Nigiraa vetiva research-cement-sector-study

Nigerian Cement Sector: Unbundling Potentials I January 2011 I

January 4, 2011

In this report, we update our views on the Nigerian cement industry,

assessing the sector’s long term potentials from a global standpoint. On

a company-specific level, we upgrade our rating on Nigeria’s biggest

cement producer – Dangote Cement to “Accumulate” whilst downgrading

our rating on Ashaka Cement to a “Reduce”.

Slight price cuts likely in the short term… In view of the recent

inventory build-up in the industry, we envisage some reduction in prices, albeit

in the short term. In our view, cement producers, in a bid to clear out

accumulated inventory, may further reduce prices directly or indirectly through

bonuses and rebates. In contrast to our previous views, we are not likely to see

the anticipated boost in private sector lending till late Q2, hence strong demand

would only resume in the latter half of 2011 into 2012. Whilst sluggish demand

persists in the short term, we believe maintaining lower prices at current or

higher capacity utilisation rates is a better option, compared to reducing

capacity utilisation, in view of the huge operational gearing of the industry.

…Notwithstanding, mid to long term fundamentals remain

impressive: The need to meet Nigeria‟s huge infrastructural deficit cannot be

overemphasized. Despite its large population and rapidly growing urbanisation,

Nigeria's roads network significantly lags comparable African countries and

emerging markets countries (30% paved, in comparison to North Africa average

of 68%, BRIC average of 64%). Housing deficit has been widely reported as 16

– 18 million units, with an estimated N60 trillion (more than twice Nigeria‟s

GDP) needed to bridge the gap. It is evident therefore that the sector‟s long

term potential is unquestionable; nonetheless, we believe the potentials are

gradually unfolding.

Pivotal to SSA‟s infrastructural development: With the bigger global

players (Lafarge, Heidelberg, CEMEX) focusing on deleveraging, there would

probably be little on-going investment in cement plant expansion in Africa.

Thus, given the inherent possibility of exports to other African countries in the

medium to long term, the Nigerian cement sector can potentially become a

dominant player within the continent. Furthermore, the planned expansion of

Dangote Cement in southern, central and western Africa shows the important

role Nigeria‟s cement sector is set to play in sub-Saharan African.

Valuations: On a relative valuation basis, the cement producers are cheap;

Nigerian cement producers are trading at a 2011 weighted P/E and EV/EBITDA

of 10.1x and 9.0x relative to emerging market peer average of 14.2x and 8.9x

respectively. Our valuations for the cement producers are based on an 80/20

weights of Discounted Cashflow and EV/EBITDA valuation methodologies

respectively. Thus, we upgrade our rating on Dangote Cement to an

“Accumulate” (11% upside to our fair value), maintain our “Accumulate”

and “Underweight” rating on Lafarge WAPCO and CCNN respectively but

downgrade our rating on AshakaCem to a „reduce‟ (11% downside to our

fair value).

Nigerian Cement Sector Unbundling Potentials

Market Cap: N2,060bn (US$13.7bn)

% of NSE: 26.2%

Forward 2011 P/E: 10.1x

EV/2011 EBITDA: 9.0x

2011 Div Yield: 6.5%

YTD perf: 38.81%

Recommendations list

Dangote Cement: ACCUMULATE

Lafarge WAPCO: ACCUMULATE

Ashaka Cement: REDUCE

Cement Co. of North. Nig: UNDERWEIGHT

52-week share price performance (rebased to Dec

‟09)

Source: NSE, Vetiva Research

Vetiva Capital Management Limited

266B Kofo Abayomi Street

Victoria Island, Lagos

Tel: +234-1-46175213

Fax: +234-1-4617524

Email: [email protected]

Analyst

Tosin Oluwakiyesi

[email protected]

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ASI Building Materials Index

Nigerian Cement Sector: Unbundling Potentials I January 2011 I 1

Nigeria I Building Materials I Equities

Table of Contents

Summary ................... 1

A global perspective .................... 3

Nigerian Cement Sector: The Value Proposition................... 4

Industry Outlook ................... 8

Industry Structure .................. 13 Demand Dynamics .................. 19 Changing Landscape of Supply ................... 21 Pricing dynamics ................... 23

Regulatory Perspective ..................... 26

Investment Summary .................... 28

Quoted Companies ................... 34

Dangote Cement Plc Lafarge WAPCO Cement Plc AshakaCem Plc Cement Company of Northern Nigeria Plc

Non-quoted Companies ................... 90

Disclosures ................... 91



A global perspective

Times are changing for global cement producers as they struggle to grow earnings

under a weight of debt and slowing demand in developed economies. The focus of

global players on minimising costs and debt exposure, and slowing down on

expansion and investment may make them lose out on the growth prospects

expected in frontier markets in sub-Saharan Africa. Among the global cement

producers, Lafarge is perhaps the only one well poised to benefit from the

ongoing and expected economic growth in Africa and the Middle-East, as the

region has the second highest contribution to its global revenue, unlike Holcim

and Heiderberg which have very little presence in these regions. The five key

players dominating the global cement industry - Lafarge (France), Holcim

(Switzerland), Heidelberg (Germany), CEMEX (Mexico) and Italcementi (Italy),

account for c.20% (Industry HHI* is 6,685) of global cement sales in 2008,

indicating the highly concentrated nature of the industry. Furthermore, the

mature state of most of the global players, has been compounded by the recent

downturn in global economy, thus there is considerable pressure on the growth

potentials of the global players, especially in developed economies.

In Western Europe, where the global players have a major market share,

construction activities have been on a decline since the onset of 2010. The

eurozone debt crisis further slowed down recovery as the affected

governments embarked on fiscal cuts, thus reducing the spend on new

infrastructural and non-residential public projects which should have

stimulated construction activity. Regional split of sales for the producers (as at

half year 2010) shows declining sales in Europe, with slight pick-ups in North-

America, Asia and Africa.

* HHI means Herfindahl HirschMan Index, calculated as the sum of the squared market share of

industry players. It‟s a measure of industry concentration.

More global cement producers are

shifting focus to deleveraging and

cost cutting

Apart from Lafarge, other global

players are not likely to embark on

any major expansion in Africa

155143

89 87

63

205 194

10396

77

0

55

110

165

220

Lafarge Holcim Heidelberg Cemex Italcementi

Cement Sales Capacity

Figure 1: Market Share (mill. tonnes of top five global cement producers)

2008 data

Source: CemNet

Decline in construction activities in

Europe considerably affected the

earnings of the key global players



While we still see some potential in less developed eastern european countries,

we believe the expected slow-down in growth in more developed western

europe would cause an overall strain on earnings growth from the european

market. Apart from Lafarge, who virtually had presence in almost all the

African sub-regions – North Africa (Lafarge Ciments – Morocco, Orascom -

Egypt), East Africa (Bamburi Cement – Kenya), West Africa (Lafarge WAPCO

and Ashaka Cement - Nigeria) and Lafarge S.A (South Africa), the other global

players at best only operate in one or two sub-regions. Therefore, based on

the current low level of social and physical infrastructure penetration in Africa,

and the boom expected from increasing discovery of mineral resources and

commodities, we make a case for Africa as the next frontier of global

economic growth, with Nigeria‟s cement sector strategically positioned

to drive the expected growth in physical infrastructure.

The African story: the next frontier of growth

Though the African continent still lags significantly in infrastructure, we believe

the next pioneer of global economic growth would be Africa. Asia, aided by the

very rapid growth of China, India, Singapore, Malaysia, Indonesia, Thailand,

which are classified by the International Monetary Fund (IMF) as Newly

Industrialised Asian Economies (NIAE) over the last two decades, has been the

propelling force of global economic growth.

Global cement producers with

significant presence in Africa are

better poised to grow earnings in

the long term

Europe:

29.40%

North

America

: 12.50%

Latin

America

: 15.40%

Asia

Pacific:

37.40%

Africa/

Middle

East: 5.3%

Holcim

Europe:

36.0%

North

America

:17%Latin

America

: 5%

Asia

Pacific:1

5%

Africa/

Middle

East: 27%

Lafarge

Europe:

37%

North

America

: 28%

Latin

America

: 13%

Asia

Pacific:2

1%

Africa/

Middle

East:1%

Heidelberg

Figure 2: Regional Split of Sales (based on interim quarterly results) of the top three global cement producers

Sources: Company‟s websites, Vetiva Research

With the growth in the developed

economies expected to slow-down

over the next decade, whilst SSA‟s

growth trends up, Africa can be the

next pioneer of global growth



However, economic growth in Asia would gradually slow down over the next

decade; thus we expect growth in Africa, especially SSA (excluding south Africa)

to gradually trend up on the back of increasing discovery of mineral resources,

strong commodity prices and improving political landscape.

1 MENA: Middle East and North Africa, NIAE: Newly Industrialised Asian Economies, SSA: Subsaharan Africa

In our view, there‟s an increasingly lesser potential for infrastructural

development in advanced and fast growing Asian economies. Thus, Africa has

the highest untapped potential for economic growth and infrastructural

development. According to a recent World Bank report – Africa Infrastructure:

Time for Transformation, Africa is estimated to have an infrastructural deficit of

$93 billion out of which we estimate that about a third, c.$31 billion would be

used for electric power and about $25 billion for the construction of physical

infrastructure (roads, bridges, ports and rails). Based on the same report,

most African cities face the challenge of acute housing shortage. In most

African countries, real estate and government agencies are only able to meet

at most one quarter of housing demand, leaving three-quarter to the informal

market. Based on UN Habitat estimates, as much as 70 percent of Africa‟s

urban population reside in slums. However, the infrastructure deficit is not

evenly spaced across the African sub-regions. For instance, countries in the

Northern Africa region particularly Egypt, despite its inherent minor challenges,

is way ahead of others in cement consumption, housing delivery and other

physical infrastructure.

-4.00%

-2.00%

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010E

2011E

2012E

2013E

2014E

2015E

Advanced Economies NIAE MENA SSA

Figure 3: Economic growth of some regions1 of the world (2000-2015E)

Sources: IMF, Vetiva Research

Africa‟s infrastructure deficit

portends significant growth

opportunities in the longer term



The major deficits in housing and other phyiscal infrastructure in Africa is more

concentrated in West, Central and East African sub regions. In view of Nigeria‟s

enormous population (a sixth of Africa‟s population), we see the highest

prospects for infrastructural development in Nigeria. Hence, we believe the

Nigerian cement sector offers a very robust growth potential.

Nigeria‟s cement sector: The value proposition

Among the top five major markets in Africa (South Africa, Egypt, Algeria,

Morocco and Nigeria), Nigeria offers the highest growth opportunity in the

cement sector. Using cement consumption patterns, Nigeria‟s cement

consumption per capita significantly lags that of the remaining top four

markets. Egypt has the highest cement production capacity on the continent

(as at 2008). Owing to the impact of the rapid development of the Middle East

region on North Africa, the sub-region generally leads in cement consumption

pattern on the continent. Average cement consumption per capita for North

Africa is slightly above 300 kg, the highest on the continent. Given Nigeria‟s

heavy cement supply deficit and historically low local production capacity,

Nigeria‟s cement consumption level is significantly lower at about 105 kg per

capita. The dynamics of Nigerian cement production is however changing

tremendously since the entrant of key players like Dangote Cement. We

present the following as the Investment thesis for Nigeria‟s cement sector.

Robust Housing Deficit: According to estimates from industry experts,

Nigeria has an estimated deficit of 16 million to 18 million housing units. In

2009, the Presidential Committee on Implementation of Affordable Housing

has estimated that about N60 trillion would be needed to bridge the deficit.

Assuming that federal, state governments, and private sector makes very

significant efforts, within the next 10 years to provide cheap and affordable

ideal housing stock (at least a 2- bedroom apartment) to meet half of the

estimated deficit (c.9million housing stock), cement consumption based on

this premise would be c.112 million tonnes. With expected rise in local

manufacturing capacity to c.28 million tonnes by 2012, it would take 5 to 6

years to provide half of the estimated housing deficit. On a more realistic

stance, we believe it would take longer than 6 years to at least provide half of

the estimated housing deficit. However, with the Federal Housing Authority‟s

2009 – 2013 action plans to provide 100,000 units of houses annually, the

increasing mass of private real estate developers and state governments‟

participation in housing delivery; we expect Nigeria‟s housing deficit to shrink

considerably over the next 10 years.

Given Nigeria‟s massive

population and fast-paced

urbanisation, Nigeria offers the

highest growth in the cement

sector among the top markets in

Africa

Based on our estimates, c.112m

tonnes of cement would be

required to meet just half of

Nigeria‟s estimated housing

deficit

Africa



Roads: Another major case for the strong potential of Nigeria‟s cement sector

is the current insufficient and inadequate road transportation network. With

the shift of the global construction industry to concrete and steel (from the

more primitive stone and mortar) in construction activities, cement demand

has occupied a pivotal position in the construction industry. According to the

Federal Ministry of Transport, Nigeria has a road network of c.195,000 km

with only 30% paved in comparison to 63% average for emerging N-11

countries and 69.7% average for Egypt, Algeria, Morocco and Tunisia, based

on data from World Bank and International Road Federation (IRF), see figure

5 below. Based on IRF definition, paved roads refer to length of roads that are

surfaced with crushed stone (macadam) and hydrocarbon binder or

bituminized agents, with concrete or with cobblestones. Therefore, the use of

concrete in road construction implies a concurrent use of cement.

0

30

60

90

120

South Africa Nigeria Egypt India Brazil China

Housing Deficits(Mill units) Housing deficit per capita(1/1000 units)

Figure 4: Comparison of Nigeria‟s housing deficit

Sources: Nationsencyclopedia, National housing ministries websites, Vetiva Research estimates

Nigeria‟s total road network is

only 30% paved compared to

North Africa average of 69% and

“N-11” average of 63%



Rail and ports construction: The increasing use of concrete ties in railroad

construction (rather than wood), has meant a significant surge in cement

demand globally. Thus, in Nigeria, the current abysmal state of railroad

network portends a major opportunity for continuing growth in the cement

sector. With a total rail network of 3,505 km (from Federal Ministry of

Transport), Nigeria‟s rail network ranks among the lowest for highly

populated countries. In line with the Federal Ministry of Transport‟s 25 year

National Ports Master Plan, several port development projects including sea-

ports expansion, rehabilitation of facilities and channel towage development

have been embarked upon. If the master-plan would be diligently followed,

more investments in ports development and maintenance are underway,

even into the longer term.

Vast raw material deposit: Apart from the expected boom in physical

infrastructure, which would be the key propeller of growth in the cement

sector, the presence of limestone and other additives used in the production

of cement in vast quantities, is an additional plus for Nigeria‟s cement sector.

Nigeria has an estimated 837 million tonnes of limestone deposits in 22 out

of 36 states, but currently has cement plants in only 6 states. Gypsum, the

major binding substance used in the final stage of cement production is also

present in commercial quantities in some Nigerian states, even though it is

not being mined or produced in commercial quantities; leaving producers to

import the substance. According to China‟s leading cement equipment

supplier – Jiangsu Pengfei Group Co. Ltd, the high purity level and shadow-

buried depth of Nigeria‟s limestone deposits are characteristics which make it

easily exploitable and desirable. Limestone is mined in just about half of

West African countries, but then not as major economic activities.

0%

20%

40%

60%

80%

100%

Egypt

Moro

cco

Alg

eria

Tunis

ia

Nig

eria

Lib

ya

Russia

India

Chin

a

UAE

Mala

ysia

South

Kore

a

Japan

Italy

Germ

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Fra

nce

Czech R

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N/A

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vera

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N-1

1 a

vera

ge

Figure 5: Comparison of Nigeria‟s paved road network

Sources: World Bank database, World Road Federation, Vetiva Research

Nigeria‟s 3,505 km rail network

ranks lowest amongst highly

populated countries

Infrastructural boom and

abundance of raw materials

would also encourage cement

production



Hence, cement production is significantly low in West Africa and the region‟s

countries rank among those with lowest cement consumption per capita on

the continent. Nigeria‟s vast limestone deposits therefore potentially place

the country at an advantage in the sub-region if it can harness the

opportunities.

Potential FX earner: Nigeria depends almost entirely on crude oil as the

main government revenue and foreign exchange earner. Like the developed

Asian countries – China, Japan and Thailand which are top exporters of

cement globally, Nigeria can also become a net-exporter of cement through

continuous investment in local production. The cement deficits across West

and Central African countries present Nigeria with immense opportunity for

export when local production exceeds demand. We predict that this would

likely occur by 2013 at which point local production, estimated at 28 million,

would slightly surpass demand (estimated at 27.5 million tonnes). In our

view, more investments in local manufacturing would be needed beyond this

point for the sector to contribute meaningfully to the country‟s exports.

Government‟s Medium term Fiscal Commitment: We view government‟s

recent medium-term budgetary frame-work (based on National

Implementation Plan for NV2020) as a catalyst for sustained spending on

capital projects. Whilst noting that NV2020 has been flawed with criticism in

view of Nigeria‟s poor history of implementation of national goals, the

medium term frame-work offers a more realistic expectation in government‟s

commitment to achieve the goal, and also presents a shorter-term frame

work to examine and monitor performance and progression. Therefore, with

government being the biggest spender on physical infrastructure and

perhaps the largest consumer of building materials, one can readily project

cement demand, at least in the short to medium term. More important in the

recently launched medium term National Implementation Plan (NIP) is the

fact that emphasis is placed on capital expenditure (CAPEX) in the

development of critical infrastructure.

Industry Outlook

Cement consumption hinged on government‟s revenue

We restate that Nigeria‟s investment case for the cement sector and the

broader building materials industry is quite attractive, thus we reaffirm our

long term optimistic outlook for the industry. Our outlook on cement

demand is hinged on expected government revenue from crude oil

(since crude oil constitutes c.90% of government‟s revenue), the

proportionate spending of the revenue on physical infrastructure

while drawing historical correlation between federal government‟s

physical infrastructural spending and cement consumption.

Cement deficits in African

countries drive potential for

export, as local production is

expected to exceed demand in

the longer term

Improved efficiency of

Government‟s short-term plan for

projects is expected to boost

physical infrastructural projects,

hence demand for cement



Figure 6: Federal Government Revenue assumptions

2010 2011 2012 2013

Crude Oil Production (mbpd) 2.4 2.5 2.5 2.5

Crude Oil Price (US$) 60 60 60 60

Real GDP Growth rate (%) 8.2 10.9 11.8 13.1

Population Growth rate (%) 2.8 2.8 2.8 2.8

In our view, projecting cement consumption this way presents a fundamental

basis for the expected boom, especially because with the vast majority of

Nigeria‟s population living below the poverty line, it is difficult to justify that

the expected rise in cement production can be absorbed by the rather weak

purchasing power of the of the citizenry.

Thus, a base case assumption for cement consumption that is directly linked

to government‟s expected revenue, in our view, provides a more fundamental

backing for our outlook on cement demand. We note however, the increasing

involvement of the private sector through Public Private Partnerships and the

rising spate of debt issuance by governments (both state and federal) to fund

major capital projects. Thus, we reiterate that our outlook represents a base

case on which higher expectations can be built, in view of other possible

sources of funding for physical infrastructure.

Medium term outlook on cement consumption

Following from our overall expectation of government revenue being the key

driver of cement consumption, we expect, based on the analysis of

governments‟ (both states and federal) medium term CAPEX on housing and

road construction, that cement consumption will increase at 4-year CAGR of

16.7% to 27.54 million tonnes by 2013. Over the four year period, 2010 –

2013, we expect cement consumption to sum up to c.70 million tonnes.

Figure 7: Estimated CAPEX on housing and transportation infrastructure (2011 – 2013)

State Government (N‟Trn) 3.55

Federal Government (N‟Trn) 1.68

Total (N‟Trn) 5.23

Cement Consumption ('000 tonnes) 69,088

Source: NIP implementation plan

Sources: National Planning Commission, Vetiva Research

Poor economic conditions argue

against domestic demand by the

masses, putting the spotlight on

the government

However, fundamentals still point

a little in the direction of the

Private sector contribution

through Public-Private projects

.



As seen in the table above, we arrive at an estimated sum of N5.2 trillion

(c.US$35 billion) for housing, road, ports and rail transportation CAPEX

(including only projects which based on our view are directly correlated to

cement consumption while adjusting for outliers). Following from minister of

finance recent affirmation of about 50% budgetary implementation for 2010,

we assume about 60% execution of physical infrastructure projects (relating to

housing and transportation only) for 2010 and while gradually scale percentage

execution upwards to 75% by 2011, 85% by 2012 and 95% by 2013. We also

assume that unspent allocations on these projects would be automatically

rolled over to the following year.

Potential for export in the medium term?

Based on the medium term outlook presented for cement consumption above,

the potential for export in the sector may not be realized prior to or by 2013.

Exports of about 4 million tonnes of cement would only be feasible by 2012 if

we make an aggressive assumption that all existing and new cement plants

would operate at full capacity by 2012. While this might be possible, we

consider it very unlikely in view of the usual ramping up phase for most

cement plants. Historically, based on Dangote Cement‟s Gboko Plant expansion

(former Benue Cement Company) in 2008 and Obajana Cement Plant built in

2007, we believe that it will take a minimum of 2 to 2.5 years before a new

cement plant or line can reach full capacity utilisation.

Figure 8: Federal and State government CAPEX on housing, roads, rail and ports

(N‟bn) and cement consumption construction (million tonnes) 2006 – 2013E

Sources: CBN, Ministry of National Planning Vetiva Research estimates

0

500

1000

1500

2000

0

6000

12000

18000

24000

30000

2006 2007 2008 2009 2010E 2011E 2012E 2013E

Cement Consumption Government CAPEX

Estimates show N5.23 trillion in

government spending on

Infrastructure with 50%

implementation and a potential to

ramp up in subsequent years

.

Actualizing the export potential

might take more than 2 years

due to the ramping up associated

with cement plant expansion

.



Longer term outlook – Where will it swing?

