 35 36 34 36 35

Net margin, % 30 29 27 26 28 28


Robust demand trend — the group recorded much stronger than anticipated

volume growth in the last 12 months, up 56% yoy on average, with much of the

boost coming from a low base effect in Nigeria and successful ramp-up of new

non-Nigerian operations. The strong positive trend observed in Nigeria in spite of

the challenging operating environment (volumes +37% yoy on average) over the

last three quarters has come as a surprise to us. We identify the following factors

as drivers of the unusual trend:

– Gains in market share due to the de facto ban on cement imports and as

key competitors faced occasional production stoppages owing to gas

shortages, we estimate a market share of 66% in H1 16 vs 59% in H1 15. We

51.0

8.9 8.4 8.1 6.6 4.5 4.2 2.0 1.1

(0.0) (3)

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DANGOTE CEMENT PLC

28

note, however, that recent price hikes (discussed below) re-open the

investment case for imports into the country as cement price increases

augment the impact of weaker currency.

– Higher exported cement by neighbouring country distributors who came into

the country to pick up products to enjoy more favourable FX rates and

cement pricing. We expect this to taper as price increases cut distributors’

margins.

– Stronger retail demand, we observed a boost in retail demand of its product

on the back of (1) stronger retail penetration, as Dangote revamped its route

to market (RTM) strategy by strengthening retail channels; and (2) higher

private sector cement demand to complete existing construction projects. We

link this development directly to inflationary pressures as (i) home-builders

rush to complete construction in fear of further hikes in building material

prices, and (ii) demand for inflation-protected assets such as properties.

In our view, while we expect most of the above-mentioned drivers to subside in

subsequent quarters in light of weaker consumer purchasing power given the

magnitude of recent price hikes, we remain fairly constructive on volumes, as

sustained improvement in retail presence and a gradual recovery in public sector

demand drive future growth.

Downtrend in Nigerian cement prices imminent in spite of recent price

hikes. In an earlier note, “DCP - better demand outlook priced in”, we anticipated

a price increase aimed at enabling producers to accommodate rising cost

pressures stemming from the weakness in the naira and negative fuel mix.

Management has taken a number of re-pricing actions in the year, the most

recent being a 40% price hike at the end of August, before that there was

NGN100/bag in March, NGN50/bag in May and NGN50/bag in June. Even so, we

see considerable risk of a gradual reversal once Dangote concludes its coal

conversion and milling plant which is due in November 2016. Recent price

volatility which more recently reflects the tense competitive landscape than input

cost movements further supports our views. We therefore expect a 3% pa

decrease in selling prices in Nigeria over FY15-FY18f.

Cost management. Cost-side pressures have been quite intense in the year as a

result of: (1) the higher cost base of non-Nigerian operations as they incur costs

towards building RTM and establishing a proper supply chain; (2) higher energy

cost in Nigeria from costly alternatives as the gas mix drops to c.23% from 79%

in FY15; (3) higher cost of dollar-linked inputs in light of the naira depreciation;

and (4) higher selling costs to improve distribution channels and incite demand.

Management intends to complete the conversion of all lines to use coal by

November 2016. To that extent, we have incorporated an increase of 12% in

FY16f cost per ton, although we expect that costs ease up from FY17f, -2% pa.

Sharp margin contraction. The risk of margins contracting still persists, in line

with a lower pricing trend, especially in Nigeria, and increased contribution from

lower-margin non-Nigeria businesses. We therefore anticipate a broad-based

decline in operating margin which we expect to decline 12ppt to 36.3% in FY18f.

The most notable impact will be on the PAT margin, which we expect to decline

by 16ppt over FY15-FY18f to 28.2% in FY18 as the company’s pioneer tax

incentives expires.

Slow-down in capital expenditure. Management alluded to cutting down on

capex and prioritising projects going forward, a positive development in our view.

Management has begun to commit to this plan, as evidenced in the reported H1

16 spending of US$168mn vs a budget of US$500-600mn for the year FY16f,

which went strictly into finishing existing projects, ie the Congo plant and

conversion to coal on some production lines in Nigeria. This reads well to us as it

highlights (1) a commitment to de-risk the business by managing debt; and (2)

the intention to bed down existing businesses before rolling-out other projects,

which we believe could help to stabilise margins, and even drive a modest

positive margin trend in the medium to long term.

