BUA, WAPCO, Dangote Cement Battle for Market Shares
Some industry’s analysts pointed to extra capacity brought into the cement market by BUA Cement to have kept cement prices stable despite increased production cost profiles.
In what industry’s analysts called strategic manoeuvring of fierce competition, BUA created the third largest capacity, trailing Dangote and WAPCO Cement in the market.
Data obtained from the retail market indicates that Cement prices have remained stable due to extra capacity in the industry following an obvious pressure on demand.
Analysts however said this might not be sustained as prices of input material for the operators are fast rising.
Fiercely, both Lafarge and Dangote Cement are fighting to protect their market share from the third force infiltration.
Across Africa, Nigeria’s market has been noted to be paying significantly higher retail prices compared with neighbouring countries.
As the third force that emerged in the oligopolistic cement sector through a well-designed acquisition and combination, BUA’s extra capacity added pressure to existing competition.
In its recent industry review, Cardinalstone, a leading investment company headquartered in Lagos explained that BUA Group created the third-largest cement concern by the capacity of about 8MTPA.
The company did this through the consolidation of Cement Company of Northern Nigeria (CCNN) with 2 million tonnes per annum (MTPA) and Obu Cement, Edo State with a total capacity valued at 6MTPA.
The investment firm stated that building upon its historical brand capital which goes as far back as 1962 with CCNN, the combination cemented the company as the largest cement producer in the Northwest and a formidable force in the southern parts of the country.
Specifically, analysts recognised that CCNN overtook the 1MTPA Ashaka plant in Gombe, while the Obu plant offered competition to UNICEM and a few competitor plants in the South West.
However, the competition stepped up by the entry of BUACEMENT has seen companies extend price differentiation and distributor discounts across regions to retain market share.
In the first half of the year, the BUA CEMENT recorded a revenue per tonne of ₦41,113/MT that trailed those of WAPCO’s revenue per tonne of ₦44,316 and DANGCEM ₦44,855.
“This suggests that aggressive pricing may be part of its short-term strategy”, Cardinalstone explained.
Analysts stated that in addition to competing in the domestic market, BUACEMENT also plays alongside DANGCEM on the export front, leveraging the northern routes.
In June 2020, BUA exported about 20 trucks of cement to the Niger Republic while DANGCEM extended its export drive with a maiden shipment of 27.8KT of clinker to Senegal via the Apapa Export Terminal in the same month.
Meanwhile, Cardinalstone held that energy efficiency could be another differentiator in 2020 as brands compete for market share.
While DANGCEM recorded a 12 basis points year on year contraction in earnings before interest and tax (EBIT) margin to 35.8% in the second quarter, WAPCO edged the entire industry with a 9.9 points increase in operating margin to 37.1%.
Analysts at Cardinalstone said notably, the DANGCEM cost pressure resulted from higher gas prices in Nigeria and currency translation impact from the Pan African businesses.
WAPCO, however, flipped the narrative in the quarter following sharp contractions of 44.7% in production cost as well as 51.2% drop in raw material cost.
Cardinalstone’s analysts added that WAPCO also took advantage of remote working to drive down its office and general expenses to ₦544.1 million in Q2’20 from ₦3.7 billion in Q2’19.
“Although these savings are likely to be sustained in the interim, we highlight the possibility of a reversal in operating expense trend on the full resumption of office activities”, analysts stated.
In the review note, analysts said the recent naira devaluation likely affected cement companies via increases in the cost of gas (priced in dollars), gypsum, maintenance equipment/spare parts, and, to a lesser extent, foreign currency debt/liabilities.
According to industry touchpoints, gas prices increased by about 30.0% in Q2’20, with the resource constituting an average of 62% of the energy mix in the cement sector.
Cardinalstone detailed that even though gypsum accounts for only a small fraction of raw material cost, it is also fully imported into the country by cement companies.
“By our assessment, at least 55.0% of the sector’s cost is (directly or indirectly) exposed to FX fluctuations”, analysts remarked.
Meanwhile, Cardinalstone in its estimates held that local currency devaluation would have minimal impact on debt obligations.
From a balance sheet standpoint, the firm explained that the recent devaluation of the naira is likely to have only limited debt pass through to the sector.
To this point, Cardinalstone noted that recent debt issuances have been in the domestic currency.
Besides, WAPCO has paid off all its foreign currency-denominated borrowings with the proceeds from the sales of its South Africa subsidiary.
BUA CEMENT, also, has no foreign-currency-denominated debt in its books, while the USD borrowings of DANGCEM only account for 4.5% of its total debt obligations as of the first half of 2020.
Analysts explained further that the recent sector commercial papers (CPs) and bond programs are also relatively cheap to service due to the sustained moderation in yields, with interest coverage averaging 7.8x for WAPCO and DANGCEM.
All in, Cardinalstone projected that the financial year 2020 return on equity (ROE) is likely to average 18.6% for its coverage names as against 13.9% in 2019.
The firm stressed that the traction in ROE could reflect improved net income margin (driven by a blend of cost efficiency and lower taxes), stable asset turnover, and high leverage for the industry leader.
“The key risks to sectoral outlook comprise weak CAPEX implementation by government, further naira devaluation, and second wave of COVID-19 infections.
“From a relative valuation standpoint, BUACEMENT is the most expensively priced Nigerian Cement Company even though it trails WAPCO and DANGCEM in terms of size and EPS.
“While we note that the company’s ROE is higher than that of WAPCO, its ROE discount to DANGCEM’s still appears to contradict its premium pricing relative to the entire sector”, Cardinalstone explained.
Based on the industry’s data, cement output declined for the first time in 10 quarters in the second quarter of 2020.
According to the Nigeria Bureau of Statistics, real output (GDP) in the Nigerian cement sector contracted by 5.5% year on year in the second quarter of 2020 as against a 1.7% uptick in the first quarter of the same year.
With a reduction in supply, there was an expectation of a price hike but subdued by a total lockdown that had contaminated the first half macroeconomic performance.
Cardinalstone however noted that the numbers were also in sync with reported volume contractions across its coverage names as DANGCEM reported a 5.9% decline as WAPCO dropped of 3.7% in the review quarter.
“These contractions may have reflected a macroeconomic weakness made worse by the coronavirus pandemic and the strict measures put in place to contain it”, analysts explained.
However, the firm stated that the reopening of the economy may drive a rebound in the second half of 2020 while the downward review of the proposed government capital expenditure for 2020 (-9.2% to ₦2.2 trillion) remains concerned.
Overall, the ongoing lifting of restrictions leaves some legroom for output rebound in the second half of the year, analysts maintained.
Analysts at Cardinalstone stated that this view is also consistent with expectations of near-normal rainfalls in the third quarter of 2020, which could imply muted impact from the wet season in the current year.
BUA, WAPCO, Dangote Cement Battle for Market Shares