The outlook for the cement industry in the longer term is strongly correlated to

economic and population growth. From the development pattern of most

developed economies and emerging markets, the link between GDP growth and

cement consumption is well established. (Figure 11 below shows the correlation of

the two)

0

7500

15000

22500

30000

2009 2010E 2011E 2012E 2013E

Consumption Production

Production outstrips

consumption; exports likely

0

7500

15000

22500

30000

2009 2010E 2011E 2012E 2013E

Consumption Production

Production lags

consumption; exports

unlikely

Figure 9: Aggressive case: Cement production vs

consumption (million tonnes)

Figure 10: Normal case: Cement production vs

consumption (million tonnes)

Sources: Industry, Vetiva Research estimates

Figure 11: G-20 countries: Cement Consumption Vs GDP per

consumption

Sources: Industry, Vetiva Research estimates

0

200

400

600

800

1000

1200

1400

0 10000 20000 30000 40000 50000 60000

Cement Production Per Capita

S/Arabia

S/KoreaChina

ItalyTurkey

Japan

Australia

MexicoCanada Germany

Russia

France USABrazil

S/Africa ArgentinaUnited KingdomIndonesia

IndiaNigeria

In the long run, economic

prosperity and population growth

would be the major drivers of the

demand for cement

.



In our view, the potential for strong economic growth in Nigeria is

largely dependent on government‟s ability to intensely increase its

revenue and the success of its medium term (2010 – 2013) power

sector reform. We highlight the following as the reasons undergirding this

view.

Government‟s oil revenue is not sufficient to cater for all its long term

investments; hence the private sector is pivotal to the achievement of these

goals. However, the power sector reform must be successfully implemented to

encourage sustainable private sector investment. Notwithstanding, we believe

government can achieve more if its revenue base becomes substantially

diversified to reduce the heavy dependence on crude oil revenue. Agriculture

and Manufacturing are two key sectors that can help Nigeria achieve the

desired diversification.

The growth prospects in the Agriculture and Manufacturing sectors are almost

entirely dependent on the success of the power and banking sector reforms.

Stable power supply would significantly minimize overheads and encourage

large scale private sector involvement in these sectors. Furthermore, re-

structuring of the banking sector to enable Small and Medium Scale

Enterprises (SMEs) access credit facilities is imperative. If these are achieved,

the effect on the broader economy would be higher revenue to government,

lower unemployment and a significant improvement in the purchasing power

of the citizenry.

Government spending has historically been the major driver of cement

consumption in Nigeria. While we believe government‟s expenditure would still

account for a sizeable portion of cement consumption in the medium to longer

term, a more rapid growth could be achieved in the longer term if purchasing

power becomes less concentrated in government‟s hands. Currently, there‟s

still a huge deficit in Nigeria‟s cement consumption despite the inventory

build-up which had plagued the industry in the last few months as a result of

lower effective demand (demand backed by purchasing power).

Assuming a successful implementation of government‟s medium term plan on

critical infrastructure and steady strengthening of commodity prices,

particularly crude oil, cement consumption would continue to rise beyond

2013 and would soon out-pace local capacity except new capacities are

added.

In line with this, we assume a base case outlook of cement consumption

continuing to rise at a constant CAGR of 13.5% beyond 2013. However,

cement consumption may grow at a much quicker pace if there is massive

influx of the private sector in real estate development, higher purchasing

power and stronger government revenue base.

Nigeria‟s economic growth is

strongly linked to increased

funding and the success of the

power sector reforms

.

Diversification of sources and

private sector participation are

expected to back up Crude oil

proceeds in boosting revenue

.

A slight shift off the Government

in cement consumption may help

close the cement deficit faster as

effective demand grows

.

Barring failures in Government‟s

infrastructural programs and local

demand boom, cement

consumption would soon outpace

local production capacities

.



Homogeneous product - prospects for integration?

Competition gradually rising...In our view, the Nigerian cement sector is

becoming increasingly competitive. Industry players have attributed the slower

sales that characterised the industry for most part of this year to heavier-than-

usual rainfalls and strained credit flow. While this is partly valid, we believe

competitive pressures are gradually increasing in view of rising surplus. Recently,

Lafarge WAPCO launched a new brand of its cement - “Elephant Supaset”- which

portrays, as explained by the company, that the brand would harden or set faster

under water compared to the usual Portland cement. As we have always

maintained, this buttresses our view that Lafarge WAPCO would be facing intense

competition from Dangote Cement and would gradually incur higher marketing

expenses to defend its market share. We expect the competition to heighten,

especially in the Lagos and Abuja regions when the on-going expansion projects

from Dangote Cement and Lafarge WAPCO are completed next year.

...Vertical integration possible in the longer term: We believe the Nigerian

cement industry would move towards vertical integration in the longer term, as

obtainable in developed countries and emerging economies. Cement is relatively

homogenous in physical attributes and little brand differentiation can be achieved,

therefore, as it has historically being in Nigeria, competitive effects relating to

pricing arise more from market structure rather than product alterations. For

instance cement is usually cheaper in areas closer to plant or depot locations.

Eventually, in the longer term, profit margins would either start reducing or

remain constant, if prices decline or at best remain constant. We believe players

who generate huge volumes would have the upper-hand, until a saturation point

when volume increases might create a glut, and vertical integration would

become imperative to achieve some cushioning in revenue base.

Dynamics of vertical integration in the cement industry: The most common

form of vertical integration in the cement industry involves the acquisition or

setting-up of ready-mix concrete, aggregate businesses and production of

gypsum. Construction activities in most developed countries have been quite

simplified with the use of ready-mix concrete and aggregates. Ready-mix

concretes (also referred to as customised concrete), which have significant

advantages over site-mix concrete in terms of labour costs and wastage, would be

needed to achieve faster and cheaper housing delivery in Nigeria.

Industry Structure

High concentration: The Nigerian cement industry (importation and local

production) is highly concentrated. Based on available data for 2009 cement

consumption from industry sources, the cement industry had a HHI of about

2,840 which based on global standards on anti-thrust policies implies a highly

concentrated and less competitive industry. According to US anti-thrust policy an

industry with a HHI of less than 1000 is considered a competitive market; HH1 of

1000 – 1800 is considered moderately competitive, while HHI greater than 1800

implies a highly concentrated and less competitive industry. The higher the HHI,

the closer the industry is to being a monopoly. Using FY‟09 data from industry

sources, Dangote Cement controls c.50% of the Nigerian cement industry (both

local production and importation).

While manufacturers blame

waning sales on odd rains and

lack of funding, facts point to

increased competition especially

in the cities

.

Product homogeneity and market

structure are bound to encourage

vertical integration in the long

term as profit margins eventually

softens

.

Common integration involves

obtaining ready-mix and

aggregate business units; these

would help simplify construction

and accelerate permeation of

low-cost housing

.

With a HHI of 2,840, the Nigerian

Cement Industry is quite

concentrated



Though 2010 cement consumption data are unavailable, we guesstimate from the

interim earnings announcement of publicly listed cement producers that industry

concentration has increased with Dangote gaining market share, as most other

producers recorded YoY decline in sales. In view of the much anticipated

completion of Dangote Cement and Lafarge WAPCO‟s expansion next year, the

concentration level of the industry would rise further as we expect Dangote

Cement‟s market share to rise to c.70% by end of 2011.

Sources: Industry, Vetiva Research Estimates

Wide variations in operating efficiency: The different fuel types and energy/

cost dynamics of Nigerian cement producers have translated into varied

profitability margins in the industry, with big producers like Dangote Cement

having PBT margins slightly in excess of 50% (based interim Q3‟10 earnings),

whilst that of small-scale producers like Cement Company of Nigeria and

AshakaCem Plc are as low as 11% and 20% respectively.

6.2%

57.1%

3.7%

14.7%

18.3%

Ashaka

Dangote

CCNN

Lafarge WAPCO

Unicem

4.4%

70.3%

1.8%

14.8%

8.8%

Ashaka

Dangote

CCNN

Lafarge WAPCO

Unicem

Figure 12: Current market share of Nigerian

cement producers

Figure 13: Expected market share at the

completion of on-going expansion

4447

5544

6284 6357

16%18%

23% 24%

0%

10%

20%

30%

40%

0

2500

5000

7500

10000

2009 2010E 2011E 2012E

PBT/Tonne PBT Margin

5537

7286

83048695

20%

26%

32%34%

0%

10%

20%

30%

40%

0

2500

5000

7500

10000

2009 2010E 2011E 2012E

PBT/Tonne PBT Margin

Figure 14: Industry Average PBT/tonne (N) and

PBT margin (%) with Dangote Cement

Figure 15: Industry Average PBT/tonne (N) and

PBT margin (%) without Dangote Cement

Sources: Annual, Vetiva Research Estimates



Even with the least profitable producer having a PBT margin in the low double-

digits, the cement industry, having an average PBT margin (based on latest

interim results) of 28%, is still more attractive than the food/beverage,

conglomerates and breweries sectors of the Nigerian Stock Exchange, which has

average PBT margins of 12.4%, 11.6% and 21.0% respectively.

Sources: Company Filings, Vetiva Research

Operational gearing: Given the huge fixed asset base of the industry,

operational gearing is high and producers can only reduce its impact through

higher sales. Overall, the bigger players have the best opportunity to minimise

operational leverage at higher volumes.

Domination by local players: In comparison to bigger cement markets in Africa

which are still dominated by global players, the Nigerian cement industry has

witnessed a radical shift with the entry of the Dangote Group into cement

production. Suez group, the biggest cement producer in Egypt is owned by the

Italcementi group – the fifth largest cement producer globally. Other global

players like Lafarge, Holcim, and Cemex also have major presence in other North

African countries. In a similar vein, the Lafarge Group has a significant presence

in South Africa. Although, the Lafarge Group (through its subsidiaries – Lafarge

WAPCO and Ashaka Cement) is the second largest producer in Nigeria, its market

share of c.13% significantly lags behind Dangote Cement‟s 50%.

Prior to 2007, Lafarge WAPCO dominated cement production in Nigeria with a

market share of c.60%. Whilst the Dangote Group has always had a significant

hold on cement importation, its backward integration which culminated in the

commissioning of the Obajana plant in 2007, pushed its dominance to local

production, hence displacing Lafarge WAPCO. Germany‟s top cement producer -

the Heidelberg group, until 2009, had a minute exposure to Nigerian Cement

industry through the Cement Company of Northern Nigeria (CCNN).

Figure 16: Average Pre-tax profit margins of key sectors on the Nigerian Stock

Exchange (based on latest interim earnings)

12% 12%

21%

19%

28%

5.4%

0%

8%

15%

23%

30%

Conglo

mera

tes

Food/B

evera

ge

Bre

weries

Bankin

g

Buildin

g M

ate

rials

(Cem

ent)

Petr

ole

um

Mark

eting

Though technology sets Nigerian

cement players apart, the sector

is profitable on the overall,

outclassing the local FMCG‟s and

matching continental

counterparts.

.

Manufacturers would aim to

soften gearing effects by upping

sales, tipping the scales the way

of the big players.

Dominated by Dangote Cement,

local influence is strong in the

Nigerian cement market, as

against trends in other African

countries.



Perhaps due to inability to compete adequately as a result of the small production

scale of CCNN (0.5 million tonnes annual capacity) and its obsolete state, the

Heidelberg group pulled out of the Nigerian cement industry, selling its stake in

CCNN to a local conglomerate – the BUA group, in 2009. The Holcim group, which

entered the Nigerian cement industry in 2005, operates through the Unicem plant

in Calabar (South-South Nigeria). The company is a Joint Venture with Flour Mill,

and Lafarge.

Figure 17: Dominant Cement Producers in some African Countries (put company

before parent)

Country Company Parent Production1 Capacity

Egypt Suez Italcementi 12.0

Morocco Lafarge Ciment Lafarge 7.0

South-Africa PPC** Barloworld 8.0

Kenya Bamburi Lafarge 2.5

Ghana Ghana Cement Heidelberg 2.4

Nigeria Dangote Cement Dangote 8.0 Source: Vetiva Research

** PPC - Pretoria Portland Cement, 1Current Production Capacity only

Nigerian Cement Sector: Unbundling Potentials I December 2010 I


Figure 18: Emerging market cement producers‟ comparable metrics

Company (Mkt Mn

USD)

EBITDA Margin

EBIT Margin ROE (%) EV/EBITDA P/E (x) Dividend yield

Country 2010E 2011E 2010E 2011E 2010E 2011E 2010E 2011E 2010E 2011E 2010E 2011E

Pret. Portland Cement

S/Africa 2,715.5 38% 38% 33% 34% 112.9 99.3 8.7 7.8 13.1 11.5 5.9 6.7

Anhui Hong Kong 13,400.2 26% 26% 20% 20% 15.4 16.5 12.1 9.9 21.5 17.8 0.9 1.1

Ambuja India 4,771.3 28% 26% 21% 21% 19.6 18.0 9.4 9.1 15.9 15.1 1.8 1.9

Bamburi Cement

Kenya 885.5 30% 33% 32% 32% 26.6 29.0 7.1 5.5 12.9 9.9 4.7 6.3

ACC Limited India 4,191.8 25% 24% 22% 19% 20.4 17.9 8.4 8.0 14.1 13.7 2.2 2.3

Gulf Cement UAE 359.8 18% 26% n/a n/a 5.3 12.0 8.5 5.5 24.8 11.5 n/a n/a

Sib Cement Russia 714.0 30% 33% 22% 22% n/a n/a 7.5 5.1 15.0 7.0 n/a n/a

Huaxin Cement

China 1,098.9 17% 19% 8% 9% 6.8 9.5 10.7 7.8 23.6 14.9 0.7 1.0

Siam Cement Thailand 12,842.1 17% 17% 11% 12% 22.9 23.9 10.9 9.2 14.7 12.2 3.1 4.0

Holcim Phillipines

Phillipines 1,561.7 33% 33% 27% 27% 23.9 24.9 7.9 7.1 15.0 13.1 3.8 5.5

MISR Cement Egypt n/a 52% 50% 46% 44% 45.2 41.7 n/a n/a 7.3 7.6 11.7 11.0

Sinai Cement Egypt 588.9 51% 49% 45% 47% 36.6 32.4 3.7 3.9 5.0 5.1 12.1 13.1

Tai Shan Jidong

China 4,182.1 20% 26% 20% 21% 18.0 20.0 12.8 9.9 18.3 13.9 0.7 1.0

Ashaka Nigeria 358.5 25% 34% 23% 32% 20% 25% 10.8 7.4 15.8 11.5 2.3 3.2

Lafarge WAPCO

Nigeria 860.2 35% 29% 26% 22% 14% 18% 9.9 7.8 18.2 12.9 0.6 1.2

Dangote Cement

Nigeria 13,553.40 58% 61% 51% 56% 59% 83% 18.3 11.1 20.9 12.7 3.7 5.9

Nigerian Cement Sector: Unbundling Potentials I December 2010 I 18


Demand Dynamics – What drives consumption?

Government‟s expected spend on the built environment- Government,

both at state and federal levels, would still be the major driver of cement

demand in the medium term, as it has been historically. The expected CAPEX on

infrastructural development as detailed in the medium term National Plan would

be the boost for demand in the next three years, if adequately implemented.

Cement constitutes about 7% to 15% of concrete-(a mixture of cement and

other aggregates), a key material in construction; thus an increase in

construction activities naturally means a rise in demand for cement as well. As a

pointer to the fact that increasing government spending on housing and road

construction has been a key driver of the upswing seen in demand for cement in

Nigeria, the federal government‟s capital spending rose by c.212% between

2004 and 2008. In the same vein, state governments (Federal Capital Territory

inclusive) CAPEX on housing and transportation infrastructures have also peaked

significantly over the last five years. According to figures from CBN‟s 2008

annual reports, state governments and FCT capital spending on housing and road

construction rose to N388.3 billion in 2008, from N50.2 billion in 2004. We

expect an additional 144% rise in federal and state governments CAPEX on

housing and transportation (road, rail and port construction) between 2009 and

2013 (See figure 19 below).

Apart from government‟s CAPEX, recurrent expenditure on road maintenance

and housing are key contributors to the increase seen in the demand for cement

over the years. Recently, the chairman of Dangote Group, Alhaji Aliko Dangote

proposed the use of concrete, rather than bitumen, in road maintenance. Whilst

some local government roads in major cities like Lagos are already being re-

constructed using pre-cast concrete, the suggestion may cause stakeholders to

introduce more of concrete in road maintenance, as it is the case in South Africa.

-8%

76%

104%

23% 21%17%

78%

17%

-20%

20%

60%

100%

0

500

1000

1500

2000

2006 2007 2008 2009 2010E 2011E 2012E 2013E

Government CAPEX Y-o-Y growth

Figure 19:Actual and forecast Government (state and federal) CAPEX (N‟Bn) and

yearly growth (%) on housing and physical infrastructure in transportation

Sources: CBN, Vetiva Research Estimates

As capital expenditure grows,

government spending on

Infrastructure follows suit, even

as new road construction

techniques use to cement

.



If the use of concrete in road maintenance receives increased acceptance,

cement consumption would considerably rise faster than our forecasts, which

have been solely based on expenditures on capital projects.

Public-Private Partnerships (PPPs) in real estate development: The

growing involvement of public-private partnerships in real estate development

across the country would also continue to contribute substantially to cement

demand. In 2009, the federal government signed partnership agreements with

ten private sector real estate developers and investors, to increase national

housing stock by 1,694 units in Osun, Adamawa, Ondo and Niger states, and the

Federal Capital Territory. According to the erstwhile minister of works, housing

and urban development - Dr Muhammed Lawal, the federal government had

signed 80 partnership and Development Lease Agreement to spur development

of affordable housing in Nigeria. Also in the government‟s national development

plan on housing, increased emphasis is placed on forming more PPPs to help

drive the national plan on housing delivery. Thus, the federal government plans

to deliver 600,000 housing units under Public Private Partnerships (PPPs)

arrangement, estimated at cost of c.N105 billion over a three year period from

2011 to 2013.

Growth in private sector real estate development: Whilst admitting

governments‟ (at State and Federal levels) efforts on housing delivery to its

citizenry, one should note that the complexities surrounding the effectiveness of

the land use regulations in Nigeria, and the fast rate of urban migration in

Nigeria have continued to promote the growth of private sector in housing

delivery. We conclude therefore, that the private sector (either at organized level

as real estate development companies, or through individuals) is increasingly

becoming the major provider of housing to Nigerians. This year however, the

slow-down in credit to the private sector has adversely affected overall cement

consumption.

-10

0

10

20

30

40

50

60

70

Jan Feb Mar Apr May Jun Jul Aug Sept Oct

Credit to Government

Credit to Private Sector

Source: Central Bank of Nigeria, Vetiva Research

Figure 20: Credit to Government vs Credit to Private Sector

(% growth over 2009 levels)

With about 600,000housing units

expected from PPPs, close to

N105 billion would be spent on

housing provision in the next 3

years

While the Private sector plays a

growing role in housing provision

for Nigerians, funding challenges

have limited delivery in 2010



Private real estate developers became quite pivotal in housing delivery in the

country after federal government‟s housing reforms of 2003/2004. We note also

some key features of the reform which catalysed the rapid growth seen in the

number of private estate developers between 2004 and 2008. Some of these

features include; assignment to government of primary infrastructure for new

estate development, an amendment of the Land Use Act, development of a

secondary mortgage market and a five-year tax holiday for developers. In line

with the general economic boom of the 2007/2008 era, real estate development

also witnessed a significant boom during this period, translating therefore into

huge demand for cement and other building materials.

Changing landscape of supply

Cement glut…possible? The dynamics of cement supply in Nigeria is gradually

changing from being predominantly dominated by imports to local production. In

line with the additional supply expected to come from new capacities by 2012,

we believe imports would gradually shrink within the next 2 to 3 years. Whilst we

do not expect the slow-down in cement demand this year to persist, we are not

overly bullish on cement demand rising significantly next year for political

reasons, as development projects typically slow-down during election years in

most African countries. Furthermore, credit to the private sector is not yet at the

desirable level after last year‟s shake-up of the banking sector.

Further compounded by the Central Bank‟s rising concern on inflationary

pressures and its somewhat weariness to continue to stimulate banks to lend to

the real economy as indicated by recent rate hikes, credit extension to the

private sector is not likely to witness any significant improvement in the short

term, at least until after the April 2011 polls. This implies that the slow-down

seen in demand this year may only improve slightly in 2011, if weather

conditions (heavy rainfalls) are not as adverse as they were in 2010. In our view

therefore, supply would likely still outstrip effective demand next year and big

producers like Dangote Cement and Lafarge WAPCO, which expect additional

capacities next year, must begin to seek creative means to sell their product.

Dangote Cement which is currently planning to commence exports, would likely

see its revenue cushioned by exports to other West African countries. The

alternative for Lafarge WAPCO and other smaller producers might be to reduce

capacity utilisation rates.

Post-elections, especially by 2012, we believe there would be major

improvements in demand and purchasing power, especially in view of the

expected improvements in power supply, coupled with stability and increased

lending to the private sector. With our expectation of increasing implementation

rate of the medium term National Development Plan, local demand would likely

surge again to fully absorb cement supply. Prior to 2010, cement demand had

significantly outstripped supply and the resultant supply deficit made Nigeria the

third largest importer of cement in the world. Between 2004 and 2008, imports

accounted for about 64% on average of cement supply, while local production

only accounted for 36%.