DANGOTE CEMENT PLC

29

Valuation



NGN182.5). We use a 75:25 weighting in favour of DCF as we believe it better

captures normalised long-term earnings and margins of the company and new

businesses. Our relative valuation model also incorporates a 20% premium over peer

multiples in recognition of the group’s superior margins, RoE, size and market

coverage.

Table 16: Dangote Cement - target price derivation (NGN)

DCF 191.00








Persistent shortages in gas supply and increasing cost pressures which cannot

be passed on to consumers.

Higher-than-expected movements in the Naira against other currencies (including

Kwacha, Cedi and Rand).

Further delays in project execution.


In the table below, we present a sensitivity analysis of Dangote Cement’s FY16f

earnings to changes in the NGN/US$ exchange rate and changes in cement prices

beyond our FY16 estimates. As noted earlier, these represent some of the most

significant downside risks to group earnings for the year.

Table 17: Dangote Cement - sensitivity of FY16f EPS to changes in FX rates and cement prices


% change in rate 20% 10% 0% -10% -20% -30%


Pri

ce c

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es in

Nig

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2016

f)

15% 29% 31% 33% 36% 38% 40%

10% 18% 20% 22% 24% 27% 29%

5% 6% 9% 11% 13% 16% 18%

0% -5% -2% 0% 2% 5% 7%

-5% -16% -13% -11% -9% -6% -4%

-10% -27% -24% -22% -20% -18% -15%

-15% -38% -36% -33% -31% -29% -26%


DANGOTE CEMENT PLC

30

Table 18: Dangote Cement - financial summary

Income statement (NGN mn) FY14 FY15 FY16f FY17f FY18f

Year-end: December

Revenue 391,638 491,725 594,413 745,351 827,010

EBITDA 219,758 258,497 254,075 340,054 372,593


Pre-tax income 184,688 188,294 204,041 229,147 265,486

Post tax income 159,501 181,323 177,516 201,649 233,628

Net Income 160,577 184,994 181,110 205,732 233,628



Current assets 137,104 165,980 231,177 232,362 223,831

Non-current assets 847,618 944,963 972,112 1,020,541 1,070,133

Total assets 984,721 1,110,943 1,203,289 1,252,904 1,293,964



Long-term debt 131,942 208,329 260,202 330,101 302,064

Minorities interest 4,161 (6,235) (9,829) (13,911) (13,911)


Net debt/(funds) 228,612 214,812 298,127 295,467 285,811

Change in working capital (23,878) 26,356 12,026 14,026 12,522

Cash flow statement (NGN mn) FY14 FY15 FY16f FY17f FY18f


Funds from investing activities (192,045) (155,691) (89,241) (113,938) (119,522)

Funds from financing activities (80,384) (117,521) (133,258) (224,501) (254,117)

Operating free cash flow (1,844) 47,586 152,241 209,327 231,205

Net increase/(decrease) in cash (57,081) 26,305 25,682 (9,857) (18,382)


HEPS (NGN) 9.4 10.9 10.6 12.1 13.71

DPS (NGN) 7.0 6.0 8.3 9.7 11.0

BVPS (NGN) 34 38 34 37 40

Revenue growth (%) 1 26 21 25 11

EBIT growth (%) (4) 11 (9) 44 11

HEPS growth (%) (11) 15 (2) 14 14



EBIT margin 48 42 32 36 36


Net margin 41 37 30 27 28

ROIC 22 23 20 28 30

ROE 28 30 29 34 36


P/E (x) 9.7 10.2 13.1 12.9 11.4

EV/EBITDA (x) 7.6 7.8 10.0 8.3 7.6

EV/Capacity (USD) 325 246 238 224 220

Net debt/ equity 0.4 0.4 0.6 0.6 0.5


31


Debt in dire need of restructuring

We reiterate our Sell recommendation on Lafarge Africa, on the basis of: (1)

its weaker core operations, in light of the recent deterioration of the Nigerian

operating environment, evidenced by recent earnings releases; (2) lack of a

coherent strategy to restructure the business in recognition of greater industry

competition, the need to refinance outstanding dollar-denominated debt, and

capacity expansion requirements; (3) debt overhang which exposes the company

to high financing cost and vulnerability to weakness in naira; (4) impending

dilution of minority shareholders; and (5) its relatively rich valuations. Accordingly,

we revise our TP downwards to NGN52.00 (previously NGN66.00), representing

an ETR of -10.3%.

