CSL Stockbrokers Estimate Higher FX Losses for Cement Producers

CSL Stockbrokers Estimate Higher FX Losses for Cement Producers

Following a steep devaluation of the naira by the apex bank over a plan to unify Nigeria’s multiple exchange rates, analysts have projected that cement producers will record higher losses on their foreign exchange transactions, which is expected to affect margin into 2023. 

The local cement producers have been reporting foreign exchange losses due to local currency fluctuation amidst sustained capital investment aimed at boosting capacity. With all the excitement around the decision to float the naira, analysts have projected negative impacts on cement companies that rely heavily on foreign materials inputs.

In the first quarter, the Cement sector posted a growth of 1.6% year on year as producers intensified efforts to increase their respective capacity, supported by rapid government spending on roads, and housing infrastructure development. With the monetary authority’s decision to float the naira after the ‘no devaluation’ stance of Godwin Emefiele, suspended Central Bank of Nigeria’s (CBN) governor, analysts expect the cement sector FX losses record to spike.

In a commentary note, CSL Stockbrokers said the cement players in Nigeria -Dangote Cement, BUA Cement, and Lafarge Africa- have been suffering taking significant foreign exchange losses, which continue to weigh on earnings. The report reads that technical depreciation of the currency is likely to increase the cement industry’s FX vulnerability, resulting in rising production costs. MarketForces Africa gathered retail price of cement produce and supplied to the Nigerian market has increased significantly.

However, prices differ across brands amidst rising competition among the cement oligarchs. Channel checks conducted by MarketForces Africa also revealed that the same brand is selling at different prices across the country. “We also note that the anticipated increase in costs of funds will have a major negative impact on these players’ profits. We envisage a significant price hike before the end of the year for the players to safeguard profit margins”, CSL Stockbrokers said.

Analysts however said price hikes by cement producers could in turn impact volumes. This could reduce profitability. In their respective financial scorecard, there have been projections that devaluation would hit earnings operators’ results.

Lafarge Profit Slumped 15% in Q1

In the first quarter of 2023, Lafarge Africa reported a 1.3% year-on-year increase in revenue to N91.82 billion from N90.61 billion in the comparable period in 2022.  Compared with the fourth quarter of 2022, the cement company’s revenue decreased by 11.2%. The management told analysts that volume growth was affected by the cash crunch in the first quarter but the multiplier effect from the fourth quarter of 2022 price increases protected margins.

According to analysts ‘ reviews, Lafarge reported that its production fixed costs decreased in the first quarter by 7.6% year on year to N5.60 billion and production variable costs. The cement company faced significant pressures associated with FX devaluation on imported raw materials, persistent inflationary pressures, and rising energy costs.

The company’s pre-tax profit jumped by 4.7% year on year to N22.48 billion while a steep rise in tax provision dragged lower net profit. The significant growth in tax expense is attributed to the expiration of the tax holiday of the company’s profit on the Mafamosing line 2 plant in Calabar. Consequently, profit declined by 14.9% to N14.93 billion in Q1 2023 from N17.56bn in Q1 2022. 

BUA Cement Profit Falls 19% in Q1

In the first three months’ financial scorecard for 2023, BUA Cement Plc reported a 9.7% year-on-year revenue growth to N106.35 billion from N96.99 billion in the comparable period.  Compared with the fourth quarter 2023 performance, the cement company’s revenue increased by 8.1% from N98.39 billion, following an increase in retail price in the local economy.

BUA Cement’s profit slumped due to a faster increase in its cost of sales ahead of revenue growth as the company contends with inflationary pressures, FX depreciation, and high energy prices.  Consequently, the cement company reported that its pre-tax profit declined significantly by 23.2% yearly to N32.57 billion.  The cement producer’s net profit slumped 19.1% year on year to N26.80 billion from N33.14 billion.

Dangote Grows Profit 4% in Q1

Dangote Cement reported a marginal decline in Revenue by 1.6% to N406.22 billion in the first quarter of (Q1) 2023 from N413.18 billion in the comparable period in 2022, its financial statement submitted to the Nigerian Exchange showed. However, the cement company’s performance was disappointing on a quarterly basis, according to a review by CSL Stockbrokers as revenue bumped by 7.1% from N441.07 billion in Q4 2022.

 Analysts attribute the cement giant’s revenue slump to the drop in the company’s production levels, down by 10.6% in Q1 2023 as the company continues to battle with worsened supply chain challenges. The cement producer saw its pre-tax profit lowered by 6.1% year on year to N146.82 billion in Q1 2023 from N156.40bn in Q1 2022. The Cement producer reported a decline in tax expense which boosted the bottom line by 4.01% to N109.50 billion in Q1 2023 from N105.9 billion in Q1 2022.#CSL Stockbrokers Estimate Higher FX Losses for Cement Producers#

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