Local manufacturing is growing

fast, significantly cutting imports

Private real estate developers

benefitted from the 2004 housing

reforms, riding on the 2008

economic boom to boost demand

for housing ergo cement

We expect minimal improvements

over this year‟s consumption

seem likely, in view of the slow-

down in new infrastructure spend

expected pre-elections

As availability of power, political

stability and access to loans

converge in 2011; demand for

cement is bound to increase



Supply dynamics however changed in 2009 as Dangote Obajana and BCC

recorded higher utilisation rates. We note that local production now accounts for

the larger proportion of cement supply in Nigeria. Industry estimates for 2009

put production at c.59% and importation at c.41% of total cement supply. In

view of the bulky nature of cement which posts significant problem in

transportation over long distances, supply is typically localised to the immediate

region of cement manufacturers. The south west region has historically been

dominated by Lafarge WAPCO‟s Elephant Cement, Flour Mill‟s Burham Cement

and Dangote Cement. In a similar vein, the north-west region is dominated by

Cement Company of Northern Nigeria - CCNN‟s Sokoto Cement while the north-

east region is largely controlled by Ashaka Cement. Benue Cement Company and

Obajana Cement - both owned by Dangote Industries (before the Merger of the

two entities), accounted for the larger portion of local production and cement

supply in 2009. Dangote Cement is however able to penetrate most regions of

the country because of its extensive depot network.

Tighter importation policy: In line with the changing dynamics of cement

supply in Nigeria, government policies on cement imports have become tighter.

The new cement import policy announced by the federal government in August

2010, involves re-stating the 20% import duty on bulk cement and the

imposition of a 15% levy on the cost, insurance and freight price of bulk cement

to substitute the existing N500 per tonne, which would be utilised in the

development of the Cement Technology Institute. Also, as a part of the new

cement import policy, the federal government cancelled all existing un-utilised

cement import quota between 2002 and 2008, and stated that an annual review

of local production would be carried out going forward, to determine the need for

cement imports.

Figure 21: Cement import terminal operators and import quota (Jul.-Dec. 2010)

Company Location Capacity („tonnes)

Import Quota2

Eastern Bulkcem P/Harcourt 600,000 225,000

Ibeto P/Harcourt 1,500,000 245,000

BUA Floating terminal, Lagos 1,051,000 225,000

Flour Mill Apapa Port, Lagos 2,000,000 600,000

Dangote Cement P/Harcourt, Onne 3,000,000 895,000 Apapa, Tincan & Aliko terminals, Lagos

3,000,000

Lafarge: Atlas P/Harcourt 2,000,000 160,000

Local manufacturing capacity and utilisation rates: Besides the expected

rise in volume from the new cement plants which would be commissioned next

year, existing plants will continue to ramp up capacity. Based on our estimates,

average capacity utilisation in the industry as at Q3‟10 in 2010 was about 62%,

even though Obajana Plant‟s capacity utilisation was c.90%.

Sources: Media, Industry sources

With the expected up-shoot in

local supply, companies have

developed more frameworks for

distribution, with Dangote cement

running the broadest network

Regulations favour local

production as conditions for

importation have become more

stringent

Apart from new plants, ramping

up of utilisation by older plants

would also increase supply



According to the Nigerian Bureau of Statistics, Nigeria‟s average utilisation rate

for the cement manufacturing sector stood at 53.39% between 2002 and 2007.

Owing to the gradual ramp up of the Obajana plant and Gboko (former Benue

Cement Company), which were commissioned in 2007 and 2008, capacity

utilisation dropped to 47% in 2007, but steadily rose to 59% in 2009, using

available data from industry sources. Based on our estimate, average capacity

utilisation in the cement industry stood at 66% as at Q3‟10. However, we project

that average industry capacity utilisation would dip slightly to 65% in 2011, but

rise again in 2012 when most of the new plants would have ramped up

capacities.

Pricing Dynamics: Likelihood of crashing?

Notwithstanding the significant increase in cement capacity anticipated next

year, we do not see major cuts in cement prices in the mid to long term. To

stimulate sales in 2011 in view of the inventory build-up witnessed by producers

this year, a slight cut in prices next year is likely. In our view, once producers

clear up built-up inventory, the alternative would be to reduce capacity utilisation

to minimize production rather than embark on aggressive price cuts to stimulate

sales. We however believe that it would be more profitable for cement producers

to maintain higher capacity utilisation given the huge operational gearing of the

industry. By Q4‟11 we believe demand would increasingly become stronger, as

the newly elected government settles in, and continue the pursuance of the

medium term National Development Plan on infrastructure development.

54.5%58.8%

82.1%

64.7%

82%

0.0%

30.0%

60.0%

90.0%

0

5000

10000

15000

20000

25000

2008 2009 2010E 2011E 2012E

Production Volume Utilisation Rate

Figure 22: Actual and forecasts of production volume („000 tonnes) and

capacity utilisation rates (%) from local manufacturing

Sources: Annual reports, Vetiva Research Estimates

We believe cement prices would

be kept relatively stable by

volume adjustments despite

foreshadows of changes in supply

and demand



Despite our expectation of a resumption of strong demand at this period, we do

not see producers hiking prices; we believe volume play would be a core

strategy, as new plants gradually reach higher utilisation rates to remain

competitively profitable. We reiterate that cement prices would at best,

remain constant. The following are factors that underpin our view that

cement prices are not likely to crash in the medium term:

Huge cost of production: With an industry average of $102 per tonne, the cost

of producing cement in Nigeria is one of the highest globally.

Excluding Dangote Cement (which has the least cost of production per tonne of

$58) from the industry would even raise industry cost of production further to

$117 per tonne (based on FY‟09 figures). Whilst we expect some reduction in

production costs for most Nigerian cement producers with the increasing

popularity of using coal as an additional fuel alternative, and the relative stability

in the Niger-Delta region, the expected decline in production cost would not be

significant enough to warrant a crash in cement prices. A producer like Dangote

Cement has a significantly lower cost of production relative to others because it

predominantly uses gas, which is the cheapest fuel source locally, in its 5 million

tonnes, Obajana Cement Plant. However, due to the usage of Low Pour Fuel Oil

(LPFO) at its Gboko plant, Dangote Cement‟s production cost of $58 per tonne,

despite being the lowest in the Nigerian cement industry, is quite higher than

what is obtainable in other emerging economies in Africa and Asia like Egypt

($33), India ($32) and China ($26). The comatose state of electric power in

Nigeria is another contributing factor to the high production costs of Nigerian

cement producers, as more cement plants virtually run on generating plants

which mostly run on diesel, LPFO or gas in some cases.

26.232.2 32

54

103

55

15

33

24 23

4045

0.0

30.0

60.0

90.0

120.0

Chin

a

India

Egypt

Om

an

Nig

eria

Jord

an

Alg

eria

UAE

S/A

rabia

Iran

Ave.M

EN

A

Ave.

Euro

pe

Figure 23: Comparison of production cost (USD per tonne) of cement

Sources: CEMNET, Vetiva Research

The excessive cost of cement

production in Nigeria is expected

to fall with improvements in

power and political stability in the

Niger Delta

Average cost of production per

tonne for Nigerian cement

producers is $103, quite higher

relative to most emerging

economies



Transportation costs: According to industry sources, the cost of transporting

cement from the plant to distributors can increase production cost by an

additional 25% to 30%, given the practically non-existent railway transportation

in Nigeria and the bad state of most Nigerian roads. Expectedly, the additional

cost incurred on transportation is passed on to consumers in form of higher retail

prices; thus, Nigeria has one of the highest cement prices globally.

Cement Imports: Owing to the high costs associated with cement imports, in

the form of actual cement costs, as well as freight and shipping costs, the pricing

dynamics of imported cement is significantly different from locally produced

cement. On the average, the cost of sale of cement import terminal operators

80% - 85% of cement sales. Apart from the cost of cement and freight charges,

the recent hike in import duties (to 35% from N500 per tonne) would

significantly cause a surge in the overall cost of imported cement, thereby

putting pressure on retail prices going forward.

-5%

0%

5%

10%

15%

0

5000

10000

15000

20000

25000

30000

2007 2008 2009 2010E 2011E 2012E

Price per tonne (N) Production cost per tonne Y-o-Y Growth in Price (%)

Figure 24: Average selling price and production cost (N per tonne) for publicly

quoted cement producers

Sources: Annual reports, Vetiva Research Estimates

Given the lack of a functional

railway system, inefficient means

of transport are used translating

to costs laid on the final

consumer

Cement import dynamics have

been set even further apart from

local production by recent hikes

in import duties



Regulatory Perspective: impact of government

policies... Through its recent policies, government has demonstrated its support for the

rapid investments seen in the cement industry. As an industry with very huge

capital outlay, the Nigerian cement industry is highly regulated. Following a re-

introduction of backward integration in the sector during President Obasanjo‟s

administration, government had since then paid close attention to investments in

the sector, putting various incentives in place to protect the industry and

encourage potential investments in cement production.

In line with this policy, we have seen significant investments in the cement

industry in the last three years culminating in the addition of three cement plants

(Dangote Cement‟s Obajana and Gboko- former BCC-plant and, Holcim and Flour

Mill‟s Unicem plant) having a combined annual capacity of 13.2 million tonnes. In

recent time government has re-introduced policies, which in our view, would

protect local manufacturers at the expense of cement importers. The recent

measure involve an increase in duties on imported cement as summarised

below;

Re-instatement of 20% import duty on bulk cement and an additional 15% duty on cost insurance and freight price of bulk cement. The 35% import duty would replace the existing N500 per tonne

Cancellation of all existing unutilised import licenses issued between

2002 and 2008

Annual review of local production to ascertain the need and extent of imports

Banned importation of bagged cement

86.7%

3.1%

3.7%3.2%

3.2%

Cement cost

Demurrage

Packaging

Direct Factory Overhead

Fixed costs

Figure 25: Components of production costs for an import terminal (2009

Estimates using Dangote Cement)

Sources: Company, Vetiva Research

Having re-introduced backward

integration in the cement sector a

while back, government has

followed up with incentives to

sustain investments in the

industry

Policies have as well been aimed

at retarding importation while

encouraging local production,

through selective taxing and bans



Other existing government incentives available to investors in the industry

include;

Removal of restrictions on the importation of gypsum

Reduction of the duration for obtaining exploratory and mining licenses to 18 and 6 months respectively

The reinstatement of tariff incentives for imported spare parts and machineries for the production of cement for 2-3 years.

The duty free period is to cover the plant building phase and the first

two years of commencement of production

The approval of tax deductible incentives on investments in system

conversion to coal

The approval of concessional pricing and special allocation of LPFO to the sector

Delinking the price of gas for cement production from the price of LPFO

Apart from policies that are directly linked to the cement sector, the federal

government through its Nigerian Investment Promotion Commission (NIPC) has

encouraged new investments in the sector. One of such incentives is the Pioneer

Tax Status from which players like Dangote Cement and Unicem which invested

in new capacities through brown-field and green-field projects are benefitting.

Apart from the Pioneer Tax Status, tax relief for Research and Development is

also available for industry players who engage in active research and

development for the improvement of their industrial processes. Most companies

in the cement industry however are yet to exploit this tax relief incentive as little

Research and Development activities are carried out locally. Cement companies

like Lafarge WAPCO and Ashaka mostly rely on the Research and Development

carried out at the parent (Lafarge) level.

The cement industry is also poised to benefit from government‟s export policies,

especially those relating to free trade within the ECOWAS region. With the

exception of CCNN which sometimes embark on minimal export to Niger Republic

to reduce the impact of sluggish sales locally, no other player in the industry

currently embarks on cement exports. With the indication that cement export

might be feasible in the medium term, players are poised to benefit from

ECOWAS incentives on exports to West African countries. Some of these

incentives are as follows;

Manufacture-in-Bond Scheme

Export Expansion Grant (EEG) Scheme

Export Development Fund Scheme

Trade Liberalisation Scheme of ECOWAS

Nigeria Export Processing Zones (Free Zone Law)

NIPC incentives in form of tax

reliefs have also encouraged

investments in the cement sector

and the overall economy

Free trade policies among West

African countries are also policies

that would evidently favour

cement export in the long run



Particularly, we believe Dangote Cement, the biggest producer in the industry

will be the most suited to benefit from these export incentives, given its

aggressive business strategy to commence cement export to West African

countries.

Industry Risks

Energy costs/supply: Since the major input (apart from Limestone) in

cement production is energy, the key risk facing industry players relate to

energy cost and supply. In the Nigerian cement industry, the major fuel types

used to power cement kilns include Low Pour Fuel Oil (LPFO), gas and coal, with

coal being the newest fuel substitute in the Nigerian cement industry, gradually

gaining more acceptances among producers. We highlight the following as the

major risks relating to each type of fuel:

Low Pour Fuel Oil: Possible scarcity and hike in fuel price since the

product is largely imported; local refinery capacity is limited (at 60%

utilisation). The Kaduna refinery which mainly produces LPFO has

however been shut down due to technical hitches, despite resuming

operation in May 2010.

Gas: threat from militant activities in the Niger-Delta and possible

disruption of gas supply; possible hike in prices

Coal: The key risk relating to the use of coal relates to its potential as a

major source of environmental pollution, especially in view of the rising

global emphasis on the “green evolution”.

Pricing: Although we broadly maintain our view that a crash in cement prices is

unlikely, we do not completely eliminate the possibility of major price reductions

if the wane in purchasing power observed for most of this year is prolonged

beyond expectation.

Investment Summary

Stock Market performance

Cement stocks are among the best performing on the Nigerian Stock Exchange

year to date. As measured by the Vetiva Building Materials Sector Index, the

sector has recorded a YTD appreciation of 39%, ahead of the NSE All Share

Index which has recorded a gain of 19%. The sector reached its peak

appreciation of 60.5% in April, the period when the stock market posted the

highest gains. Prior to the listing of Dangote Cement Shares and delisting of

BCC, the strongest movers of the sector‟s performance were Lafarge WAPCO and

Benue Cement Company (BCC) as they predominantly dominated the sector‟s

market capitalisation. On an individual basis, Ashaka Cement, with a YTD gain of

c.116% is the biggest gainer in the sector, followed by WAPCO (YTD gain of

c.30%) and CCNN (YTD appreciation 18%). Following the listing of Dangote

Cement Shares, the stock became, the major determinant of the building

materials sector performance as it accounts for c.91% of the sector‟ s market

capitalisation. The declines seen in Dangote Cement Price post listing (the stock

has lost 11%) has further eroded the gains in the sector, bringing it down to

39%.

Despite the global use of coal as

a more prominent fuel in the

cement industry, its use in

Nigeria is still largely limited

Despite expected stability,

persistence in the current

weakness in purchasing power

could drive prices down

Stocks in the sector have

progressed over the year

(outperforming the ALSI)

especially prior to the listing of

Dangote Cement



Q3‟10 Earnings Update

For most cement producers, the Q3‟10 earnings came in with weak top-lines, but

relatively improved bottom-line performance. Cement sales took a double blow

from the prevalent slack in lending from the banking sector, and the protraction

of the rainy season. Reports from industry sources have indicated that there is

as much as 500,000 tonnes of clinker piled up across the industry as at

October/November 2010. Earlier at the beginning of Q3, Lafarge WAPCO had

expressed concerns about the wane in demand the possibility of shutting one of

its plants temporarily if the situation does not improve. Accordingly, its Q3‟10

earnings came in with weak top-lines. Whilst the build-up may have somewhat

caused some surplus in the industry, we maintain our view that it is only a

temporary glut which we believe would cease latest by Q4‟11.

Dangote Cement Plc: Closing Up on Expectations

Dangote Cement Plc is the only cement producer that recorded a YoY growth in

sales in the Q3‟10 earnings season. Reported figures (see figure 26 below) show

an impressive 60% growth in turnover, quite laudable in a period when all the

cement producers reported decline in sales. Whilst noting that Dangote Cement

was not immune to the slow-down in general demand across the sector as it had

to embark on slight price cuts, the sales growth achieved was possible by

aggressively pushing volumes through its extensive distribution network, as well

as granting bonuses and credits to loyal customers. More importantly, the

company‟s Q3‟10 earnings show EBIT and PBT margins of 52.9% and 52.5%,

quite in line with forecasts of 54.2% and 53.7% respectively. The company also

paid an interim dividend per share of N2.00.

0.75

1.25

1.75

2.25

31-D

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30-J

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1-M

ar

31-M

ar

30-A

pr

30-M

ay

29-J

un

29-J

ul

28-A

ug

27-S

ep

27-O

ct

26-N

ov

26-D

ec

ASI BMIndex Ashaka WAPCO DCP CCNN

BMIndex:+39%

Ashaka: +132%

WAPCO:+35.7%

ASI:+19%

CCNN: 19%

DCP: -11%

Figure 26: Share Price Performance Year Open to 15th December 2010 (Rebased)

Sources: Company, Vetiva Research

Even as extended rains and

dearth of loans have lowered

earnings, a rebound in demand

by H2‟11 is expected to restore

growth in the sector

As against the trend, Dangote

cement grew its earnings through

effective product distribution and

incentives to loyal customers



Key Headlines

Q3'10 Q3'09 Chg 2010F Q3 as %

NGNbn % NGNbn of 2010F

Turnover 146.56 91.3 60.47 197.25 74.3 EBITDA 87.97 58.21 51.12 114.25 76.99

EBIT 77.37 49.56 56.11 100.83 76.73

PBT 76.93 46.93 63.92 99.83 77.06

Tax -1.63 -1.79 8.93 - -

PAT 75.29 45.14 66.75 99.83 75.42

Sources: Company Fillings, Vetiva Research

Lafarge WAPCO Cement Plc: Tough Quarter, Earnings Growth Strained

In line with the trend observed for Lafarge WAPCO‟s Q1‟10 and Q2‟10 earnings,

Q3‟10 earnings came in with a decline of 5.8% in revenues but strong growth of

41% in after tax profit. Notwithstanding, the results are somewhat in line with

our Q3‟10 revenue and profit after tax forecasts of N32.20 billion (variance of

+2.6%) and N5.32 billion (variance of +6.9%). Relative to the prior two quarters

however, the company recorded a more pronounced decline in sales on a QoQ

basis as its Q3‟10 (July – September) revenue dipped by 9.2%. Despite lower

sales, Lafarge WAPCO has been able to sustain the improvement seen in its

profitability margins at the beginning of the year.

Figure 28: Lafarge Cement WAPCO Plc Q3‟10 Results

Key Headlines

Q3'10 Q3'09 Chg 2010F Q3 as %


Turnover 33.04 35.09 (5.80) 42.86 77.09 PBT 9.02 7.21 23.40 11.08 81.39

Tax (3.34) (3.29) 1.50 (3.99) 83.71

PAT 5.68 4.02 41.40 7.09 80.11

AshakaCem Plc: Margins under Pressure?

Notwithstanding being in line with general expectations for cement producers,

Ashaka‟s Q3‟10 numbers came in shy of our estimates for revenue and after tax

earnings by 8.5% and 15.9% respectively. On a quarterly basis, Ashaka took a

significant hit in both top and bottom line performance in Q3‟10 (July to

September) as revenue and pre-tax profit plunged by 29% and 55% respectively.

In view of the faster rate of decline in Ashaka‟s Q3‟10 pre-tax profit, the company

recorded the lowest profitability margins in the quarter as pre-tax profit margin

fell to 12.5% in Q3‟10 (July to September) from 19.9% and 25.5% in Q2‟10 (April

to June) and Q1‟10 respectively. The drop in efficiency and margins in the quarter

which had been contrary to our expectations as higher gains in efficiency has been

expected to accrue from the company‟s coal investment. Ashaka‟s management

however adduced the poor bottom-line numbers to LPFO costs (which had been

purchased at high price levels of 2009) and the lower substitution of coal in its

fuel mix.

Figure 27: Dangote Cement Plc Q3‟10 Results

Ashaka‟s Q3 performance fell

short of our forecasts though it

stood in line with the average

industry expectations

Notwithstanding waning sales,

Lafarge WAPCO results showed

continuing improvement in

operating efficiency



Key Headlines

Q3'10 Q3'09 Chg 2010F Q3 as %


Turnover 13.57 12.71 6.80 18.19 74.60 PBT 2.73 1.77 53.75 3.73 73.19

Tax (0.82) (0.59) 39.76 (1.19) 68.91

PAT 1.91 1.19 60.64 2.54 75.19

Cement Company of Northern Nigeria: Laggard in the Pack

Though falling short of our turnover forecast by 12%, CCNN‟s Q3‟10 top-line

earnings reflect the general industry theme of slowing sales for the quarter. The

result however was considerably disappointing in bottom-line earnings as pre-tax

and after tax profit fell by 51% and 61% respectively, making CCNN the least

efficient amongst the cement producers. CCNN is perhaps still having challenges

in getting around its rising energy costs to remain profitable. Whilst noting that

CCNN‟s management had indicated at various times its plans to expand

production capacity, our major concern regarding its expansion cost reduction

strategy relates to the lack of clarity regarding the expected kick-off/completion

of these projects as well as funding considerations. Without specific steps on its

expansion and cost reduction plans, CCNN would increasingly become grossly

incapable of matching up with the rising competitive pressure from Dangote

Cement depots in its region.

Key Headlines

Q3'10 Q3'09 Chg 2010F Q3 as %


Turnover 8.39 8.91 (5.8) 11.54 72.71 PBT 0.93 1.89 (50.6) 1.14 82.01

Tax (0.36) (0.43) 17.1 (0.36) 98.90

PAT 0.574 1.46 (60.6) 0.774 74.16

Figure 29: AshakaCem Plc Q3‟10 Results

Figure 30: Cement Company of Northern Nigeria Plc Q3‟10 Results

Despite aligning with general

industry trend in terms of top-line

earnings, CCNN seems to lag others

in the sector given its significantly

weaker bottom-line performance



Dangote Cement Plc

Entrenching Market Dominance

Matchless organic value: In our view, Dangote Cement‟s ability to

drive growth organically is quite enormous, given the anticipated

increase in its production capacity by an additional 11 million tonnes

before the end of 2011. This presents Dangote Cement Plc the

opportunity to consistently drive higher growth through increasing

volume and capacity utilisation, at least over the next 7 to 8 years.