Shareholders have been on the losing end of Lafarge Africa’s restructuring

since it started in June 2014, evident in the downtrend in earnings, eroded by

high restructuring and financing costs. This has significantly impacted the

profitability of the group. For context, our estimated debt to equity and interest

coverage of 3.4x and 1.7x which compare poorly to Dangote’s 0.62x and 5.7x

and SSA peer average of 0.78x and 3.3x respectively. In this note, we highlight

the urgent need to restructure the group debt; we continue to see considerable

risks relating to uncertainties surrounding management’s ability to successfully

execute such restructuring. Also, we review our underlying estimates in light of

recent developments and earnings releases.

We cut our FY16 earnings estimate to a loss per share of NGN4.1. This

largely reflects adjustments to our model to better capture the business’s US$

exposure by way of its input costs and dollar-denominated debt. Furthermore, we

have: (1) weak demand outlook and loss in market share, visible in the persistent

downtrend in quarterly volumes; (2) factored in weaker price realisation in H1 16

due to delays in price hikes. However, we expect an improvement in H2 16 prices

due to recent price hikes (NGN100/bag in March, NGN50/bag in May,

NGN50/bag in June and NGN600/bag in August). These factors overshadow

savings recorded in operating expenses in the period. Similarly, we cut our

medium-term EPS forecasts, averaging -16% pa (previously +2% pa) over FY15-

18f to NGN3.76 in FY18f, although most of the decline comes as a result of the

expected loss per share of NGN4.1/share in FY16f.

In H1 16, performance was weak, reflecting industry-wide operating

challenges from gas shortages, competitive pressures and the material impact of

unrealised exchange losses. Nigerian operations were particularly impacted by

(1) weak Nigerian volumes and highly depressed pricing, resulting in a 33% yoy

decline in revenue. Performance was further weakened by higher input costs due

to erratic gas supply and the devaluation of the Naira which led to revaluation

losses of NGN29bn. In SA, high cost of operation and negative product mix led to

weak earnings even though revenue was unchanged yoy.

LAFARGE AFRICA PLC

14 September 2016

MATERIALS

Recommendation: SELL

Price 58.00 53.28


Expected share price return -10.3% 23.9%


Expected total return -10.3% 27.1%

Market cap (mn) 290,603 266,954

Market cap (US$mn) 923 858



YTD return (%) (31.7) (37.2)

3-month return (%) (17.3) (14.7)

1-yr return (%) (31.8) (41.3)


Contact:

Jumai Mohammed

+234 808 811 0302

[email protected]

Year to 31 Dec 2014 2015 2016f 2017f 2018f

Revenue (mn) 260,810 267,234 256,682 309,295 323,964


Net income (mn) 33,785 28,632 (22,710) 30,366 20,832

EPS 7.7 6.3 (4.1) 5.5 3.8

EPS (Old) 7.4 6.3 3.5 4.3 6.8

DPS 3.40 2.89 - 2.74 1.88

P/E (x) 3.9 5.7 -10.9 9.1 13.3

EV/EBITDA (x) 3.6 4.7 12.4 8.0 8.0

Dividend yield (%) 5.9% 5.0% 0.0% 4.7% 3.2%

-

20

40

60

80

100

120


NSE ASI Lafarge Africa

LAFARGE AFRICA PLC

32

Figure 12: Lafarge Africa - earnings outlook vs select peers (FY15-FY18f), %

Figure 13: Lafarge Africa - RoE vs select peers (FY16f), %


estimates


Table 19: Lafarge Africa - changes to earnings estimates (NGN bn)

FY16f FY17f FY18f


Revenue 256,682 220,491 16 309,295 238,210 30 323,964 254,507 27

EBITDA 38,815 46,197 (16) 67,508 49,598 36 67,791 54,101 25

PBT (21,424) 30,111 34,507 36,525 (6) 23,147 45,652 (49)

Net Income (22,710) 24,695 30,366 26,608 14 20,832 31,009 (33)

Net Asset 86,529 227,039 (62) 92,103 243,471 (62) 103,566 254,051 (59)

EPS (NGN) (4.1) 5.4 (176) 5.5 5.8 (6) 3.8 6.8 (45)

DPS (NGN) - 2.7 2.7 4.1 (33) 1.9 5.4 (65)

EBIT margin % 15.1 16.7 21.8 16.9 20.9 17.5

Net margin, % (8.8) 11.5 9.8 11.5 6.4 12.6

Source: Company accounts, Exotix Research estimates

Valuation remains expensive. Despite a significant de-rating of the stock, down

32% YTD, the company’s current trading multiple of 8.0x FY17f EV/EBITDA is at

an unjustified premium to its SSA peers which trade on FY17f EV/EBITDA 6.9x

and its historical average EV/EBITDA of 6.7x alike. We place more emphasis on

our DCF methodology and EV/EBITDA multiples given that the company’s

earnings are currently depressed. A 15% discount over peer multiples in

recognition of the uncertainties and execution risks that may contribute to errors

in our forecasts.

