The big battle for Africa’s cement market

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Though high cost of sales continue to pose threat to profit and dividend of listed equities, particularly those in the building sector of Nigerian Stock Exchange, the duo of Dangote Cement and Lafarge Africa, manufacturers of Elephant brand of cement, still remains investors’ toast in the industry.

Both companies continued to show resilience in the face of the seemingly harsh operating conditions in the country as key performance measuring indices continue to grow.

Going by absolute financial figures and ratios generated from both companies’ nine month audited financial report for the period ended September 30, 2015, one could confidently argue that both Dangote Cement and Lafarge Africa are leaders in the cement industry in Nigeria.

However, comparatively, peer to peer analysis of both companies shows that Dangote Cement seems ahead of Lafarge Africa as the company posted after tax profit of N157 billion in nine months as against N29.5 billion posted by Lafarge Africa. The nine months results only re-emphasised Dangote Cement leadership position in the industry.

Dangote Cement Cameroon rolls out
Dangote Cement Cameroon rolls out

Further breakdown of the report shows that Lafarge Africa Plc’s pre and post tax profits dropped in the third quarter as the cement company struggled with slow sales and rising costs.

Key extracts of the nine-month earnings report of Lafarge Africa for the period ended September 30, 2015 showed that sales rose marginally by five percent to N168.14 billion in third quarter 2015 as against N159.4 billion recorded in comparable period of 2014.

Lafarge Africa result seems worrisome considering the fact that the company had just completed its merger with its local and regional entities to become Lafarge Africa. The merger, an obvious response to check growing strength of Dangote Cement.

Dangote-Cement
Dangote-Cement

Return on Investment (ROI)
Each share of the Lafarge Cement Plc generated an average of 110 kobo per share in the last two years against Dangote Cement’s average Earnings per Share (EPS) of 96 kobo in the same period.

On the average, Dangote Cement has rewarded its shareholders better than Lafarge Africa with 80 percent of profit paid out as dividend as against 57 percent by the latter.

Earnings Growth
Following the consolidation, Lafarge Africa’s revenue grew by just three percent year on year. This is similar in comparison to the Q3 2015 results which saw revenues grew by single digits (five percent).

This also might suggest that the flat revenue growth may have been the result of its regional operations which are growing at a slower pace. Revenue growth is critical to the cement industry and this should get shareholders worried.

In the case of Dangote Cement, revenue grew by 18 percent, moving from N310.2 billion in Q3 2014 to N365.5 billion in 2015. Despite Lafarge consolidation, Dangote Cement still dictates the space and controls, substantially, market share having earned N197.3 billion more than Lafarge Africa sales.

Lafarge Africa’s ability to convert sales to profit recorded a decline during the review period, as profit margin stood at 17 percent compared with Dangote’s 44 percent in the same period.

Performance chart
Performance chart

By implication, Dangote retained 44 kobo on every 100 kobo of sales in the last nine months while Lafarge Africa retained 17 kobo from every N1 of sales. Cost of sales is evidently heavy for Lafarge Africa.

Return on equity (ROE) which reveals how much profit a company earned in comparison to total amount of shareholders’ equity, sees Dangote Cement recording 25 percent RoE compare to Lafarge’s 49 percent.

Lafarge Elephant Cement
Lafarge Elephant Cement

Assets Quality
Analysis shows that both cement companies’ assets are not yielding reasonable income as at the review period, ass reflected in the total assets turnover ratio which stood at 0.33x and 0.54x respectively.

It means Dangote was able to generate income of 33 kobo from every N1 worth of asset deployed. Similarly, Lafarge Africa total assets turnover ratio of 0.54x in the review period, suggesting a more efficient use of assets than Dangote Cement.

Performance table
Performance table

Liquidity
Liquidity ratio shows that both companies’ assets quality needs to be improved upon. Dangote cement’s current ratio (a ratio which shows the relationship between current assets and current liabilities) stood at 0.59:1 in nine months compare to Lafarge’s 0.95:1.

The figures indicate that both companies could not meet up with their short- term financial obligations as at when due.

Future Outlook
After it successfully integrated its operations in South Africa and Nigeria to create Lafarge Africa, Lafarge had revealed plan to double its production capacity in Nigeria as part of a new expansion programme that would see additional investments by the foreign majority shareholders in its Nigerian subsidiaries.

Performance chart
Performance chart

Lafarge, which had increased its capacity from 3.0 million metric tonnes to 8.0 million metric tonnes, said it would be making new investments in the next few years to double its capacity and strengthen its position to become a leader in the Nigerian cement industry.

On the other hand, Dangote Cement has already started delivering on its promise to become a truly Pan-African manufacturer. Its plants in South Africa and Senegal became operational while plants in Zambia and Cameroon were commissioned in the 2015 financial year.

Lafarge Cement Wapco
Lafarge Cement Wapco

Also, its new facilities in Tanzania, Republic of Congo, Ghana, Côte d’Ivoire, Sierra Leone and Liberia are expected to begin operation in 2015/2016.

Besides, Dangote has only recently announced an additional nine metric tonnes of cement plants in Itori, Ogun State and Okpella, in Edo State.

Analysts at New Mail Online expect both companies to post growth sales by the end of current financial year and continue to expand to more Africa countries.

We particularly project that Dangote cement will surpass EPS of N9.8 posted in FYE 2014 while Lafarge is likely to remain flat.

Overall, shareholders in both companies are expected to be rewarded better than 2014 by the end of ongoing financial year ending December 2015.

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