On-course with Pan-African expansion: With Dangote Industries

Limited‟s recent increase of its stake in Sephaku Cement South Africa to

a controlling position, the Dangote group is pushing strong in its Pan-

African expansion drive. Dangote Industries is currently making

arrangements to transfer other African assets to Dangote Cement Plc at

cost. According to management, we expect the transfer, which would

bring Dangote Cement‟s total capacity to c.46 million tonnes, to be

completed in 2011.

Global Offering in the offing: In compliance with NSE listing

guidelines of having at least a 25% free-float, Dangote Cement Plc has

announced plans for a Global Depository Receipt (GDR) offering,

through which Dangote Industries would reduce its holdings in Dangote

Cement by 20%. Dangote Cement Plc shares, through the GDRs to be

issued in the offering would subsequently be listed on the London Stock

Exchange.

Valuation and Recommendation: We use a blend of DCF and

EV/EBITDA for our valuation and arrive at a fair value range of

N131.50 - N142.50. Dangcem currently trades at a forward (2011)

P/E of 9.95x relative to sector average of 12.70x and average of our

universe of emerging market peers of 11.8x.

Source: NSE, Vetiva Research

Stock Data

Bloomberg Ticker:

DANGCEM:NL

Market Price (N)

120.00

Shares Outs (bn)

15.494

Market cap (N‟bn)

1,859

Fair value range (N)

131.5 – 142.5

Rating ACCUMULATE

Price Perf. Dangcem NSE

12-month (%) n/a 19.2

6-month (%) n/a -5.0

Post listing (%) -11.0 -2.0

Financials 2009A 2010F 2011F

Turnover (N'bn) 189.62 208.50 346.33

EBITDA (N'bn) 77.85 120.61 206.52

PAT (N'bn) 61.39 102.86 186.94

EBITDA Marg (%) 41.1 57.8 59.6

PBT Margin (%) 33.6 50.9 55.1

PAT Margin (%) 32.4 49.3 54.0

Valuation 2009A 2010F 2011F

P/E (x) 0.98 18.08 9.95

P/BV (x) 0.83 9.81 7.73

EV/EBITDA (x) 23.88 15.41 9.00

Div. Yield (%) 1.7 4.1 7.3

ACCUMULATE

Figure 31: Post-listing Share price performance vs. ASI and sector index (Rebased); Shareholding Structure

DIL

94.7%

Others

5.3%

0.8

0.9

0.9

1.0

1.0

1.1

26-Oct 2-Nov 9-Nov 16-Nov 23-Nov 30-Nov 7-Dec 14-Dec

ASI Dangcem BMIndex



Investment Thesis

Dominant market share: Through its 5 million tonnes Obajana Plant, 3

million tonnes Gboko (BCC) Plant and 6 million tonnes import terminals in

Lagos, Port/Harcourt and Onne, Dangote Cement controls close to 60% of the

Nigerian cement market and it‟s unarguably the giant of the industry.

Dangote Cement‟s Obajana plant is the biggest cement plant in Nigeria and

the second largest in the Africa. (See chart below). This is indeed a big mile

stone for an indigenous business in a continent where the cement industry

has historically been largely dominated by foreign multinationals some of

which include globally known names like the Lafarge group of France,

Heidelberg group of Germany, Italcementi group of Italy and Holcim group of

Switzerland. Of more importance is Dangote Cement‟s aggressive expansion

drive to entrench its dominant position in the Nigerian cement industry. As

broadly stated by Dangote Cement‟s management, an additional 6 million

tonnes cement plant in Ibese, which is billed to be completed by Q1‟11 and

Obajana‟s 3rd and 4th lines, also billed to be completed by H1‟11, would push

Dangote Cement‟s market share to c.70% of the market, giving the company

a relatively monopolistic advantage based on accretion of huge benefit of

economies of scale relative to others in the industry.

Modern and highly energy efficient plants: Given the current new state

of both Gboko (former BCC) and Obajana Plants, the plants have the

potential to achieve peak utilisation rate. Also, the plants are highly energy

efficient unlike other cement plants in the country - most of which are quite

old and have not undergone any major revamping in recent times.

Sources: Annual Reports, Vetiva Research Estimates

3

26

15

6

5

6

0

5

10

15

20

25

BCC Obajana Import

terminals

Obajana2 Ibese Expected Total

Current manufacturing and

import capacity of 14

million tonnes

Additional 11 million

tonnes (Obajana 2 +

Ibeshe) expected by 2011

Figure 32: Total production capacity (million tonnes/annum) of DCP

With a current annual production

capacity of about 8 million tonnes

and an additional 11 million tonnes

almost completed Dangote cement is

set to increase its market share to

c.70%



Generally in sub-Sahara Africa, most cement plants are quite obsolete and

have low capacity utilisation rates. According to World Bank/Carbon Finance

Assist research in April 2009, the capacity utilisation observed for most

cement plants in sub-Saharan Africa is quite low, standing at an average

(excluding South Africa) of 54%. Until 2006, average capacity utilisation in

West Africa and Nigeria were even lower at about 46% and 22% respectively.

In a region where the cement industry is characterised by low capacity

utilisation mainly as a result of the aged nature of most cement plants, the

Dangote Group is evidently well poised to dominate the market with its

relatively younger and new cement plants. Obajana Cement Plant is about 3

years old while BCC‟s cement lines (following the total overhaul and

expansion of its plants completed in 2008) are also about 2 - 3 years old.

Figure 33: Energy consumption of Nigerian cement producers

Company Plant Location Kiln Type Average

Energy/tonne Gross Profit Margin 3 (%)

Lafarge (WAPCO)

Ewekoro Dry-

Precalciner 4.03

33.1 Shagamu Wet 5.94

CCNN Sokoto Small dry kiln 5.13 43.5

Dangote Cement

BCC

Dry

Precalciner 4.03 55.4

Obajana4 Dry

Precalciner 4.03 72.4

Lafarge

Ashaka Dry 4.29 34.3 (Ashaka)

Sources: Vetiva Research, “Alternative fuels in Cement manufacture”

by Energy & Resource Group, and UC Berkele

Note: 3as at FY‟09, 4Obajana‟s EBITDA Margin is based on 10 month

management accounts

Proximity to key markets: One of the strongest competitive advantages of

Dangote Cement Plc is the proximity of its business units and cement plants to

key markets for construction and building – Lagos and Abuja. Lagos and Abuja

account for the largest consumption of cement in Nigeria given the rapid growth

in infrastructural development in these regions. By road travel, Obajana Cement

Plant located at Obajana Kogi state, is approximately 213 km and Benue Cement

Company, at Gboko, Benue state is approximately 404km, to Abuja. Compared

to other players - Ashaka, CCNN, and Lafarge WAPCO, Obajana Cement Plant is

the closest to Abuja market, followed by BCC as shown in the chart below.

Dangote Cement currently has the

most modern and energy efficient

plants in the industry

The nearness of rapidly growing

cities to Dangote cement‟s

factories also offers an advantage

as regards growth and sales.



Apart from the Abuja market, Dangote Cement‟s Ibese plant, (construction

currently on-going), places the group at the unique advantage of tapping into

the Lagos and the South West, market which hitherto has been dominated by

Lafarge WAPCO. The group, through the operation of its import terminals in

Port-Harcourt - also has significant foot-prints in the oil rich Niger Delta

region. Dangote Cement Group therefore is the only player in the Nigerian

Cement Industry, capable of extending its market beyond its immediate

localised regions, given the strategic positioning of its cement plants. As

previously stated, the bulky nature of cement, further compounded by a non-

functional railway system, makes the distribution of cement a difficult task

forproducers, thus resulting in regional monopolies.

Aggressive distribution network: Another core competitive advantage of

Dangote Cement is its extensive distribution network. Dangote Cement Plc

operates 40 depots or warehouses in all the major cities of Nigeria (see side

chart), thus easing the burden of distributors in getting the product.

Distributors get the product at the depot at the ex-factory price without

additional premiums. Similar to the distribution network for Dangote food-

based products, the cement division also has a country-wide distributorship,

especially in view of the ready accessibility of the product at the depots.

Despite the bulky nature of cement which typically limits the penetration of

cement distribution over very long distances, Dangote Cement‟s fleet of

trucks as well as its leverage on DIL‟s haulage and transportation business

helps Dangote Cement penetrate key isolated markets. This further implies

that Dangote Cement is well positioned to capture additional market share in

various regional markets particularly the North-East and North-West where

Ashaka Cement and Sokoto Cement (CCNN‟s brand) are somewhat

predominant brands.

Strong support from the Parent - DIL: Dangote Cement, being a

subsidiary of the entire Dangote Industries Limited has the unique advantage

of benefiting from the haulage business of the group to enhance the

distribution of its products. In effect, distribution costs for Dangote Cement

Group would likely be lower, (relative to other players), as it is expected to

benefit from cheaper and more convenient lease terms. Furthermore, being a

part of the DIL, which has a specific haulage business, implies that Dangote

Cement can significantly increase its penetration since it can entirely contract

distribution of cement to the haulage division of DIL, thus enabling it

(Dangote Cement Group) to focus on its core business. Dangote Cement is

also well poised to benefit from DIL in terms of financial support – either

directly as intercompany funding or guarantees to access cheaper debt

financing given the robust balance sheet size of Dangote Industries Limited

(DIL). In pursuing its Pan-African expansion strategy, Dangote Cement is at a

unique advantage given that the Pan-African expansion is largely mid-wife by

DIL. According to the company‟s management, the African assets would be

transferred, at cost to Dangote Cement, which will then take the projects to

completion

Export Alternative – supporting local sales: Given the various expansion

projects current on-going in the sector, which would perhaps lead to surplus

supply in the near term, Dangote Cement is well-positioned to reduce the

likely impact of surplus supply on its revenue through export.

16

3

11

9

Lagos/S.West Abuja/N. Central

N.West /N. East S. East/S. South

Lagos /South West depot are served by

the plants and Lagos terminals since Lagos

is the biggest cement market in Nigeria

Abuja/North Central region is the second biggest market. However, there are fewer

depots given the closeness of the region to

Obajana plant

The north east/ north west region has the

second highest number of depots in view

of their far distance to Dangote Cement

plants

The south/south and south/east depots

are mainly served by the Portharcourt and Onne import terminals

Figure 34: DCP‟s depot distribution

in Nigeria

Strategic positioning of outlets even as

far at the Niger Delta, gives Dangote

the strongest potential for national

coverage among peers.

The Company can also take

advantage of the haulage arm of

the DIL group as well as financial

support from the parent

company.



According to management, plans to build export terminals at its port

concessions in Lagos are on-going. With the expected completion of the

second line at Obajana Cement Plant and Ibese Cement Plant, total cement

output by the Dangote Cement Group (manufacturing) would be about 19

million tonnes per annum at full capacity utilisation of the plants. As we have

noted the expected additional capacity from Dangote Cement coupled with

other expansion and kiln upgrading projects currently being carried in the

sector by other players, suggests that players may as well be looking beyond

local markets to sell their products.

Pioneer tax status: Another key attraction to the combined Dangote

Cement Plc is the prolonged period for which the company would enjoy the

tax exemption in view of the combined pioneer tax status of its cement

plants. BCC and Obajana plants were given pioneer tax status for three years

and five years, respectively effective from 2009. This exempts both plants

from tax payment between till 2012 and 2014 respectively. We believe also

that a pioneer tax status would be granted to Ibese plant at completion (first

quarter 2011); implying therefore that the combined DCP would be further

poised to enjoy some tax exemption for a much longer period, till 2017

perhaps. This further improves the return outlook for DCP especially in terms

of the expected absolute dividend payout.

Economies of Scale: There are significant cost reduction benefits for the

bigger cement producers in the cement business. It is estimated, according

to JPMorgan and Nov-08 edition of International Cement Review, that a 5

million tonnes cement plant can produce cement at a much lower cost

(around $25 per tonne) than a smaller plant (estimated at $43 per tonne).

Thus, we expect Dangote Cement to continue to enjoy immense gains in cost

reductions from its large scale of operation.

Business Overview

Dangote Cement Plc (DCP) was incorporated as Obajana Cement Plc on 04

November 1992. DCP, prior to the planned special sale of shares, is 95.9%

owned by DIL. Following plans by Dangote Industries Limited (“DIL”) to

consolidate all the cement entities within the Dangote Group into a single

entity, it initiated the transfer of all cement assets into Dangote Cement Plc.

The current organisation structure of Dangote Cement Plc is show in Figure 2.

Further to plans for an African expansion, Dangote Industries Limited is

currently establishing cement plants and terminals across Africa. Some of the

countries include: Ghana, Sierra Leone, Liberia, Republic of Benin, Angola,

DRC, Congo Brazaville, Senegal, Zambia and South Africa.

Dangote Cement plans to offset

its short term supply surplus with

export as plans are underway for

the construction of export

terminals

As the cement plants of the

company enjoy pioneer tax

status, the company enjoys some

tax exemptions under the

combined structure

Economies of scale is bound to

boost gains for the large cement

producer as higher volumes help

cut unit production cost



Obajana plant

Production Dynamics

Obajana Plant currently controls the largest market share in the Nigerian

cement producers and also accounts for the larger chunk of Dangote

Cement‟s output in the cement industry. Since the plant began operation in

2007, production has rapidly risen to 3.3 million tonnes in 2009 from 1.62

million tonnes in 2007 - an increase of 106% in just two years. As at 2009,

OCP accounted for 46% of the total output of the Dangote Cement Group,

rising from c.29% in 2007. Despite the 106% increase seen in production

output of OCP in two years, the plant, as at FY‟09, operated at an average

capacity utilisation rate of 66%, based on our estimate. We expect an

average utilisation rate of 86% for Obajana Plant by FY‟10. Following the

addition of another 5 million tonnes from the on-going expansion at the

Obajana Plant, we estimate an average utilisation rate of 65% for FY‟11. The

drop in average utilisation rate is expected from the gradual ramping up of

the new lines. Figure 35 below shows our forecasts of production output from

Obajana plant and the expected contribution of the plant to Dangote

Cement‟s overall revenue.

* Dangote Cement Works

Dangote Cement Plc

Obajana Cement Plant

Ibese (DCW)* Cement Plant

Gboko Plant (former BCC)

Lagos Cement Terminal

Dangote Bail Cement (PH & Onne) Terminal

Figure 35: Dangote Cement Plc - Plant /Terminal Structure

Though, DCW and Benue Cement were previously individual companies prior to the Scheme

of merger and consolidation with the other cement entities, they will all now operate as

“plant/terminal entities with separate management structures including

Production/Bagging, Finance, Logistics and Human Resources

Source: Vetiva Research, Scheme of Merger Document, DCP Analyst Presentation

Obajana Cement Plant currently

produces 46% of the company‟s

cement at an average utilization

rate of 86% which is expected to

drop as new lines ramp up



Production costs

Energy costs (kiln fuel and power) typically make up about 55% to 60% of

total production costs of Nigerian cement producers. As we have earlier

noted, the technology used in the OCP kiln (Pre-Calciner dry) process is the

most energy efficient method in cement production. Its energy consumption

level is significantly lower (c.700 kcal) in comparison to the common dry kiln

methods (750 to 950 kcal), and the most energy intensive traditional wet kiln

methods (1300 to 1600 kcal). As an evidence of this, OCP‟s energy cost is

significantly lower relative to the others in the sector

Sources: Vetiva Research, Company Management

Obajana Plant uses the PreCalciner

rotary kiln, known to be the most

energy efficient kiln type in the

cement industry

Figure 37: Comparison of cost of sales as percentage of net sales

(average FY‟10E to FY‟12E)

Sources: Annual Accounts, Vetiva Research

Figure 36: Obajana plant output (million tonnes) and %age contribution to

Dangote Cement Plc total output (Actual and Forecast)

0%

15%

30%

45%

60%

0 1 2 3 4 5 6

Gboko1

WAPCOAshaka

CCNN

Obajana

19%

27%

34%

54%

46%47%

10%

20%

30%

40%

50%

60%

1500

3000

4500

6000

7500

9000

2007 2008 2009 2010E 2011E 2012E

OCP Output (million tonnes)-LHS

Contribution of OCP to Dangote Cement Total Output (%)-RHS



According to management‟s guidance and our estimates, energy (fuel and

power) constituted about 20% of net sales revenue, which is far lower than

the conventional estimate of about 40% - 45% for a typical local cement

plant. Consequently, we estimate that Obajana plant‟s total input costs as

percentage of net sales revenue for 2009 is about 19.8% - the lowest in the

industry. We expect Obajana‟s plant production cost to trend lower by FY‟10

as the company has achieved a higher rate of gas substitution in its fuel mix

relative to 2009. Thus, we expect cost of sales (as % of net sales) to drop to

14.1% by FY‟10. From 2011, production costs would trend higher in line with

the anticipated rise in cement output from the new lines. Furthermore we

estimate an average of 14.8% for production costs as % of revenue over

2010 to 2013. Given that the Obajana plant utilises gas which is the cheapest

energy source for cement producers in Nigeria, its contribution to DCP‟s

overall cost of production is just about 25%, despite accounting for c.50% of

Dangote Cement‟s total revenue.

Gboko Plant – (former Benue Cement Company)

Production dynamics

Gboko plant is currently the second largest cement plant in Nigeria but have the

third largest market share in terms of cement production and output. Due to the

gradual ramping up of capacity of its new plant, BCC is overtaken by Lafarge

WAPCO, (in terms of market share) despite having a larger plant.

0%

10%

20%

30%

40%

2009 2010E 2011E 2012E

Contribution to production cost Contribution to revenue

Figure 38: Comparison of percentage contribution of Obajana plant to

Dangote Cement‟s revenue and production costs

Sources: Annual Accounts, Vetiva Research Estimates

Despite having the lowest cost-

revenue ratio in the Industry, we

expect Dangote Cement Plc to

improve more on its gas

substitution to further cut cost of

production per net sales to 14.1%



Since Unicem only started operations two years, the gradual ramping up of its

capacity utilisation rate also makes it lag behind Lafarge WAPCO in terms of

market share despite having a higher plant size as the third largest cement plant

(by installed capacity) in Nigeria.

The Gboko plant has not been able to ramp up capacity utilisation as fast as

Obajana plant due to the fact that the plant can only use Low Pour Fuel Oil

(LPFO), although DCP‟s management is in the process of converting the plant to

a dual-firing kiln capable of using coal and LPFO. As at half year, the plant was

operating at c.55% capacity utilisation up from an average of about 24% in 2008

when the second cement 1.4 million tonnes line started operations. Based on

2009 figures, Gboko plant accounts for about 18.9% of Dangote Cement total

cement output, being the third largest contributor to the group‟s earnings, (the

import terminal in Lagos was the second largest revenue earner for the Dangote

Cement Group after Obajana Cement).

We expect revenue generated from this plant to rise to N60.8 billion by FY‟11

from N35.0 billion as at FY‟09. However, we estimate that its contribution to

Dangote Cement‟s overall revenue would dip to c.16% by FY‟11 from 33% as at

FY‟09 in view of additional lines to be added at the Obajana plant and the new

plant at Ibese.

Production costs

Energy costs as a whole constitutes about 60% of Gboko plant‟s total production

costs, which is quite higher in comparison to the Obajana Plant for which energy

costs is about 46% of production costs.

5%

10%

22%20%

16%

19%

0%

7%

14%

21%

28%

35%

0.0

1.0

2.0

3.0

4.0

2007 2008 2009 2010E 2011E 2012E

Gboko Plant's Output Contribution to DCP total

Figure 39: Gboko plant output (million tonnes) and %age contribution to

Dangote Cement Plc total output (Actual and Forecast)




The plant uses Low Pour Fuel Oil, which is more expensive than gas; hence the

disparity in its energy costs in comparison to Obajana. Notwithstanding, the

Gboko plant is more efficient in comparison to other competitors – Ashaka

Cement, Lafarge WAPCO and CCNN. As a standalone entity prior to its merger

with Dangote Cement, it had the highest gross profit margin relative to the

above-named competitors. By FY‟10, we estimate that the plant would account

for c.19% of Dangote Cement‟s overall production costs; this is expected to

decline to c.16% by FY‟12.

DCW Limited (Ibese Plant)

The Ibese Plant is a green-field project of the Dangote Cement Group located at

Ibese, Agbara Ogun State South-West Nigeria. The project which is being

executed under a fixed price contract by Sinoma Engineering Company (a

Chinese Engineering Company) is about 80% complete and scheduled to

commence operation in 2011 (line 1 in January and line 2 in February). The

project comprise of a two lines of 3 million metric tonnes / annum, implying an

annual capacity of 6 million metric tonnes (7,200 tonnes per day) at full

completion of the plant. The project also includes the construction of a 25

kilometre gas pipeline which would supply gas to the cement plant. The factory

occupies 2000 hectares of land with an estimated limestone capacity of 240

million tonnes and life-span of 90 years. The Ibese Cement Factory is expected

to generate 102MW electricity using three gas turbines. Other investment

projects at the plant site includes a six cement silos, and roto-parkers that would

be capable of packing 2,400 (50kg) bags per hour and about 18 trucks at a time.

0%

10%

20%

30%

40%

2009 2010E 2011E 2012E

Contribution to production cost Contribution to revenue

Dangote Cement‟s 6 million tonnes

Ibese plant is about 80% complete

and is expected to become

operational by Q1‟11

Figure 40: Comparison of percentage contribution of Gboko plant to Dangote

Cement‟s revenue and production costs


Despite falling behind the

Obajana plant in terms of

efficiency and production

economics, the Gboko plant

still stands out against

competitors



Production dynamics

The six million tonnes Ibese plant is expected to come on stream by Q1‟11.

Though a green-field plant like the Obajana plant, we believe its production

dynamics would differ from Obajana‟s plant at its commissioning next year

because of the structure of the contract for the plant. Unlike the Obajana plant,

the Ibese plant is being built as a turnkey contract, which is perhaps the most

reliable and expensive among other methods for constructing a cement plant.

Under a turnkey contract, the contractor committees to complete the execution

of the contract and to meet performance guarantees. Therefore, we expect the

Ibese plant to ramp up capacity utilisation somewhat faster than Obajana Plant.