Weak core operations reflective of environment. Specific challenges around

macro environment and intense competitive pressures have kept earnings on a

downtrend. This has manifested in the form of: (1) weak demand and loss in

market share, visible in the persistent downtrend in quarterly volumes; and (2)

high sensitivity to price movements, which we expect to decline over the medium

term; (3) downward pressures from dollar-linked input costs and higher energy

cost in Nigeria from costly alternatives following gas disruptions. We therefore

forecast a weak operating income trend, declining 3% pa on average over the

medium term (FY15-FY18f) compared to an estimated SSA peer average growth

rate of 6% pa in the same period.

Lack of a coherent strategy. In our view, Lafarge Africa lacks a sufficiently

robust strategy to counter competition effectively and secure sustainable

51.0

8.9 8.4 8.1 6.6 4.5 4.2 2.0 1.1

(0.0) (3)

(16) -20

-10

0

10

20

30

40

50

60

Ta

nga C

em

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Bam

buri

GE

M

DangC

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Cim

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Lafa

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29.3

29.2

20.0

18.7

16.9

16.3

13.6

13.5

12.3

9.7

6.3

4.9

(4.8

)

(17.0

)

-20

-10

0

10

20

30

40

DangC

em

Tw

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ent

Arm

PP

C

Ta

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Lafa

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fric

a

LAFARGE AFRICA PLC

33

earnings growth in the medium term. Our view is supported by the following: (1)

its inability to counter aggressive competition by way of capacity push and price

disruptions, evident in the persistent loss in market share across all businesses;

(2) uncertainty over debt refinancing plans; and (3) uncertainties around capacity

expansions at Ashaka and Wapco, which limit prospects for volume growth given

their high utilisation rates.

We think the challenges highlighted above are due to lack of consistency of

personnel at the senior management level as we note that in the space of 18

months, the company has appointed three CEOs. This to a large extent

contributes to poor execution and uncertainties for the company and erodes the

confidence that investors have in management’s abilities to successfully deliver

on a difficult process of restructuring related to earnings growth and reducing the

debt burden of the business. While management has alluded to its plans, it is yet

to make a firm decision and communicate it to investors.

Debt overhang - Lafarge Africa’s sizeable debt profile holds significant downside

risks for the company amid a highly volatile FX environment. The group currently

has gross debt of c. NGN253bn, 72% of which is now dollar-denominated. As a

result the group recorded c.NGN29bn in revaluation losses in H1 16. We see

further downside pressure on earnings on the back of volatile exchange rate and

surge in financing costs due to: (1) the expensing of previously-capitalised

interest on Unicem, and (2) the expiration of moratorium on shareholder loans

starting FY18f. We therefore forecast a weak earnings trajectory - declining 8%

pa on average over the medium term (FY15-FY18f) vs SSA peer average growth

of 5% pa in the same period. Similarly, the debt burden further limits balance

sheet headroom to fund much-needed expansions.

While management has indicated an intention to refinance its dollar loans, lack of

dollar liquidity and clarity on currency direction limit possible refinancing options.

The company has been more successful in refinancing its naira-denominated

bank loans which was concluded in June 2016. At this point we believe a debt

restructuring is beyond necessary and perhaps should be done through a debt -

equity swap, which exposes investors to further dilution. We discuss this in detail

below.

Potential dilution of minority shareholders. Based on our analysis, the impact

of Lafarge Africa restructuring its debt via a debt-equity swap will see minority

interests diluted to a great extent, depending on the level of debt that the swap

covers. We provide different scenarios of this in Table 2.

Our assumptions— in our analysis we make the following assumptions: (1)

additional shares are issued at our target price of NGN54.00/share; (2) the debt

to equity swap is done in FY17f; and (3) minimal restructuring costs are incurred.