Thus we forecast an average capacity utilisation rate of 50% for FY‟11, and

estimate that revenue generated from the plant would gradually rise from N76

billion in FY‟11 to N136.89 billion by FY‟13, thereby increasing the contribution

from Ibese plant to 27.1% by FY‟13 (from 21.5% by FY‟11).

Production costs

Ibese plant‟s production costs dynamics is quite similar to the Obajana Plant as

both plants are built to predominantly run on gas. Similar to Obajana, the

Dangote Cement is also making plans to have a fixed Gas Purchase Agreement

to the plant from the Nigerian Gas Company (NGC); this would help achieve

some stability in gas supply to the plant. Whilst we do not have the specifics of

the gas pricing, we expect the agreement to operate more like the Obajana Plant

which is based on a fixed priced scalable upwards by a fixed percentage year-on-

year.

0%

22%

23%

27%

0%

5%

10%

15%

20%

25%

30%

0

1

2

3

4

5

6

2010E 2011E 2012E 2013E

Ibese's expected output Contribution to DCP total production

Figure 41: Ibese plant‟s expected output (million tonnes) and %age

contribution to Dangote Cement Plc total output (Actual and Forecast)


We believe the Ibese plant will

ramp up capacity faster than the

Obajana plant and hence

estimate 50% capacity utilisation

by FY‟11

Like the Obajana plant, the Ibese

plant is built to run on gas with

arrangements already being

made for fixed gas purchase from

the NGC.



Thus, in our forecast, we expect Ibese to only account 12% of Dangote Cement‟s

total production cost for 2011, despite contributing c.22% to DCP‟s revenue. As

capacity utilisation rate and production at the Ibese plant increases, it‟s impact

on Dangote Cement‟s total production costs is expected to rise as well; however,

its input to DCP‟s total revenue would still outpace the implied increase in

production costs.

Import Terminals

Dangote Cement Group has the highest cement importation quota, which is

shared between the Lagos and Port-Harcourt terminals. The Group operates

three cement import terminals in Lagos, namely Apapa, Aliko and Tincan, all of

which have facilities to bag imported bulk cement. The Lagos terminals have an

estimated capacity of 3 million tonnes. Dangote Cement Group, through its

subsidiary-Dangote Bail Limited- operates two bulk cement terminals at Port-

Harcourt (South-South) and Onne (South East). Both cement terminals have a

combined annual bagging capacity of 3 million tonnes. As at FY‟09, the Lagos

terminals contribute the second largest revenue among other Dangote Cement

entities. Despite this, the import terminals are the least efficient and profitable

among Dangote Cement entities, given the huge cost of importation.

Combined production costs as a of sales for the import terminals is close to 85%

compared to 26% for Obajana and 38% for BCC (estimates for FY‟09). According

to management, the import terminals are gradually been wound up in

preparation for the huge output expected from local production next year. In line

with this, the Port/Harcourt terminal is almost non-operational, and the capacity

utilisation of the Lagos terminals has been significantly reduced. We expect

cement output through the import terminals to wane significantly in the medium

term, as the new plants to be added to industry next year would almost double

local manufacturing capacity to c.28million tonnes (from about 14million tonnes).

Thus we expect the short-fall in supply which has hitherto allowed for cement

imports, to drop significantly or perhaps completely eliminated. Thus, for

Dangote Cement, we project that cement imports would shrink to 8.5% of

revenue by 2013, down from 35% at FY‟09. Despite the expected decline in

import revenue, imports may still account for c.30% of Dangote Cement‟s total

production costs, owing to the huge costs associated with cement imports.

Other African Entities

Import Terminal Ghana: Dangote Industries Limited operates import

terminals in Ghana through its subsidiary - Green-view International Company

Limited. Dangote Cement initially had a 750,000 tonne annual capacity import

terminal in Tamale Ghana. This year, the group expanded its operations in

Ghana through a $28 million investment in Tema Cement Factory (also an import

terminal) which has an annual capacity of 1.2 million tonnes per annum.

Dangote Cement import terminals

have a combined capacity of 6

million tonnes and have the

highest cost of sales in the group

Dangote Industries operate the

largest cement import terminal in

Ghana



Onigbolo Cement Benin: Dangote Industries Limited acquired federal

government‟s 43% stake in Onigbolo Cement Company, Benin Republic following

the privatisation of the company by the Beninoise government. The plant has an

annual capacity of 0.6 million tonnes and is currently under management

contract that will expire in 2011.

Sephaku Cement South Africa: In 2008, Dangote Industries acquired

19.8% stake in Sephaku Holdings in South Africa. This year however, the group

has been making plans to increase its stake in the company to 65% in line with

the overall initiative of Dangote Cement Group to build capacity on the African

continent. In August 2010, Dangote Industries entered into an agreement with

Sephaku Cement, in which Dangote Industries will increase its stake to 64%

from 19.8% in exchange for R779 million in cash (translating to 217.59 million

ordinary shares in the company at R3.58 per share). The equity investment of

Dangote Industries in Sephaku Cement fulfils the equity requirements for the

projects to be embarked upon by the company and would also make the

company well positioned to finalise debt funding terms as the debt would be

guaranteed by Dangote Industries Limited. The funds would be utilised by

Sephaku Holdings to complete its ongoing projects-Aganang and Delmas

projects. The Aganang project includes a limestone mine and a cement

manufacturing plant in North-West Province, which is scheduled to produce

900,000 tonnes per year of cement by 2012. The second project - Delmas

project includes a cement milling plant in Mpumalanga province which would also

produce 1.25 million tonnes a year of cement by the end of 2012.

The cement plants will be built by Sinoma International Engineering Co. Ltd on a

fixed price full turnkey basis. Dangote investment in Sephaku Cement would

reposition the company to be third biggest cement plant in South Africa. At the

completion of Sephaku‟s cement plants, expected in four years, the company

would likely emerge as the third biggest cement producer in South Africa.

Pretoria Portland Cement (PPC) which has a combined capacity of about 7 million

tonnes is the biggest cement producer in South Africa, with Afrisam (formerly

Holcim), which has an annual capacity of about 4.6 million tonnes per annum

being the second biggest cement producer. Another key factor which would also

enhance the revenue and profitability growth of Sephaku Cement would be the

new state of the plants given that the average age of existing cement plants in

South African is about 33 years, even with the two recent brown-field expansions

in the industry.

Dangote Cement Senegal, other African countries: In 2008, Dangote

Industries Limited signed a financing deal with China‟s Sinoma International to

construct a 1.5 million tonnes/annum cement plant in Senegal. The Senegal

investment was a part of the $1.85 billion deal signed with the Chinese

construction company to install the 3rd and 4th lines at Obajana plant and to

construct the Ibese Plant. The deal was financed partly with equity and debt.

Dangote Group provided equity of about $600 million, while the balance of $1.25

billion dollars was sourced from a consortium of ten local banks, which includes

Guaranty Trust Bank (lead arranger), First Bank, First City Monument Bank

(FCMB), United Bank For Africa, Zenith Bank and Stanbic IBTC Bank.

Dangote Industries recently

acquired federal government‟s

43% stake in the 0.6 million

tonnes Onigbolo Cement, Benin

Recently also, DIL acquired a

controlling stake (65% equity) in

Sephaku Cement South Africa

The acquisition involves an

exchange of R779 million cash in

exchange for 217.59 million

ordinary shares

DIL‟s acquisition makes Sephaku

well positioned to pursue its

expansion to add over 2 million

tonnes cement plant

Dangote Industries is also building

a 1.5 million tonnes cement plant in

Senegal and plans to expand to

other countries like Tanzania and

DRC



The Dangote Group however has repaid the loan through a refinancing

arrangement from Standard Chartered Bank. DIL‟s contract with Sinoma

International also includes the construction of cement plants in Democratic

Republic of Congo, Equitorial Guinea, Ethiopia, Tanzania, Senegal and Zambia.

Recently the group signed an Investment Promotion and Protection agreement

with the Zambia government to establish a 1.5 million (per annum) cement

plant. The plant is estimated to cost $400 million dollars and it is expected to

become operational 27 months from March 2011. The 1.5 million tonnes (per

annum) cement plant in Senegal is scheduled to start operation by end of 2010.

* African Assets are cement plants and terminals currently under construction or planned

Forecasts – financial performance

On the basis of our industry outlook using federal government‟s medium term

(2010 – 2013) projections on capital expenditure, cement consumption would

grow at a 4-year CAGR of 16.7%, to 27.54 million tonnes by 2013, we expect

Dangote Cement to account for 72.4% of total industry output. Based on our

estimates of capacity utilisation rates in the industry, total production is likely to

be 25.15 million tonnes by 2013, indicating that c.2 million tonnes imports may

be needed to augment local production. Therefore, we project that Dangote

Cement‟s revenue would grow at a CAGR of 27.8% to N505 billion, which we

believe would stem from local production as well as imports. At this point, we

anticipate an average capacity utilisation rate of 91% for the Dangote Cement‟s

plants and 28.1% utilisation for the 6 million tonnes import terminal.

Our estimates put 2013 local

demand at 27.54 MT, while local

supply stands at 25.15 MT,

portending an import

augmentation of about 2.29 MT

* Dangote Cement Works

Dangote Cement Plc

Obajana

Cement Plant- 5 mn

Ibese

(DCW)* Cement Plant- 6 mn

Benue

Cement Plant - 3 mn

Lagos Cement

Terminal-3 mn

Dangote Bail

Cement (PH & Onne) Terminal - 3 mn

Figure 41: Expected structure of Dangote Cement Plc post-transfer

of African assets* from Dangote Industries Limited

Source: Vetiva Research, DCP Management

Senegal - 1.5mn

Zambia - 1.5mn Tanzania - 1.5mn South Africa - 2.2mn

Congo Brazzaville -1.5mn

Ethiopia - 1.5mn Cameroun - 1.5mn

African assets

(ongoing & planned)



On profitability, we project that EBITDA margins would steadily rise to 68.5% by

FY‟13 from 41.1% at FY‟10. Also, we expect EBIT margins to increase to 64.3%

by 2013 from 35.0% as at FY‟09. We believe Dangote Cement can achieve these

margins given its plants are built primarily (with the exception of Gboko plant-

former BCC) to operate on gas. Furthermore, the significant decline expected in

imports would also help drive higher profitability margins given the huge costs of

cement imports.

64%

79%

61%

81%

91%

0%

20%

40%

60%

80%

100%

0

100000

200000

300000

400000

500000

2009 2010E 2011E 2012E 2013E

Revenue Capacity Utilisation

Figure 42: Dangote Cement Revenue (N‟Mn) and capacity utilisation rates (%)


103%

55%

71%

44%

16%

0%

20%

40%

60%

80%

100%

120%

0

5000

10000

15000

20000

2009 2010E 2011E 2012E 2013E

EBITDA per tonne EBITDA margin EBITDA growth

Figure 43: EBITDA per tonne (N), EBITDA margin and

EBITDA growth

Sources: Annual Accounts, Vetiva Research

Estimates

0%

20%

40%

60%

80%

100%

120%

0

3000

6000

9000

12000

15000

18000

2009 2010E 2011E 2012E 2013E

EBIT per tonne EBIT margin EBIT growth

Figure 44: EBIT per tonne (N), EBIT margin and

EBITDA growth



Having re-financed its high interest bearing loans obtained from local banks, we

suspect that DCP‟s average cost of fund is now in the mid-single digits region.

Thus in the next two years during which the new loan (re-financing obtained

from Standard Chartered) is fully repayable, we do not expect pre-tax (PBT)

profit growth to largely align with the growth in operating profit (EBIT). Thus, we

forecast that PBT margin would increase to 56.6% by FY‟11 and 64.6% by FY‟13.

Given that Dangote Cement plants are largely exempt from taxation at least in

the next five years, we hope to see the run rate in pre-tax profit filtering to the

bottom-line. Thus, we project a 4-year CAGR of 51% from 2009 to 2013, which

implies that PAT margin, would rise to 63% from 32%.

34%

50%

58%

62%65%

0%

20%

40%

60%

0

4500

9000

13500

18000

2009 2010E 2011E 2012E 2013E

PBT per tonne Effective tax rate PBT margin

15%

30%

45%

60%

75%

0

4500

9000

13500

18000

2009 2010E 2011E 2012E 2013E

PAT per tonne PAT margin

Figure 45: PBT per tonne (N), PBT margin (%) and

effective tax rate (%)

Figure 46: PAT per tonne (N) and PAT margin (%)


0.0

5.5

11.0

16.5

22.0

2009 2010E 2011E 2013E 2014E

DPS EPS

0%

25%

50%

75%

100%

2008 2009 2010E 2011E 2012E

ROAE ROAA

Figure 47: Dividend Per Share and Earnings Per Share

Figure 48: Average Return on Assets and Equity


We suspect that Dangote Cement‟s

average cost of debt is currently in

the mid-single digit region having

refinanced its local loans



In view of DCP‟s proposed acquisition of other DIL‟s cement plant projects across

Africa, DCP is likely to take on additional leverage perhaps from 2012 to push

the projects to completion, as we believe that its internally generated funds

would not be sufficient to complete the projects. As earlier stated, DIL would be

transferring its Pan-Africa cement plant projects to Dangote Cement at cost in

2011. We note however that (with the exception of Senegal and Ghana) that

most of these projects are somewhat at inception stages and DCP would still

require considerable financing to complete the projects.

Whilst we note that the company can access intercompany funding from Dangote

Industries Limited, the degree of financing that would be needed to complete the

projects in our view would require taking additional debt from external sources.

Since we do not have sufficient clarity on the state of the projects, the amount

already spent and the amount that would be needed to complete the projects,

we have excluded the projects from our forecasts. However, we surmise that

Dangote Cement might need at least US$2 billion to complete the projects.

Therefore, we anticipate some significant rise in Dangote Cement‟s leverage from

2012. Figure 48 below shows DCP actual and forecast debt ratios, without

considering the possible rise in its leverage to support its acquisition of other

DIL‟s cement producing assets across the African continent.

Dangote Cement‟s debt ratio has decreased consistently over the last three years

to 22.3% as at FY‟09 from 54.9% as at FY‟07. The trend indicates DCP‟s good

stead in terms of solvency as the company has been able to reduce its debt

levels (we recall that the Obajana Plant was 60% debt financed).

7%

29%

18%

9%6%

6%

0%

5%

10%

15%

20%

25%

30%

35%

0.0

0.5

1.0

1.5

2.0

2007 2008 2009 2010E 2011E 2012E

Debt Ratio Debt to Equity ratio CAPEX/Total Assets

Figure 49: Debt, Debt to equity and CAPEX to total assets ratios


In view of the planned

acquisition of African assets

from DIL, we expect another

surge in Dangote Cement‟s

leverage within the next 3

years

To facilitate the acquisition of the

African cement projects, we

estimate that at least USD 2 billion

would be needed to complete the

projects

Historically DCP has a good

standing in terms of solvency and

leverage



In a similar vein, DCP‟s interest coverage ratio stood at an average of 571% over

the last three years and we expect this to improve further given that interest

payments would be decreasing as outstanding loan balance reduces while

operating profit (EBIT) is expected to increase substantially on the back of rising

utilisation rates and increasing revenue. As earlier stated, the company‟s recent

(early this year) refinancing of its local loans by Standard Chartered Bank would

reduce interest burden on its profitability.

Valuation

We use a blend of the Discounted Cash-flow and market capitalisation

weighted EV/EBITDA relative valuation for our valuation. Our overall fair

value however is significantly weighted to the DCF valuation (80% vs 20%)

given the relatively lower volatility of the method relative to market

multiples. Our overall fair value range for Dangote Cement is N131.50 –

N142.50 implying a midpoint of N136.00.

DCF assumptions –

Our Discounted Cash-Flow valuation for DCP is based on segmental forecasts

of revenue and production costs for each of the entities in the company. Our

DCF valuation spans through a period of 10 years, because in our view, a

longer time frame is necessary to capture the value inherent in the company

and in view of the ramping up phase before the plants reach peak capacity

utilisation. DCP‟s valuation was carried under the base case assumptions. The

assumptions guiding forecasts for revenue and production costs under this

scenario are presented below:

An important revenue driver in our DCF forecasts is the assumptions for

capacity utilisation rates in the forecast years. We believe capacity

utilisation would be gradual, as it has been the norm in the industry. Our

forecasts for capacity utilisation over the forecast period for each of the

plants are presented in the table below;

Revenue Capacity5

2010 2011 2012 2013 2014 2015 Drivers (Mn MT)

Capacity Utilisation

Obajana (%) 10.0 90.0 60.0 85.0 92.5 95.0 95.0

BCC (%) 4.0 60.0 75.0 85.0 90.0 95.0 95.0

Ibese (%) 6.0 0.0 50.0 70.0 90.0 90.0 95.0

Import terminals (%) 6.0 36.0 34.7 31.2 28.1 28.1 15.7

Average utilisation6 79.2% 61.0% 81.0% 91.0% 94.0% 95.0%

Output (Mn MT) 5.9 10.3 15.4 18.3 17.9 19.1

Selling price (N„000/tonne) 25 25.4 25.4 25.4 25.2 25.2

Revenue (N‟ Bn) 208 346 455 505 509 502

5 Only expected capacities are stated 6 Average utilisation excludes import terminals

Source: Vetiva Research

Figure 50: DCF revenue assumptions

Our valuation is based on a

combination of the DCF and

EV/EBITDA methodology; thus we

obtained a fair-value estimate of

N136.00 for Dangote Cement



As seen in the table above, we expect average utilisation rate for the cement

plants to move towards full utilisation from 2015, implying therefore that volume

from local production would be capped at this level. The only prospect for

revenue increase would therefore come from price increase; since we believe

that cement prices are more inclined to fall in the longer term, revenue would at

best be capped beyond 2015.

At optimal levels, the Obajana Ibese plant can run almost entirely on gas,

or at worst a substitution rate of 10% LPFO (that is 90% gas, 10% LPFO).

In 2009, the company was only able to achieve about 60% gas to 40%

LPFO in its fuel usage. Taking this into consideration in our forecasts for

production costs therefore, we assume a year average of 80% to 20% gas

to LPFO usage in 2010 on the back of the general improvement in gas

supply in the country since the beginning of 2010, and the fact that the

plant has increased its gas collection points from the NGC pipeline, as

revealed by management. In the medium term of our forecasts (2011 to

2013), we assume the ratio (gas to LPFO) usage would hover around the

80%/20% region and would subsequently improve further to 90%/10% in

the later years – 2014 onwards.

Gas pricing is based on the approximate cost per million standard cubic feet

of gas (Mscf) for the company in 2009, scalable by 9% yearly. According to

management, this price would not change in our forecast years since

Dangote Cement has a 20 year (from 2007) fixed Gas Purchase Agreement

(GPA) with the Nigerian Gas Company for its Obajana Plant and intends to

do the same for the Ibese plant. Thus, we largely believe that gas pricing

for the company would be relatively shielded from fluctuations in gas price

over the period.

Also in arriving at our energy consumption split (between LPFO and gas),

we estimated the average energy required to produce the tonnes of clinker

expected in the forecast years and carried out a split of the overall energy

consumption, (based on our forecast ratio of gas to LPFO usage) and

thereafter estimated the monetary value (in Naira) of the required energy

level from each fuel type.

Our estimate for power consumption is based on a common size analysis

(power costs as % of sales), adjusted for some increases over the forecast

period.

Other variable costs - gypsum, explosives, refractories, packaging materials

etc - a minor part of production costs are also estimated using common-

size analysis.

We kept depreciation charges in line with management‟s forecast (as

detailed in the Scheme of Merger) of a fixed depreciation rate of about

6.7%. The tax exempt nature of the cement plants given their pioneer tax

status was also considered in our forecast of Net Operating Profit After Tax

(NOPAT) in the forecast period. This further improves the outlook on the

company‟s free cash flow at least in the first five years of our forecast.

WACC assumptions are as detailed in the table below;

In our view, DCP plants would be

close to full capacity utilisation by

2015

The Obajana plant significantly

minimizes DCP‟s production cost as

it can run entirely on gas

Our estimates for gas pricing in

Dangote Cement‟s forecasts is

based on 2009 price per Mscf

scalable by 9% annually

Our forecasts of energy costs also

involve an estimation of the energy

consumption level per tonne of

clinker and assumption on

LPFO/Gas usage



Figure 51: WACC Assumptions

After tax cost of debt 6.8%

Tax rate 32.0%

Risk free rate4 10.8%

Beta 1.0

Equity risk premium 5.0%

Target Debt/Total Capital 25.9%

Shareholders Equity/Total Capital 74.1%

WACC 13.5%

DCF value N140.09

4 six month exponential weighted average of 20 year bond yields adjusted quarterly

Relative Valuation: EV/EBITDA

This valuation is based on emerging market (Middle East and Africa) average

forward EV/EBITDA estimate, and Dangote Cement‟s forward EBITDA as

summarised in the table below;

Figure 52: Valuation using 2011 market cap weighted EV/EBITDA estimates of EM peers

Average EM peer average (x) 8.9

EBITDA (N‟m) 216,318

Enterprise Value (N‟m) 1,925,230

Market Capitalisation (N‟m) 1,879,167

Shares Outstanding (mn) 15,494

Per share value N121.28

Final fair value range: N131.50 -N142.50; implied mid-point: N136.33

Rating

We upgrade our rating on Dangote Cement to an “Accumulate” given the

upward revisions in our fair value and the fact the stock has declined by 11%

since its listing on October 26th 2010. The stock now trades at an upside of

14% to the mid-point of our new fair value range. The increase in our

overall fair value estimate for the stock is due to a raise in our DCF-based

valuation, as we adjusted the company‟s target debt ratio and WACC to reflect

our expectation of a major increase in long term debt in view of the planned

acquisition of other African Assets from DIL and the expectation that Dangote

Cement would continue with the projects till completion.

We upgrade our rating on Dangote

Cement to an “Accumulate”



Figure 53: Financial Statements: Actual and Forecasts (N‟Mill)

INCOME STATEMENT (N'Mill) 2007 2008 2009 2010 F 2011 F 2012 F

Turnover 34,596 61,906 189,621 208,500 346,332 455,590

Cost of Sales (8,183) (14,054) (94,345) (82,463) (111,757) (116,792)

Gross Profit 26,413 47,852 95,276 126,037 234,575 338,798

Operating Expenses (4,992) (9,470) (17,422) (5,421) (15,931) (37,814)

Core Operating Profit 21,420 38,382 77,853 120,616 218,643 300,984

EBITDA 21,420 38,382 77,853 120,616 218,643 300,984

Depreciation & Amortization (5,462) (5,982) (11,527) (13,577) (15,308) (17,586)

EBIT/Operating Profit 15,958 32,400 66,326 107,039 203,335 283,398

Interest Payable & Charges (6,137) (8,647) (6,043) (993) (456) (1,176)

Profit Before Taxation 9,820 23,753 60,283 106,046 202,879 282,222

Taxation (630) (8,665) (2,384) (3,181) (4,058) (5,644)

Profit After Taxation 11,623 17,960 61,392 102,864 198,821 276,577

BALANCE SHEET (N'Mill) 2007 2008 2009 2010 F 2011 F 2012 F

Fixed Assets 130,519 135,622 186,393 215,788 277,546 289,659

Investments - - 99 99 99 99

Inventories 2,790 5,043 13,374 11,690 15,842 16,556

Debtors 876 2,924 6,826 7,505 12,467 16,400

Bank and cash balances 6,291 5,264 10,733 48,668 117,961 208,649

Other Receivables and Current Assets 28,005 87,867 98,913 108,761 180,660 237,653

TOTAL ASSETS 168,481 236,720 316,339 392,511 604,574 769,016

Creditors & Accruals 1,879 2,411 4,715 1,467 4,311 10,233

Other Creditors 9,833 17,205 65,349 71,855 119,356 157,009

Short Term Loan 20,823 78,339 18,061 10,644 7,724 79,886

Taxation 631 1,336 4,347 5,285 7,812 9,846

Long-Term Loans 77,211 56,890 49,620 102,120 70,745 38,735

Provision for Gratuity 34 67 981 2,169 3,602 4,738

Prior Year Dividend - - - - 137,745 139,742

Deferred Taxation - 7,959 9,475 9,475 9,475 9,475

TOTAL LIABILITIES 110,410 164,208 152,548 203,014 360,770 449,665

Share Capital 500 500 500 7,747 7,747 7,747

Share Premium 42,430 42,430 42,430 42,430 42,430 42,430

Revenue and Capital reserve 15,141 29,582 113,752 125,342 119,482 233,184

Shareholders Fund 58,071 72,512 157,668 175,519 169,659 283,361

Minority Interest - - 6,122 6,945 8,535 10,748

Total Equity 58,071 72,512 163,790 189,497 178,194 319,351



Figure 54: Financial Statements: Actual and Forecasts (USD Mill)

INCOME STATEMENT 2007 2008 2009 2010 F 2011 F

2012 F

Turnover 294 497 1,287 1,345 2,234 2,939

Cost of Sales (70) (113) (641) (532) (721) (753)

Gross Profit 225 384 647 813 1,513 2,186

Operating Expenses (42) (76) (118) (35) (103) (244)

Core Operating Profit 182 308 529 778 1,411 1,942

EBITDA 182 308 529 778 1,411 1,942

Depreciation & Amortization (46) (48) (78) (88) (99) (113)

EBIT/Operating Profit 136 260 450 691 1,312 1,828

Interest Payable & Charges (52) (69) (41) (6) (3) (8)

Profit Before Taxation 84 191 409 684 1,309 1,821

Taxation (5) (70) (16) (21) (26) (36)

Profit After Taxation 99 144 417 664 1,283 1,784

BALANCE SHEET 2007 2008 2009 2010 F 2011 F 2012 F

Fixed Assets 1,110 1,089 1,265 1,392 1,791 1,869

Investments 0 0 1 1 1 1

Inventories 24 40 91 75 102 107

Debtors 7 23 46 48 80 106

Bank and cash balances 53 42 73 314 761 1,346

Other Receivables and Current Assets 238 706 672 702 1,166 1,533

TOTAL ASSETS 1,433 1,901 2,148 3,337 5,141 6,539

Creditors & Accruals 16 19 32 12 37 87

Other Creditors 84 138 444 611 1,015 1,335

Short Term Loan 177 629 123 91 66 679

Taxation 5 11 30 45 66 84

Long-Term Loans 657 457 337 868 602 329

Provision for Gratuity 0 1 7 18 31 40

Prior Year Dividend 0 0 0 0 1,171 1,188

Deferred Taxation 0 64 64 81 81 81

TOTAL LIABILITIES 939 1,319 1,036 1,726 3,068 3,823

Share Capital 4 4 3 66 66 66

Share Premium 361 341 288 361 361 361

Revenue and Capital reserve 129 238 772 1,066 1,016 1,983

Shareholders Fund 494 582 1,070 1,492 1,443 2,409

Minority Interest 0 0 42 59 73 91

Total Equity 494 582 1,112 1,611 1,515 2,715



Figure 55: Financial Ratios – Actual and Forecasts

2008 2009 2010 E 2011 E 2012 E

Growth (%)

Turnover growth 78.9% 206.3% 10.0% 66.1% 31.5%

Growth in EBITDA 79.2% 102.8% 54.9% 81.3% 37.7%

Growth in PBT 117.3% 139.5% 66.3% 91.3% 39.1%

Growth in PAT 54.5% 241.8% 67.6% 93.3% 39.1%

Profitability (%)

Return on Average Equity 27.5% 53.3% 60.5% 95.2% 101.7%

Return on Average Assets 8.9% 22.2% 29.0% 39.9% 40.3%

EBITDA Margin 62.0% 41.1% 57.8% 63.1% 66.1%

EBIT Margin 52.3% 35.0% 51.3% 58.7% 62.2%

Pretax Profit Margin 43.0% 33.6% 50.9% 58.6% 61.9%

Net Profit Margin 29.0% 32.4% 49.3% 57.4% 60.7%

Liquidity Ratios (x)

Quick ratio 1.06 0.97 1.26 1.85 2.23

Cash ratio 0.19 0.05 0.12 0.55 0.85

Current ratio 1.14 1.02 1.40 1.98 2.35

Days in inventory 101.72 35.63 55.47 44.96 50.63

Days in accounts payable 1109.83 171.34 64.85 28.92 136.07

Days in receivables 11.20 9.38 12.54 10.52 11.56

Activity Ratios (x)

Sales to cash 11.76 17.67 4.28 2.94 2.18

Sales to inventory 22.19 37.60 15.59 29.63 28.76

Sales to total assets 0.26 0.60 0.53 0.57 0.59

Sales to total fixed assets 0.46 1.02 0.97 1.25 1.57

Production Data

Capacity(million tonnes) 8.00 8.00 8.00 19.00 20.00

Production (million tonnes) 3.19 5.00 6.18 11.58 16.10

Average Utilization 39.9% 62.5% 77.3% 60.9% 80.5%

Import terminal capacity 6.00 6.00 6.00 6.00 6.00

Import terminal utilisation 53.0% 42.9% 36.0% 34.7% 31.2%

Revenue/tonne (N'000) 25.00 25.35 25.35 25.35 25.20

Per Share Data

Earnings/share 35.92 122.78 6.64 12.83 17.85

Dividend/share1 0.00 2.00 4.98 9.32 12.96

Net Asset/share 116.14 145.02 12.23 15.74 20.61

Sales/Share 123.81 379.24 13.46 22.35 29.40

Valuation Multiples

P/E (x) 3.35 0.98 18.11 9.37 6.74

P/B (x) 1.04 0.83 9.83 7.64 5.83

Dividend Yield (%) 0.0% 1.7% 4.1% 7.7% 10.8%

EV/EBITDA (x) 48.54 23.93 15.45 8.52 6.19



Lafarge WAPCO Cement Set to Defend Market Share

More Efficiency Gains to Accrue: Despite the negative impact of

slowing sales on Lafarge WAPCO‟s top-line this year, the growth in

bottom-line earnings have been impressive, owing to the improvement

in gas supply and the resultant reduction in the importation of clinker

which historically has accounted for a massive portion of the company‟s

cost of sales. Beyond our expectation of relatively stable gas supply, the

recent conversion of the existing Sagamu and Ewekoro kilns to dual-

firing would help sustain the efficiency gains seen this year.

Furthermore, the Lakatabu plant, which is expected to be more energy

efficient relative to the older plants, would to a good extent, reduce

Lafarge WAPCO‟s overall energy costs.

Getting Set for the „Volume‟ Play: With its Lakatabu plant almost set

(c.85% complete) for operation, Lafarge WAPCO cement is on course to

sustain its market share in the next phase of growth in the cement

industry, which as we have always stated would be driven by volume.

The new plant, planned to be commissioned next year, would more than

double Lafarge WAPCO‟s production capacity to 4.2 million tonnes (from

2 million tonnes), thus positioning the company to effectively compete

and defend its market share, which otherwise would have been

significantly reduced as a result of Dangote Cement‟s aggressive

expansion.

Likely to incur more on marketing and distribution: As we have

always maintained, we reiterate that Lafarge WAPCO‟s spend on

marketing and distribution is set to increase, as part of its efforts to

match up with expected competition from Dangote Cement‟s Ibese

plant. We believe the company‟s recent launch of a new cement brand -

„Elephant Supaset‟ is a step in this direction.

Valuation and Recommendation: At its current price of N40.70,

which portends c.22% upside potential to our new fair value, N49.69,

we believe the stock is trading at a significant discount and thus

maintain our “Accumulate” rating on the stock.

Stock Data

Bloomberg Ticker

WAPCO:NL

Market Price (N)

40.07

Shares Outs (bn)

3.002

Market cap (N‟bn)

117.08

Fair value range

47.71 – 51.68

Rating ACCUMULATE

Price Perf. Lafarge WAPCO NSE

12-month (%) 43.2 19.2

6-month (%) -3.7 -5.0

3-month (%) 7.7 -2.0

Financials 2009A 2010F 2011F

Turnover (N'bn) 45.59 42.86 68.82

EBITDA (N'bn) 9.85 15.52 27.71

PAT (N'bn) 5.06 7.11 12.31

EBITDA Marg (%) 21.6 35.4 33.0

PBT Margin (%) 18.2 25.9 26.3

PAT Margin (%) 20.0 26.0 26.0

Valuation 2009A 2010A 2011F

P/E (x) 22.56 9.27 7.53

PBV (x) 2.28 1.98 1.71

EV/EBITDA (x) 13.72 8.92 5.95

Div. Yield (%) 0.6 1.3 5.3

ACCUMULATE

0.8

1.0

1.2

1.4

1.6

15-Dec 15-Feb 15-Apr 15-Jun 15-Aug 15-Oct 15-Dec

ASI BMIndex WAPCO

Lafarge

S.A : 60%Odua

Group:

10.01%

Other

Nigerians:

29.99%

Figure 56: 52-week Share price performance and shareholding structure

Sources: NSE, Vetiva Research



Investment Thesis

Strong Brand Name: Given its historical dominance of WAPCO‟s elephant

cement in the South-West region of Nigeria, Lafarge WAPCO‟s elephant cement

has a renowned brand name associated with strength and good quality in the

region. As a flagship brand of the Nigerian Cement industry, Elephant Cement

has won the NIS certificate of quality and recently the company won got the

MANCAP Certificate for Portland Limestone Cement CEMII 32.5 BL, making it the

first cement manufacturer to own the certificate in Nigeria.

Good Track Record: Lafarge WAPCO has a good history of revenue and

profitability growth in the Nigerian Cement industry even during periods when

most cement plants (Nkalagu plant, Okpella, BCC) established about the same

time were either non-functional or recording losses from huge operational

challenges. Whilst Lafarge WAPCO was not immune to these operational

bottlenecks especially fuel supply and power challenges, it has been able to

sustain production by milling imported clinker into cement, whilst adjusting

prices to according compensate for the huge production costs. We believe

Lafarge WAPCO‟s history of competitive survival and experience in the Nigerian

cement sector is a pointer that the company can adequately measure up to

competitive threats to defend its market share and remain profitable.

Robust Revenue upside: Lafarge WAPCO‟s on-going expansion to 4.2 million

tonnes annual capacity implies a potential c.100% revenue upside from its

current levels assuming that prices remain constant. Using a more realistic

assumption that price would perhaps moderate slightly downwards, to make its

cement competitive in comparison to Dangote Cement (as Lafarge WAPCO‟s per

tonne cement price is currently higher than Dangote Cement‟s); we still foresee

at least 70% – 80% upside on its current revenue. Whilst noting that the

timeline for Lafarge WAPCO to achieve this revenue growth is based on the

speed of ramping up capacity utilisation at the new plant, we estimate that its

revenue would more than double (110% growth relative to 2009 level) by 2014.

Strong Parent Support: Also, being the biggest Nigerian subsidiary of the

Lafarge Group is an added advantage given the leadership position of the group

in the global building materials industry and the resultant gains in terms of

product research, innovation and quality from which Lafarge WAPCO has been

benefitting. We believe Lafarge‟s product innovation would particularly be a key

area in which Lafarge WAPCO can be competitively positioned against Dangote

Cement in Lagos and south west market. Lafarge Group recently patented a new

cement brand (Sensium® technological cements) which is 100% dust free and

has started testing the product in the South-East France market. We believe

Lafarge would soon introduce such product innovations to its other subsidiaries.

Board diversification: With respect to corporate governance processes,

Lafarge WAPCO‟s well-diversified board structure is quite an advantage, as

the diversification minimises „key-man‟ influence on management decisions.

Lafarge WAPCO‟s elephant cement

is a well respected brand in the

industry as it‟s known for its

strength and good quality

Lafarge WAPCO had a good history

of plant operations and revenue

growth even during periods of

industry wide operational

challenges

At the completion of the “Lakatabu”

plant in Ewekoro, there‟s a

potential 100% revenue upside for

Lafarge WAPCO

As Lafarge‟s biggest subsidiary in

Nigeria, the company enjoys the

competitive advantage of Lafarge‟s

leadership position in the global

building materials industry



Pioneer tax status for „Lakatabu‟ plant: In a similar fashion to its tax-exempt

status at the completion of the Ewekoro plant in 2003, Lafarge WAPCO would

again qualify for another pioneer tax status on the new „Lakatabu‟ plant at

completion, and we believe the company would duly apply for this tax incentive.

With the Lafarge WAPCO‟s current revenue expected to more than double at full

operation of the new plant, tax exemption (as a result of the pioneer tax status)

would boost growth in profit after tax faster than turnover. We believe that this

would translate to more returns for investors in terms of dividend pay-out.

Business Overview

Lafarge Cement WAPCO Nigeria Plc (WAPCO) was incorporated on 26 February,

1959. It was listed on the floor of the Nigerian Stock Exchange on 16 February,

1979. The Company‟s first plant was commissioned a year after, at Ewekoro,

Ogun State with a capacity to produce 200,000 tonnes of cement a year. The

Company later embarked on an expansion of its production capacity, increasing

it by 1.49 million tonnes to 1.69 million tonnes, which partly led to the

commissioning of another plant in Sagamu, also situated in Ogun State (1.00

million tonnes) in 1978. Until Lafarge‟s acquisition of Blue Circle Industries Plc in

2001, Blue Circle Industries Plc was the majority owner of WAPCO. Following the

acquisition, Lafarge S.A became the majority shareholder of WAPCO. The name

was eventually changed from West African Portland Cement Plc to Lafarge

Cement WAPCO Plc in 2008.

Ewekoro Plant

The Ewekoro plant was originally a wet-kiln plant commissioned with an annual

capacity of 200,000 tonnes in 1969. The plant eventually expanded, using wet

and semi-wet manufacturing processes to 690,000 tonnes in the seventies.

Following the acquisition of the company by Lafarge, the old Ewekoro plant was

replaced with a modern dry kiln plant, having an annual capacity of 1.32 million

tonnes in 2003. The new Ewekoro plant is Lafarge WAPCO‟s production plant

given its relatively new state, and its expansion by an additional 2.2 million

tonnes (Lakatabu project) currently on-going.

Sagamu Plant

The plant, also built with the wet-kiln manufacturing process was commissioned

in 1978, with an annual capacity of 600,000 tonnes. With the addition of a Raw

Mill and Roller Crusher in 1980, the plant‟s capacity was upgraded to 850,000.

Production Dynamics

Lafarge WAPCO currently has a production capacity of 2 million tonnes, which

expectedly would double by 2011. The company average capacity utilisation

stood at 84%, though it reached its peak utilisation rate of 97% in 2006.

Excluding the portion of cement obtained from milling imported clinker, actual

capacity utilisation rate for the company is actually lower. Thus, we note that the

peak utilisation rate of 97% reported for 2006 is actually lower.

We suspect that there will also be a

tax exemption (pioneer tax status)

for “Lakatabu” plant; this will

further enhance profitability and

investment return

Lafarge WAPCO is owned by

Lafarge S.A, through its controlling

position in Blue Circle Industries Plc

Though originally commissioned as

a 200,000 tonnes (per annum) wet

kiln plant, the Ewekoro Plant has

undergone various upgrading to its

current capacity of about 1 million

tonnes

Lafarge WAPCO currently has a 2

million tonnes annual capacity,

which reached peak utilisation rate

of 97% in 2006



In the same vein, we stripped out the cement volume obtained from milling

imported clinker (as against cement obtained from actual clinker production) and

extrapolate that actual capacity utilisation rate for 2009 was about 63% as

against the widely reported figure (based in cement volume in tonnes) of 81%.

Lafarge WAPCO‟s production and capacity utilisation has historically been

adversely affected by disruption in gas supply as it plants were mono-firing.

Since we hope to see stable gas supply (given the relative calmness of the Niger-

Delta region), we expect significant improvements in capacity utilisation, and a

drastic reduction in the importation of clinker. Furthermore the conversion of the

existing kilns to dual-firing would also improve production as the company now

has more fuel options.

Production costs

Although Lafarge WAPCO‟s plants are primarily built to operate on gas,

disruptions in gas supply have historically resulted in significantly high

production costs, as result of importation of clinker. In view of the recent

conversion of its plants to dual-firing kilns, the flexibility to use LPFO would

reduce the pressure on WAPCO‟s production costs. Based on our overall

expectation of continuing stability in gas supply in the medium term, we believe

Lafarge WAPCO would be able to sustain the improvement seen in its operating

efficiency so far this year as a result of the reduction in its production costs.

However, the company is more susceptible to fluctuations in gas pricing than

Dangote Cement. Whilst Dangote Cement plants predominantly operate on gas,

Dangote Cement is relatively immune to adverse volatility in gas prices in view of

the fixed term Gas Purchase Agreement (GPA), which the company already has

in place for its Obajana Plant. Thus, hikes in gas price is only likely to affect

Lafarge WAPCO and possibly Unicem which source their gas supply from gas

distributors like Gaslink. Raw materials (limestone, gypsum, kaolin and other

additives) account for a relatively small portion of production costs – we put this

at 15% - 20%. Ewekoro and Shagamu have about 50 -70 years of limestone

reserve.


Following from our overall industry outlook on cement consumption, we project

that Lafarge WAPCO would account for c.15% of total industry output.

Therefore, we forecast that Lafarge WAPCO‟s revenue would grow at a CAGR of

25.3% to N89.70 billion by 2013; this would stem from ramping up of the new

2.2 million tonnes plant. At this point, we anticipate an average capacity

utilisation rate of 82%.

Production has historically been

disrupted by acute gas supply

shortages

Although Lafarge WAPCO‟s plants

were built to run on gas, production

costs has been historically high due

to importation of clinker

We project that Lafarge WAPCO

would account for c.15% of

Nigeria‟s cement industry output at

the full operation of its new plant



5Historical capacity utilisation rates are based on cement volumes produced from locally produced and imported

clinker

On profitability, we project that EBITDA margins would rise to c.40% by FY‟13

from 21% at FY‟09. Also, we expect EBIT margins to increase to 32% by 2013

from 18% as at FY‟09. Consistent with our expectation of higher synergy in

operating efficiency at the operation of the new plant, we believe Lafarge WAPCO

can achieve these profitability margins. The Lakatabu plant would operate using

a more modern dry-kiln technology which would substantially compensate for the

challenges associated with old wet kiln technology being used at the WAPCO

Ewekoro plant. Also, the new plant would operate using a captive power plant

which would be cheaper relative to sourcing power from Independent Power

Producers.

84%

81%76%

61% 64%

82%

25%

50%

75%

100%

0

25000

50000

75000

100000

2008 2009 2010E 2011E 2012E 2013E

Revenue Utilisation rate

Figure 57: Actual and forecast Revenue (N‟Mn) and capacity utilisation

rates5 (%)

Sources: Annual Reports, Vetiva Research

We forecast EBITDA margin of 40%

by FY‟13



As Lafarge WAPCO‟s moratorium on its C225 million (secured for the construction

of the Lakatabu plant) expires by end of 2011, pre-tax profit margin would

somewhat decrease by 2012. Thus, we expect pre-tax profit margin to increase

to 28.4% by FY‟11, but expect a decline to 25.9% by FY‟12. In view of our

expectation of partial tax exemption (based on pioneer tax status consideration

for Lakatabu plant), we anticipate stronger growth in profit after tax, relative to

pre-tax profit and operating profit. Thus, we forecast that a CAGR of 42.8% in

profit after tax over the four year period to 2013 from 2009, clearly ahead of our

CAGR forecast of 25.3% in revenue. In line with our expectation of faster growth

in after tax profit, we believe the Lafarge WAPCO would shore up its dividend

payout from 2011. By 2012 and 2013, a minimal reduction in dividends is likely

since we expect the company to make interest payments on its C225 million

loan. Notwithstanding, we believe the pay-off from tax exemption would

outweigh the impact of interest payments on after-tax earnings.