Please note that our published forecast and basis of our investment valuation and

recommendation remains that no swap/restructuring is done, as we await clarity

from management. We however incorporate a 15% discount to SSA peer

valuations to address possible forecast errors from lack of clarity.

Implication of restructuring - as noted earlier, the downside of a debt

restructuring is the dilution of minority interests depending on the level of debt

that the swap covers. For instance, a 50% shareholder loan conversion into

equity (we have depicted other scenarios in the tables below) leads to 29% and

1% dilution in FY17f and FY18f earnings respectively. However, a 50% swap

could also drastically improve its financial profile in terms of gearing and other

important balance sheet ratios - debt to equity could be to1.4x and 1.3x in FY17f

and FY18f respectively, a notable improvement from our base case (zero swaps)

of 3.3x and 2.9x respectively in the same period. Moreover, such a swap could

free up about NGN12bn in cash each year, thereby providing scope to attract

new local debt, secure credit from vendors and contractors and even improve

growth prospects should funds be deployed to new projects. In summary, while

the apparent dilution may be true, in the long run, we take it that Lafarge Africa

will become a more profitable entity going forward.

LAFARGE AFRICA PLC

34

Table 2: Lafarge Africa - debt restructuring, summary of EPS dilution

FY16F FY17F FY18F FY19F FY20F

Base case (no swap) (4.1) 5.5 3.8 6.0 7.9

25% swap ratio - 4.1 4.6 3.7 5.8 7.5

Dilution (%) - -16% -1% -4% -6%

50% swap ratio - 4.1 3.9 3.7 5.6 7.1

Dilution (%) - -29% -1% -7% -10%

75% swap ratio - 4.1 3.3 3.7 5.4 6.8

Dilution (%) - -40% -2% -10% -14%

100% swap ratio - 4.1 2.8 3.7 5.2 6.5

Dilution (%) - -50% -2% -13% -18%


Table 3: Lafarge Africa - debt restructuring, summary of changes in RoE


Base case (no swap) -17% 34% 21% 30% 34%

25% swap ratio -17% 26% 17% 24% 27%

Dilution (%) - -22% -20% -21% -20%

50% swap ratio -17% 21% 15% 20% 23%

Dilution (%) - -38% -32% -33% -32%

75% swap ratio -17% 17% 13% 18% 20%

Dilution (%) - -50% -39% -41% -40%

100% swap ratio -17% 14% 12% 16% 18%

Dilution (%) - -59% -43% -46% -46%


Table 4: Lafarge Africa - debt restructuring, summary of changes in debt to equity


Base case (no swap) 3.4 3.3 2.9 2.4 2.0

25% swap ratio 3.4 2.1 1.9 1.6 1.3

Dilution (%) - -38% -36% -35% -35%

50% swap ratio 3.4 1.4 1.3 1.1 0.9

Dilution (%) - -58% -56% -56% -56%

75% swap ratio 3.4 1.0 0.9 0.8 0.6

Dilution (%) - -71% -68% -69% -71%

100% swap ratio 3.4 0.7 0.7 0.5 0.4

Dilution (%) - -80% -77% -79% -81%


Table 5: Lafarge Africa - debt restructuring, summary of changes in cash position


Base case (no swap) 1,005 3,036 3,655 10,317 8,553

25% swap ratio 1,005 7,135 13,562 16,855 12,099

Dilution (%) - 135% 271% 63% 41%

50% swap ratio 1,005 11,174 23,416 23,321 15,551

Dilution (%) - 268% 541% 126% 82%

75% swap ratio 1,005 15,119 33,189 29,677 18,854

Dilution (%) - 398% 808% 188% 120%

100% swap ratio 1,005 18,911 42,826 35,847 21,899

Dilution (%) - 523% 1072% 247% 156%


LAFARGE AFRICA PLC

35

Valuation



NGN41.80). We use a 50:50 weighting for the two methodologies to arrive at our TP

of NGN52.00. Our relative valuation model also incorporates a 15% discount over

peer multiples in recognition of the uncertainties and execution risks that may

contribute to errors in our forecasts.

Table 6: Lafarge Africa - target price derivation (NGN)

DCF 62.14






Further weakening of the naira beyond our expectation; which could further

pressure earnings.



Persistent shortages in gas supply and increasing cost pressures which cannot

be passed on to consumers.

Earnings surprises relating to ongoing restructuring and consolidation.


In the table below, we present a sensitivity analysis of Lafarge Africa’s FY16f earnings

to changes in the NGN/US$ exchange rate and changes in cement prices beyond our

estimates. As noted earlier, these represent some of the most significant downside

risks to group earnings for the year.

Table 7: Lafarge Africa - sensitivity of FY16f EPS to changes in FX rates and cement prices


% change in rate 20% 10% 0% -10% -20% -30%


Pri

ce c

ha

ng

es in

Nig

eri

a

(2016f)

15% -207% -158% -110% -61% -13% 36%

10% -170% -122% -73% -25% 24% 72%

5% -134% -85% -37% 12% 60% 109%

0% -97% -48% 0% 48% 97% 145%

-5% -60% -12% 37% 85% 134% 182%

-10% -24% 25% 73% 122% 170% 219%

-15% 13% 61% 110% 158% 207% 255%


LAFARGE AFRICA PLC

36

Table 8: Lafarge Africa - financial summary

Income statement (NGN mn) FY14 FY15 FY16F FY17F FY18F

Year-end: December

Revenue 260,810 267,234 256,682 309,295 323,964

EBITDA 69,476 67,794 38,815 67,508 67,791


Pre-tax income 40,358 29,275 -21,424 34,507 23,147

Post tax income 33,820 26,998 -22,710 30,366 20,832

Net income 33,785 28,632 -22,710 30,366 20,832

Balance sheet (NGN mn) FY15E FY16F FY17F FY18F


Current assets 72,214 73,877 58,991 68,994 71,836


Total assets 415,947 453,012 518,223 540,651 547,082



Long-term debt 116,002 142,943 262,457 274,847 295,595

Minorities interest 75,204 58,803 0 0 0


Net debt/(funds) 100,806 131,795 294,574 304,811 294,940

Change in working capital (3,691) 2,917 6,939 (3,386) 1,997

Cash flow statement (NGN mn) FY14 FY15E FY16F FY17F FY18F


Funds from Investing activities (55,230) (63,141) (42,769) (28,714) (20,218)

Funds from financing activities (28,264) 1,652 (13,844) (29,236) (46,636)

Operating free cash flow 32,331 (1,985) (1,239) 29,052 44,796

Net increase/(decrease) in cash (25,678) (3,620) (12,144) 2,031 619

Key metrics FY14 FY15E FY16F FY17F FY18F

HEPS (NGN) 7.7 6.3 (4.1) 5.5 3.8

DPS (NGN) 3.4 2.9 - 2.7 1.9

BVPS (NGN) 40 39 16 17 19

Revenue growth (%) 27 2 (4) 20 5

EBIT growth (%) 19 (2) (58) 119 (1)

HEPS growth (%) (61) (19) - - (31)



EBIT Margin 21 20 9 16 15

Pre-tax margin 15 11 (8) 11 7

Net margin 13 10 (9) 10 6

ROIC 18 16 6 12 12

ROE 20 16 (17) 34 21


P/E (x) 3.9 5.7 -10.9 9.1 13.3

EV/EBITDA (x) 3.6 4.7 12.4 8.0 8.0

EV/Capacity (US$) 160 160 159 130 129

Net debt/ equity 0.6 0.7 3.4 3.3 2.8


LAFARGE AFRICA PLC

37

DISCLOSURES

Analyst Certification

This document is independent investment research as contemplated by FCA Rule COBS 12.2 and is a research recommendation under FCA Rule COBS 12.4. Where it is not technically a research recommendation because the subject of the research is not listed on any European exchange, it has nevertheless been treated as a research recommendation to ensure consistent treatment of all Exotix's research. This research has been produced by Jumai Mohammed who is the Africa Equity Analyst (the "Analyst").

Exotix Research – Explanation of Research Recommendations

Buy recommendation means – an upside of 15% or more within a trading range of 180 days.

Sell recommendation means – a downside of 10% or more within a trading range of 180 days.

Hold recommendation means – an upside or downside of less than the above within a trading range of 180 days.

The recommendations are based on data generally available in the market and reflect the prices, volatility, corporate information and general economic data available at the time of publication together with historical information in respect of the security(ies) or issuer(s). Further information in respect of the basis of any valuation is available from the analyst on request.

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www.exotix.co.uk/Legal and Regulatory Information.aspx.

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Trading recommendations as at 30 June 2016:

Buy 50 Sell 32 Hold 41

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