-30%

0%

30%

60%

0

2500

5000

7500

10000

2008 2009 2010E 2011E 2012E 2013E


-35%

0%

35%

70%

0

2000

4000

6000

8000

2008 2009 2010E 2011E 2012E 2013E

EBIT per tonne EBIT Margin EBIT Growth

Figure 58: EBITDA per tonne (N), EBITDA margin

and EBITDA growth (%)

Figure 59: EBIT per tonne (N), EBIT margin and EBIT

growth (%)


With the moratorium on its 225

million loan expiring by end of

2011, interest payments would

start taking tow on profitability by

2012



At the completion of Lakatabu‟s expansion, we do not expect significant capital

expenditure beyond 2012. Thus, we project that capital expenditure (as

percentage of sales) would slow down to 5%.

12%

24%

36%

48%

0

2000

4000

6000

8000

2008 2009 2010E 2011E 2012E 2013E

PBT per tonne Effective tax rate PBT Margin

0%

5%

10%

15%

20%

25%

30%

0

2500

5000

7500

2008 2009 2010E 2011E 2012E 2013E

PAT per tonne PAT Margin

Figure 60: PBT per tonne (N), PBT margin (%) and

effective tax rate (%)

Figure 61: PAT per tonne (N) and PAT margin (%)


0%

8%

17%

25%

33%

2008 2009 2010E 2011E 2012E 2013E

ROAA ROAE

0.00

1.50

3.00

4.50

6.00

2008 2009 2010E 2011E 2012E 2013E

EPS DPS

Figure 62: Earnings Per Share (N) and Dividend Per

Share (N)

Figure 63: Return on Average Equity and Assets (%)




As the two year moratorium on Lafarge WAPCO‟s current C225 loan expires,

interest expense would rise within the next two years. Thus, a significant portion

of the company‟s cash-flow within the next three years would be gulped by debt

repayment. We believe the loan will be fully liquidated by 2013. Therefore, we

project that Lafarge WAPCO‟s debt ratio (long term debt divided by total assets)

would gradually decline to 0% from 28.4% at FY‟09. Long term debt to equity

ratio is expected to follow the same trend, as declining from c.57% (at FY‟09) to

0% by FY‟13.

Valuation

We used a blend of the Discounted Cash-flow and EV/EBITDA relative

methodologies for our valuation. Our overall fair value however is significantly

weighted to the DCF valuation (80% vs 20%) given the relatively lower volatility

of the DCF method relative to market multiples. Our overall fair value range for

Lafarge WAPCO is N47.71 – N51.68 implying a midpoint of N49.69.

DCF assumptions -

Based on industry trends, we assume gradual ramping-up of the new 2.2

million tonnes plant. Capacity utilisation rates are summarised below;

0%

57%

49%

43%

14%

0%

28%

23% 22%

8%

0%

15%

30%

45%

60%

2008 2009 2010E 2011E 2012E 2013E

Long term debt to equity Long term debt to total assets

CAPEX to total assets

Figure 64: Lafarge WAPCO debt and debt to equity ratios


We expect the loan to be fully

liquidated by 2013 and project

minimal long term debt exposure

for the company

We use a blend of DCF and

EV/EBITDA valuation with a 80/20

weighting criteria



Revenue Capacity

2010 2011 2012 2013 2014 2015 Drivers (Mn MT)


Existing plants (%) 2.0 76.0 70.3 85.0 85.0 90.0 95.0

Lakatabu (%) 2.2 - 25.0 50.0 80.0 90.0 95.0

Average utilisation 76.0% 60.0% 67.0% 83.0% 90.0% 95.0%

Output (Mn MT) 1.52 2.50 2.80 3.48 3.80 4.00

Selling price (N„000/tonne) 28.2 27.45 26.5 26.0 25.7 25.7

Revenue (N‟ Bn) 42.86 68.12 74.20 89.96 97.05 105.44

As seen in the table above, we expect average utilisation rate for the cement

plants to move towards full utilisation from 2015, implying therefore that volume

from local production would be capped at this level. Beyond this point, the only

prospect for revenue increase would therefore come from price increase; since

we believe that cement prices are more inclined to fall in the longer term,

revenue would likely decline in the longer term if the additional capacities are not

added. Assuming that price would at best remain constant, revenue would at

best be flat beyond 2015.

In line with our overall expectations, we expect a downward trajectory in

Lafarge WAPCO‟s production costs. Though we do not have specific details on

the actual of gas, its major energy input, we have assumed that WAPCO‟s cost

of sales decline to c. 53% and 50% of sales by FY‟10 and FY‟11 (from c.67% at

FY‟09) respectively.

Our assumption is predicated on peer analysis using Dangote Cement, which

also use gas as its major energy input (Obajana), whilst adjusting the estimate

obtained for Lafarge WAPCO upwards to account for the relatively lower pricing

being enjoyed by Dangote Cement as a result of purchasing its gas directly from

the Nigerian Gas Company (NGC).

Alongside the construction of the 2.2 million tonnes Lakatabu plant, Lafarge

WAPCO is also constructing a 100MW multi-fuel power plant capable of

operating using diesel, Low Pour Fuel Oil (LPFO) and gas. The captive power

plant at completion, will supply electricity to Lafarge WAPCO‟s new and existing

plants.

Following from this, we expect some major reductions in the company‟s

operating expenses as the captive power plant would supply cheaper electricity

compared to Independent Power Producer, upon which the company historically

relied. This also feeds into our forecasts of declining costs of sales.

We assumed a long term CAPEX to sales ratio of 5% and kept average

depreciation years at twenty-five. The expected tax exemption of the new

Lakatabu plant is also considered in our forecast of Net Operating Profit After

Tax (NOPAT) in the forecast period. This further improves the outlook on the

company‟s free cash flow at least in the first five years of our forecast.



Given expected higher efficiency of

the new plant, we expect to see a

continuing downward trend in

Lafarge WAPCO production costs

Our forecast for production costs is

premised on peer analysis using

DCP plants which also uses gas as

its major fuel



WACC assumptions are detailed in the table below



Tax rate 32.0%


Beta 0.85


Target Debt/Total Capital 17%

Shareholders Equity/Total Capital 83%

WACC 13.57%

DCF value N47.89


This valuation is based on emerging market (Middle East and Africa) average

forward EV/EBITDA estimate, and Dangote Cement‟s forward EBITDA as

summarised in the table below;




Enterprise Value (N‟m) 206,542

Market Capitalisation (N‟m) 185,376


Per share value (N) 57.93

Final fair value range: N47.71 – N51.68; implied mid-point: N49.69

Rating

Despite raising our fair value for Lafarge WAPCO slightly, we maintain an

“Accumulate” rating on stock as it‟s trading at an upside of 23% to our new fair

value.

We maintain an “Accumulate”

rating on Lafarge WAPCO





Turnover 38,665 43,274 45,590 42,864 68,817 74,200

Cost of Sales (21,945) (25,026) (30,513) (22,847) (35,785) (37,100)

Gross Profit 16,720 18,247 15,077 20,017 33,032 37,100

Distr. & Admni Expenses (4,843) (4,542) (5,224) (4,865) (10,323) (11,130)


EBITDA 11,877 13,705 9,853 15,152 22,710 25,970

Depreciation & Amortization (1,378) (1,580) (1,576) (4,045) (4,618) (4,773)

EBIT/Operating Profit 10,499 12,125 8,277 11,107 18,091 21,197

Interest Payable & Charges (831) (228) - - - (3,168)

Profit Before Taxation 11,665 12,769 8,956 11,107 18,091 18,029

Taxation (1,358) (1,781) (4,182) (3,999) (5,789) (2,885)

Profit After Taxation 11,179 11,252 5,056 7,109 12,302 15,144


Non-Current Assets

Total fixed Assets 33,356 43,121 69,681 87,301 93,115 95,674

Long Term Investments 60 60 60 60 60 60

Current Assets Inventories 8,572 10,083 12,517 9,372 14,680 15,220

Debtors - 166 185 174 280 302

Bank and cash balances 4,220 5,974 3,628 2,871 7,006 5,414

Other Receivables and Current Assets 4,388 2,364 1,092 1,715 2,753 2,968

Total Current Assets 17,180 18,587 17,422 14,132 24,719 23,903

TOTAL ASSETS 50,596 61,769 87,163 101,494 117,894 119,638

Current Liabilities

Creditors & Accruals 7,732 8,353 8,573 7,985 16,941 18,266

Other Creditors 1,461 1,422 1,056 1,341 2,152 2,321

Short Term Loan 4,713 7,113 - - 8,632 15,519

Taxation 1,842 1,212 1,044 - - -

Total Current Liabilities 15,748 18,099 10,674 9,325 27,726 36,106

Non-current Liabilities Long-Term Loans - - 24,793 24,793 24,793 9,274

Provision for Gratuity 1,748 1,758 2,801 717 3,661 3,680

Deferred Taxation 294 1,455 5,183 2,072 4,225 4,001

Total Non-Current Liabilities 2,042 3,213 32,778 27,582 32,678 16,955


Net Assets 32,806 40,456 43,711 64,586 57,490 66,576



Figure 69: Financial Statements: Actual and Forecasts (USD‟Mill)

INCOME STATEMENT (USD'Mill) 2007 2008 2009 2010 F 2011 F

Turnover 329 347 310 286 444

Cost of Sales (187) (201) (207) (152) (231)

Gross Profit 142 147 102 133 213

Distr. & Admni Expenses (41) (36) (35) (32) (67)

Core Operating Profit 101 110 67 101 147

EBITDA 101 110 67 101 147

Depreciation & Amortization (12) (13) (11) (27) (30)

EBIT/Operating Profit 89 97 56 74 117

Interest Payable & Charges (7) (2) - - -

Profit Before Taxation 99 103 61 74 117

Taxation (12) (14) (28) (27) (37)

Profit After Taxation 95 90 34 47 79

BALANCE SHEET (USD'Mill) 2007 2008 2009 2010 F 2011 F

Non-Current Assets Total Fixed Assets 284 346 473 582 621

Long Term Investments 0.5 0.5 0.4 0.4 0.4

Current Assets - - - Inventories 73 81 85 64 100

Debtors - 1 1 1 2

Bank and cash balances 36 48 25 19 48

Other Receivables and Current Assets 37 19 7 12 19

Total Current Assets 146 149 118 96 168

TOTAL ASSETS 430 496 592 678 789

Current Liabilities Creditors & Accruals 66 67 58 53 109

Other Creditors 12 11 7 9 14

Short Term Loan 40 57 - - 56

Taxation 16 10 7 - -

Total Current Liabilities 134 145 72 62 179

Non-current Liabilities Long-Term Loans - - 168 165 160

Provision for Gratuity 15 14 19 5 24

Deferred Taxation 2 12 35 14 27

Total Non-Current Liabilities 17 26 223 184 211

TOTAL LIABILITIES 151 171 295 246 390

Net Assets 279 325 297 431 371



Figure 70: Financial ratios: Actual and Forecasts

2007 2008 2009 2010 E

2011 E 2012 E

Growth (%)

Turnover growth -2.5% 11.9% 5.4% -6.0% 60.5% 7.8%

Growth in EBITDA -15.2% 15.4% -28.1% 53.8% 49.9% 14.4%

Growth in PBT -1.6% 9.5% -29.9% 24.0% 62.9% -0.3%

Growth in PAT 4.7% 0.7% -55.1% 40.6% 73.1% 23.1%

Profitability (%)

Return on Average Equity 38.7% 30.7% 12.0% 15.2% 22.9% 24.4%

Return on Average Assets 22.6% 20.0% 6.8% 7.5% 11.2% 12.8%

EBITDA Margin 30.7% 31.7% 21.6% 35.4% 33.0% 35.0%

EBIT Margin 27.2% 28.0% 18.2% 25.9% 26.3% 28.6%

Pretax Profit Margin 30.0% 30.0% 20.0% 26.0% 26.0% 24.0%

Net Profit Margin 28.9% 26.0% 11.1% 16.6% 17.9% 20.4%


Quick ratio 0.64 0.41 0.15 0.64 0.33 0.44

Cash ratio 0.27 0.33 0.34 0.12 0.25 0.15

Current ratio 1.09 1.03 1.63 0.59 0.89 0.66

Days in inventory 113.27 136.04 135.18 174.86 122.67 147.08

Days in accounts payable 110.25 110.62 93.76 153.38 110.70 170.71

Days in receivables 0.15 0.70 1.41 1.53 1.20 1.43

Activity Ratios (x)

Sales to cash 9.16 7.24 12.57 14.93 9.82 13.71

Sales to inventory 4.63 3.83 3.46 4.86 2.92 4.52

Sales to total assets 0.76 0.70 0.52 0.42 0.58 0.62

Sales to total fixed assets 1.16 1.00 0.65 0.49 0.74 0.78

Production Data

Capacity(million tonnes) 2.00 2.00 2.00 2.00 4.20 4.20

Production (million tonnes) 1.70 1.68 1.60 1.52 2.51 2.80

Average Utilization (%) 0.85 0.84 0.80 0.76 0.60 0.67

Revenue/tonne (N'000) 22.74 25.80 28.49 28.20 27.45 26.50

Per Share Data (N)

Earnings/share 3.72 3.75 1.68 2.37 4.10 5.05

Dividend/share 1.20 0.60 0.10 0.24 0.50 2.02

Net Asset/share 10.93 13.48 14.56 16.69 19.15 22.18

Sales/Share 12.88 14.42 15.19 14.28 22.93 24.72

Valuation Multiples

P/E (x) 10.20 10.14 22.56 16.05 9.27 7.53

P/B (x) 3.48 2.82 2.61 2.28 1.98 1.71

Dividend Yield (%) 3.2% 1.6% 0.3% 0.6% 1.3% 5.3%

EV/EBITDA (x) 9.66 11.39 9.87 13.72 8.92 5.95



AshakaCem Plc Rating Downgraded to „Reduce‟

Share Price Performance: With a YTD gain of 116% Ashaka has been

the best performing stock amongst the cement producers this year. We

attribute its impressive stock performance to rising investors‟ interest in

the sector and the fact that it started the year on a low base which

made its price attractive to investors. Whilst maintaining that Ashaka

fundamentals present a long term value play, we believe our

expectations have been fully priced in by investors. Hence, we

downgrade our rating on the stock to a „reduce‟.

Ramping up coal utilisation: Following the completion of its coal plant

in Q4‟09, Ashaka has begun substituting Low Pour Fuel Oil with coal,

which is cheaper relative to the former. Whilst we are yet to see

considerable improvement in margins in its quarterly earnings, we

strongly maintain that the company is poised to improve its margins in

the medium to longer term as it achieves higher coal substitution levels

and fully integrate the coal plant into its cement operations. At about

90% of coal utilization, energy cost is expected to drop to 2.1-2.7

Euro(can we convert to dollars or naira for consistency) per GigaJoule

(GJ) from about 7 Euro per Giga-Joule (representing a 60% to 70%

decline).

In tune with industry expansion drive: In addition to its coal plant

investment, Ashaka is not lagging in positioning itself for the expected

volume drive in the sector from next year. The company‟s is upgrading

its existing kiln capacity of 0.85 million tonnes to 1.25 million tonnes

and we expect this to be completed next year. Whilst Ashaka is a

relatively small player in the Nigerian cement industry, the expansion

would somewhat help the company strengthen its position in its major

market – North-East Nigeria.

Valuation and Recommendation: Despite our optimistic outlook on

Ashaka, we downgrade the stock to a „reduce‟ as our valuation mid-

point (relative to its current price of N27.50) implies a downside of

11%. Ashaka is trading at a 2011 P/E of 14.54x relative to peer of

12.70x.

Stock Data

Bloomberg Ticker

ASHAKACEM:NL

Market Price (N)

26.50

Shares Outs (bn)

2,240

Market cap (N‟bn)

61.60

Fair value range

22.40 – 26.26

Rating REDUCE

Price Perf. Ashaka NSE

12-month (%) 135.0 19.2

6-month (%) 50.0 -5.0

3-month (%) 7.5 -2.0

Financials 2009A 2010A 2011F

Turnover (N'bn) 17.19 18.19 21.02

EBITDA (N'bn) 4.48 7.53 9.83

PAT (N'bn) 2.53 4.37 5.97

EBITDA Marg (%) 8.9 24.6 35.8

PBT Margin (%) 7.7 19.3 31.0

PAT Margin (%) 5.5 13.9 20.8


P/E (x) 59.86 25.09 14.54

PBV (x) 4.30 4.37 3.74

EV/EBITDA (x) 41.42 14.17 8.43

Div. Yield (%) 0.0 1.8 3.1

REDUCE

Fig 71: 52-week Share price performance and Shareholding structure

0.5

1.0

1.5

2.0

2.5


ASI BMIndex Ashaka

Lafarge S.A

: 50.16%

Others:

49.84%




Investment Thesis

Rising costs savings: The most compelling attraction to Ashaka Cement, in our

view, is its potential to sustain long term efficiency and profitability despite its

relatively low scale of production. According to management‟s insights, the

company can achieve 60% -70% savings in energy costs, when full substitution

of LPFO with coal is achieved. Nonetheless, we have discounted management‟s

expectation and assumed only a 55% savings in energy costs. Whilst noting that

Ashaka has not met its projection on coal utilisation level so far this year,

(management achieved only coal utilisation rate as at half year relative to a 60%

projection), we still maintain long term optimism on its operating efficiency,

though we have adjusted our expectation to reflect a long time frame for the

company to reach peak (c.100%) coal utilisation. Therefore, we project that

EBITDA margins would increase to 35% by FY‟12 and 42% by FY‟15 (from 9% at

FY‟09). Similarly, we forecast an EBIT margin of 32% by FY‟12 and 40% by

FY‟15, (from 5.9% at FY‟09).

Non-debt status: According to insights from Ashaka‟s management, the coal

mine project completed by the company last year was purely financed by

internally generated cash-flows from Ashaka and intercompany funding from the

parent company. The debt free status of the company implies that the company

can make significant savings from zero interest expense and boost bottom-line

earnings. This, coupled with the expected rise in profitability from achieving

higher operating efficiency, enhances the potential return, in form of dividend

payments, to its shareholders.

The Lafarge advantage: We believe Lafarge‟s clout as the parent company of

Ashaka Cement gives the company a competitive edge relative to its closest peer

– Cement Company of Northern Nigeria. In this regard, we highlight Ashaka‟s

access to intercompany funding from Lafarge, as the company did not take on

any long term debt in completing its coal plant, which is estimated to have cost

approximately N5 billion (US$333 million). Ashaka also benefits from product

research and innovation – another competitive edge.

Potential for revenue diversification from coal mining: Ashaka is the

pioneer user of coal energy in cement production in Nigeria. The company

actually completed its coal plant last year, with the aim of utilising mining coal

from the mine to power the kilns. Apart from the anticipated reduction energy

costs which the company would achieve from substituting Low Pour Fuel Oil to

coal, we believe coal mining may in the longer term be an additional source of

revenue for company, given the huge reserve of its coal mine. Ashaka has an

installed coal capacity utilization of 300,000 tonnes per annum and can expand

this further since the coal mine (in Maiganga, Gombe State) has an estimated

proven reserve of 4.5 million tons which can adequately serve the company‟s

requirement of at least 25 years fuel. Given the increasing interest of other local

producers in using coal fuel (CCNN and Dangote Cement), we see a possibility of

Ashaka eventually diversifying its revenue through coal sales, especially if

purchasing coal locally is cheaper for other cement producers in comparison to

importation.

Ashaka‟s most prominent

investment case is the expected

reduction in its productions and the

implied improvement in operating

margins

Ashaka currently has no debt; thus

the savings from non-payment of

interest would boost bottom-line

earnings

Though the company has not

indicated any intentions to

generate revenue directly from its

coal mine, we believe it may

eventually be an additional source

of revenue in the longer term



Consistent Track Record: Ashaka has a good history of revenue and

profitability growth in the Nigerian Cement industry even during periods when

most cement plants (Nkalagu plant, Okpella, BCC) established about the same

time were either non-functional or recording losses from huge operational

challenges. Though Ashaka‟s production capacity is somewhat small, the

company with Lafarge WAPCO has historically dominated cement manufacturing

until 2007. Ashaka‟s capacity utilisation rate averaged 81% between 2004 and

2009. Based on production level between 2004 and 2006, Ashaka‟s accounted

for 27% of cement production in Nigeria.

Business Overview

Ashaka is the second subsidiary of Lafarge (biggest cement producer in the

world) in Nigeria. Following the acquisition of Blue Circles Plc by Lafarge in 2001,

the company became integrated into Lafarge Group in 2002. The company was

incorporated in 1974, with core activities in manufacturing and marketing of

cement. AshakaCem became a publicly quoted company in 1990.

Production Dynamics

AshakaCem currently has a production capacity of 0.85 million tonnes, which is

expected to increase to 1.25 million tonnes by 2012 through a kiln upgrade

process. In the last five years, Ashaka has an average capacity utilisation rate of

84%. It reached its peak utilisation rate of 101% in 2008, but reported the least

capacity utilisation rate of 76% in 2009 due to operational challenges which

adversely impacted on production. Ashaka Cement‟s market share has shrunk

significantly since Dangote‟s Obajana Cement plant started production in 2007.

Based on FY‟09 data, Ashaka cement only accounted for 4% of total cement

consumed, and 7% of total local production, in Nigeria, down from 7.5% and

27% as at 2005, respectively. Despite the 0.25 million tonnes additional

production capacity expected from Ashaka, we estimate that the company‟s

market share would likely remain at 4% by 2013, as the expected capacity is not

significant enough to increase its market share, in view of the encroachment of

Dangote Cement into its historical region of domination – North East Nigeria.

Production costs

Historically, Ashaka had one of the highest energy costs in the industry as it

uses Low Pour Fuel Oil (LPFO) in cement production. The non-functional

state of local refineries also made the situation worse as producers made

use of imported LPFO. Therefore, Ashaka‟s production costs constitute

c.70% (average of 2007 – 2009) of its sales revenue. The dynamics of

Ashaka‟s energy costs has however begun to take a different turn since the

company started adapting coal energy. Whilst coal is the most popular

energy for cement producers globally, its use in the Nigerian cement

industry is significantly minimal, although Nigeria has c.billion tonnes of coal

deposits. In recent times, more producers like CCNN and Dangote Cement

have indicated interest to adapt coal energy. Ashaka operates a coal mine

located in Maiganga, about 10 km to its cement plant which house a coal

grinding workshop.

Ashaka has a consistent history of

cement production in Nigeria

Ashaka became Lafarge subsidiary

in 2001 following the acquisition of

Blue Circle Industries by Lafarge

S.A

Ashaka currently has a production

capacity of 0.85 million tonnes,

expected to be increased to 1.25

million tonnes, through a kiln

upgrade by 2011

Ashaka currently has a production

capacity of 0.85 million tonnes,

expected to be increased to 1.25

million tonnes, through a kiln

upgrade process by 2011



Apart from gypsum which is largely imported by producers, raw materials

are largely sourced locally, and account for only 20%-25% of overall

production costs whilst energy (kiln fuel and power) account for 50% –

60%.

From historical patterns, production costs typically account for c.70% of

Ashaka‟s revenue. With the anticipated savings in kiln fuel costs, we expect

production costs to gradually decline to 39% of revenue by 2015. Consistent

with this expectation, fuel costs would increasingly shrink, accounting for

only 13.8% of production costs by 2015.

Forecasts – financial performance Following from our overall industry outlook on cement consumption, we project

that Ashaka would account for only 4% of total industry output by 2013.

Therefore, we forecast that Ashaka‟s revenue would grow at a CAGR of 11.3% to

N26.34 billion by 2013; this takes into cognisance the additional 0.4 million

tonnes from kiln expansion. At this point, we anticipate an average capacity

utilisation rate of 83%.

66%

68%

65%

48%

42% 39%

0%

20%

40%

60%

80%

0

4000

8000

12000

16000

2008 2009 2010E 2011E 2012E 2012E

Cost of sales Cost of sales as % of sales

Figure 72: Ashaka Cement Cost of Sales (N‟Mn)


Ashaka would only account for 4%

of total production output by 2013



Consistent with our expectations on Ashaka‟s operating efficiency; we project

that EBITDA margins would rise to 36% by FY‟13 from 8.9% at FY‟09. Also, we

expect EBIT margins to increase to 33% by 2013 from 5.9% as at FY‟09.

Figure 73: AshakaCem Revenue (N‟Mn) and Capacity utilisation rates

(%)

Source: Annual Reports, Vetiva Research

101%

76.0%81%

97%

73%83%

30%

-20%

6%

16%11%

13%

-20%

8%

35%

63%

90%

0

6000

12000

18000

24000

30000

2008 2009 2010E 2011E 2012E 2013E

Revenue Capacity Utilisation Rate Revenue Growth

-50%

0%

50%

100%

150%

200%

0

3000

6000

9000

12000

2008 2009 2010E 2011E 2012E 2013E

EBITDA per tonne EBITDA Margin EBITDA growth

-70%

-20%

30%

80%

130%

180%

0

3000

6000

9000

12000

2008 2009 2010E 2011E 2012E 2013E

EBIT per tonne EBIT Margin EBIT growth

Figure 74: EBITDA per tonne, EBITDA margin and EBIT

margin


Figure 75: EBIT per tonne, EBIT margin and EBIT growth



We expect pre-tax profit margins to be the same as operating profit (EBIT)

margin, since we believe Ashaka would maintain its debt-free status. Thus, we

anticipate a pre-tax profit margin of We anticipate a CAGR of 33% in profit after

tax to N5.90 billion from 2010 estimate of N2.53 billion. Thus, we expect after

tax profit margin to rise to 23% by FY‟13, from 5.5% (as at FY‟09) and our FY‟10

estimate of 14%.

Given the completion of Ashaka‟s coal project and the expected completion of its

kiln-expansion next year, we do not foresee any major capital expenditure in the

medium term, thus we expect Ashaka increase dividend payments. Based on the

average of the Ashaka‟s dividend payment ratio over its three most recent years

of dividend history, we forecast a payout ratio of about 45% from 2011 and thus

expect a dividend per share of N0.66 by 2011 and N1.18 by 2013.

We project that average return on equity (ROAE) and average return on assets

(ROAA) would rise to 15% and 9% from 3.6% and 1.9% as at FY‟09

respectively.

-100%

-20%

60%

140%

220%

300%

0

2000

4000

6000

8000

2008 2009 2010E 2011E 2012E 2013E

PAT per tonne PAT Margin PAT growth

-80%

-30%

20%

70%

120%

170%

0

3000

6000

9000

12000

2008 2009 2010E 2011E 2012E 2013E

PBT per tonne PBT margin PBT growth

Figure 76: PBT per tonne(N), PBT margin and PBT growth

(%)


Figure 77: PAT per tonne(N), PAT margin and PAT

growth (%)

After the completion of the on-

going Kiln-expansion project, we do

not foresee any capital expenditure

and expect Ashaka‟s dividend

payout to rise steadily



We do not expect any rise in Ashaka‟s leverage, especially since capital

investments are very unlikely in the medium term after the completion of kiln

expansion. Thus, we forecast that long term debt ratio would remain at its

current zero level.

Valuation

We use a blend of the Discounted Cash-flow and EV/EBITDA relative

methodologies for our valuation. Our overall fair value however is

significantly weighted to the DCF valuation (80% vs 20%) given the relatively

lower volatility of the DCF method relative to market multiples. Our overall

fair value range for AshakaCem is N22.40 – N26.20 implying a midpoint of

N24.30.

DCF assumptions -

In line with industry norm, we assume gradual capacity ramp-up additional

capacity from kiln upgrade. As seen in the table below, capacity utilisation

would decline slightly in 2012 as a result of slow ramp up of the additional

kiln capacity. However, utilisation would pick up from this point and we

expect that the company would almost reach full capacity utilisation rate

(c.100%) by 2015.

0.5

1.0

1.5

2.0

2.5

3.0

3.5

2008 2009 2010E 2011E 2012E 2013E

EPS DPS

0%

7%

14%

21%

28%

35%

2008 2009 2010E 2011E 2012E 2013E

ROAA ROAE


Figure 78: Earnings Per Share (N) and Dividend

Per Share (N)

Figure 79: Return on average equity and assets

(%)

Our valuation is based on the DCF

and EV/EBITDA multiple

We assume gradual ramp-up of the

additional 0.4 million tonnes



Revenue Capacity

2010 2011 2012 2013 2014 2015 Drivers (Mn MT)


Existing line (%) 0.85 81.0 97.0 96.0 98.0 98.0 98.0

Kiln expansion (%) 0.40 - - 25.0 50.0 75.0 98.0

Average utilisation (%) 81.0 97.0 74.0 83.0 91.0 98

Output (Mn MT) 0.71 0.83 0.92 1.03 1.13 1.23

Selling price (N„000/tonne) 26.5 25.5 25.5 25.5 25.5 25.5

Revenue (N‟ Bn) 18.2 21.0 23.4 26.3 30.0 32.5

As we have earlier highlighted, we expect a downward trajectory in Ashaka‟s

production costs. In line with management‟s guidance, coal fuel would only

be used for kiln firing. Thus, we expect that the power plants would still run

on diesel or LPFO. On the back of this, we estimate that energy cost (kiln

fuel only) account for c.50% of total production cost and assume gradual

ramp up of the additional 400,000 tonnes. Other assumptions regarding coal

utilisation rate and expected energy savings over our forecast period are

detailed in figure 79 below.

Figure 81: Assumptions on coal subsitution and cost savings

2010 2011 2012 2013 2014 2015

Cement Production(Mn tonnes) 0.686 0.824 0.916 1.033 1.133 1.225

Total Energy consumption (Bn cal) 583.4 659.6 732.8 826.4 906.4 980.0

Coal Utilisation (%) 30.0 60.0 80.0 90.0 90.0 90.0

Coal Consumption („000 tonnes) 32.91 74.42 110.25 139.87 153.41 165.87

LPFO Utilisation (%) 70.0 40.0 20.0 10.0 10.0 10.0

LPFO consumption (MnL) 41.14 26.58 14.77 8.33 9.13 9.87

Fuel Costs (Bn N) 3.63 2.44 1.77 1.46 1.61 1.74

Savings in Fuel costs (Mn N) 779 2,544 3,768 4,781 5,244 5,669

%age savings in production costs 9.70 28.1 37.4 42.1 42.1 42.1

We assumed a long-term CAPEX to sales ratio of 5% and average

depreciation period of 25 years.




As Ashaka achieves higher coal

utilisation relative to LPFO, we

expect a continuing reduction in

energy costs in our forecasts





Tax rate 32.0%


Beta 1.19



Shareholders Equity/Total Capital 100%

WACC 16.74%

DCF value N23.89


Final fair value range: N22.40 - N26.20; implied mid-point: N24.20

Rating

We downgrade our rating on Ashaka to a “reduce”, and believe the stock is fully

valued, despite raising our fair value mid-point to N24.20 (previous: N23.61).

Given the recent rallies in Ashaka‟s share price the stock is now trading at a

downside potential of 11%, relative to the mid-point of our new fair value range.








Notwithstanding the positive

outlook on Ashaka, we downgrade

the stock to a “Reduce” because of

its rich valuation




INCOME STATEMENT (N'Mill) 2006 2007 2008 2009 F 2010 F 2011 F 2012 F

Turnover 16,772 16,473 21,378 17,194 18,189 21,025 23,358

Cost of Sales (8,794) (10,868) (14,039) (11,771) (11,846) (10,132) (9,792)

Gross Profit 7,978 5,605 7,339 5,423 6,343 10,893 13,566

Selling and distri. Expenses (2,408) (1,486) (1,437) (432) (771) (1,472) (1,635)

Core Operating Profit 5,570 4,120 5,902 4,991 5,572 9,421 11,931

EBITDA 5,948 4,452 2,697 3,785 1,533 4,481 7,529

Depreciation & Amortization (436) (514) (519) (526) (966) (1,008) (1,054)

EBIT/Operating Profit 4,016 2,183 3,265 1,007 3,515 6,521 8,774

Interest Payable & Charges - - - - - - -

Profit Before Taxation 4,952 2,513 3,430 1,324 3,515 6,521 8,774

Taxation (1,574) (1,361) (911) (1,422) (984) (2,152) (2,808)

Profit After Taxation 3,378 1,153 2,519 943 2,531 4,369 5,966

Dividends 1,087 1,106 597 - 1,126 1,944 2,655

Retained Earnings 2,291 47 1,922 943 1,405 2,425 3,311

BALANCE SHEET (N'Mill) 2006 2007 2008 2009 2010 F 2011 F 2012 F

Non-Current Assets

Fixed Assets 2,685 3,811 5,686 5,218 19,478 19,522 19,635

Work in Progress 5,333 8,891 10,901 13,849 2,981 3,030 3,031

Current Assets Inventories 4,931 4,220 4,706 4,707 5,017 4,292 4,148

Debtors 1,674 386 139 88 100 115 128

Bank and cash balances 3,798 2,137 1,636 850 508 5,062 9,085

Other Receivables and Current Assets - 2,785 1,958 908 1,200 1,388 1,542

Total Current Assets 10,403 9,528 8,440 6,552 6,826 10,856 14,902

TOTAL ASSETS 18,421 22,230 25,027 25,618 29,285 33,408 37,568

Current Liabilities Creditors & Accruals 887 1,151 1,921 2,296 1,099 1,986 2,206

Other Creditors 3,341 6,164 7,269 5,967 4,892 5,655 6,283

Short Term Loan - 968 - - - - -

Taxation 1,661 1,687 928 1,385 984 2,152 2,808

Total Current Liabilities 5,890 9,971 10,117 9,648 6,976 9,792 11,296

Non-current Liabilities Long-Term Loans - - - - - - -

Provision for Gratuity 408 836 982 1,648 2,862 1,994 1,610

Deferred Taxation 526 710 1,144 1,181 1,920 1,621 1,349

Total Non-Current Liabilities 934 1,546 2,125 2,829 4,783 3,615 2,959

TOTAL LIABILITIES 6,824 11,518 12,242 12,477 11,758 13,407 14,255

Net Assets 11,598 10,713 12,785 13,142 14,085 15,489 17,914

Shareholder's fund 11,598 10,713 12,785 13,142 14,085 15,489 17,914




INCOME STATEMENT (USD'Mill) 2006 2007 2008 2009 F 2010 F 2011 F 2012 F

Turnover 143 140 172 117 121 136 151

Cost of Sales (75) (92) (113) (80) (79) (65) (63)

Gross Profit 68 48 59 37 42 70 88

Selling and distri. Expenses (20) (13) (12) (3) (5) (9) (11)

Core Operating Profit 47 35 47 34 37 61 77

EBITDA 51 38 22 26 10 29 49

Depreciation & Amortization (4) (4) (4) (4) (6) (7) (7)

EBIT/Operating Profit 34 19 26 7 23 42 57

Interest Payable & Charges - - - - - - -

Profit Before Taxation 42 21 28 9 23 42 57

Taxation (13) (12) (7) (10) (7) (14) (18)

Profit After Taxation 29 10 20 6 17 28 38

Dividends 9 9 5 - 8 13 17

Retained Earnings 19 0 15 6 9 16 21

BALANCE SHEET (USD'Mill) 2006 2007 2008 2009 F 2010 F 2011 F 2012 F

Non-Current Assets

Fixed Assets 23 32 46 35 130 126 127

Work in Progress 45 76 88 94 20 20 20

Current Assets Inventories 42 36 38 32 33 28 27

Debtors 14 3 1 1 1 1 1

Bank and cash balances 32 18 13 6 3 33 59

Other Receivables and Current Assets - 24 16 6 8 9 10

Total Current Assets 88 81 68 44 46 70 96

TOTAL ASSETS 157 189 201 174 195 216 242

Current Liabilities

- -

Creditors & Accruals 8 10 15 16 7 13 14

Other Creditors 28 52 58 41 33 36 41

Short Term Loan - 8 - - - - -

Taxation 14 14 7 9 7 14 18

Total Current Liabilities 50 85 81 66 47 63 73

Non-current Liabilities

- - - - - -

Long-Term Loans - - - - - - -

Provision for Gratuity 3 7 8 11 19 13 10

Deferred Taxation 4 6 9 8 13 10 9

Total Non-Current Liabilities 8 13 17 19 32 23 19

TOTAL LIABILITIES 58 - - - - - -

Net Assets 99 98 98 85 78 86 92




2007 2008 2009 2010F 2011F 2012F

Growth

Turnover growth 29.8% -19.6% 5.8% 15.6% 11.1% 12.8%

Growth in EBITDA -39.4% 40.3% -59.5% 192.3% 68.0% 30.5%

Growth in PBT -49.2% 36.5% -61.4% 165.4% 85.5% 34.6%

Growth in PAT -65.9% 118.6% -62.6% 168.4% 72.6% 36.6%

Profitability



EBITDA Margin 16.4% 17.7% 8.9% 24.6% 35.8% 42.1%

EBIT Margin 13.3% 15.3% 5.9% 19.3% 31.0% 37.6%




Quick ratio 0.53 0.37 0.19 0.26 0.67 0.95

Cash ratio 0.21 0.16 0.09 0.07 0.52 0.80

Current ratio 0.96 0.83 0.68 0.98 1.11 1.32




Activity Ratios (x)

Sales to cash 7.71 13.06 20.24 35.78 4.15 2.57




Production data



Utilization (%) 79.65 101.06 76.47 83.92 97.00 73.28

Revenue/tonne ('000) 24.33 24.89 26.45 25.50 25.50 25.50

Per Share Data

Earnings/share 0.58 1.27 0.47 1.13 1.95 2.66

Dividend/share 0.10 0.30 0.00 0.50 0.87 1.19

Net Asset/share 5.39 6.43 6.60 6.49 7.58 9.05

Sales/Share 8.27 10.74 8.64 8.12 9.39 10.43

Valuation Multiples

P/E (x) 48.97 22.40 59.86 25.09 14.54 10.64

P/B (x) 5.26 4.41 4.30 4.37 3.74 3.13

Dividend Yield (%) 0.4% 1.1% 0.0% 1.8% 3.1% 4.2%

EV/EBITDA (x) 23.54 16.78 41.42 14.17 8.43 6.46



CCNN Plc

Dual uncertainties dampen future outlook

Blur expansion, weak revenue outlook...Given its uncertain

expansion and cost reduction plans, we are currently pessimistic about

CCNN‟s earnings outlook. Whilst noting that the company‟s management

has indicated at different times the likelihood of expanding its capacity

to 1.4 million tonnes, the sustained lack of clarity about the plans have

informed our negative outlook on the company, as potential for revenue

growth is significantly minimised with its current 500,000 tonnes

cement plant.

...Further worsened by rising cost profile: The second worrisome

concern on CCNN‟s outlook is its growing energy costs as the company

remains the only cement producer in Nigeria without definite steps

substituting Low Pour Fuel Oil with a cheaper fuel. Similar to Ashaka, we

believe the company should place emphasize on efficiency, as it seems

the best way it can remain competitive, since it would be difficult to

compete with Dangote Cement (perhaps the only substitute brand in the

region) on volume.

Location offers good prospects notwithstanding: Despite our

cautious stance on CCNN, we maintain that the company perhaps has

one of the best opportunities for growth in the Nigeria cement industry

for two key reasons; the region has the least cement consumption in

Nigeria and enormous potentials for growth. We highlight Australia

Mines (Nigeria Gold Pty) Limited proposed investment in gold mining in

the region as a major catalyst for infrastructural development in the

North-West region in the longer term.

Valuation and Recommendation: In view of the fore-going, our

valuation indicates that CCNN is overpriced as it trades at a potential

downside to c.42% to the mid-point of fair value range. Hence, we

maintain an „underweight‟ rating on the stock, noting however, that

clarity from the company‟s management on its investment plans could

raise our valuation on the company. At its current price, CCNN is

trading at a forward (2011) P/E of 23x relative to average sector P/E

of 12.7x.

Stock Data

Market Price (N)

15.49

Shares Outs (bn)

1.256

Market cap (N‟bn)

18.84

Fair value range

7.90 – 9.60

Rating UNDERWEIGHT

Price Perf. CCNN NSE

12-month (%) 15.7 19.2

6-month (%) -19.7 -5.0

3-month (%) 10.0 -2.0

Financials 2009A 2010A 2011F

Turnover (N'bn) 11.19 11.93 12.51

EBITDA (N'bn) 1.64 1.73 1.84

PAT (N'bn) 1.81 0.79 0.83

EBITDA Marg (%) 16.5 14.6 14.5

PBT Margin (%) 19.5 10.2 10.2

PAT Margin (%) 15.3 7.0 6.9


P/E (x) 10.40 24.17 22.79

PBV (x) 4.47 4.01 3.61

EV/EBITDA (x) 9.59 11.52 10.89

Div. Yield (%) 6.0 1.6 1.7

UNDERWEIGHT

Fig 87: 52-week Share price performance and Shareholding Structure

0.8

1.0

1.3

1.5

1.8

2.0


ASI BMIndex CCNN

BUA group

51.00%

Nasdal

Bap:11.63%

Kebbi,

Sokoto

&Kaduna

states:

15.01%

Ferrostal

A.G:0.10%Other

Nigerians:

15.00%

Dantata:

7.08%




Investment Thesis

Present capacity inadequate to sustain market share: CCNN is the last of

the cement producers to announce definitive plans around its expansion. While

there have been indications from management that the company may expand

capacity to 1.4 million tonnes, timelines and funding for the expansion are still

unclear. Compounded by its obsolete state, CCNN‟s 500,000 tonnes plant is

grossly inadequate to position the company competitively in the industry. We

highlight that CCNN has one of the highest cement prices in the industry,

evidently as a result of its higher energy costs, relatively obsolete technology

and small production capacity. Due to supply deficit which has historically

plagued the Nigerian cement industry and CCNN‟s relative isolation in North-

West Nigeria, revenue growth has been somewhat sustained through price

increases. We recall in 2009 that the company increased its cement price (per

tonne) by c.12% and has consistently hiked prices YoY since 2006. Infact in

FY‟09 earnings, c.60% of revenue growth came from the 12% increase in price.

However, in our view, CCNN is unlikely to continue to enjoy such revenue growth

from price increases as it has historically done, in view of the surplus expected in

the industry and increasing competition from Dangote Cement, which has the

highest number of depots concentrated in the North.

Increasing cost exert additional pressure on top-line: CCNN is still having

challenges getting around its increasing energy costs to remain efficient and

adequately profitable. In its FY‟09 accounts, management had stated the huge

increase in energy costs (c.40%) arising from transportation expenses incurred

in moving imported LPFO from the south to its plant (located in Sokoto, North-

West Nigeria). Despite this reality in 2009, the company still operated more

efficiently, reporting a PBT margin of 21.1% as at Q3‟09, and 19.5% by FY‟09,

significantly higher than 11.1% achieved as at Q3‟10. Apart from energy costs,

we believe fixed costs also took toll on CCNN‟s profitability, since the impact of

such fixed costs would have been felt more as a result of lower sales. As implied

by the fall seen in CCNN‟s pre-tax margin, the plunge in efficiency as at Q3‟10

broadly negates our expectation of slight reductions in fuel costs. As it stands

therefore, CCNN is the least efficient amongst the cement producers. More

worrisome is the fact that CCNN‟s plans to curtail the rising costs trend are still

uncertain, though management had vaguely stated intentions to convert to coal

fuel, which is cheaper relative to LPFO.

Accessibility to financing: We believe CCNN‟s delay in pursuing its proposed

expansion relates to funding considerations, given the huge investment required

for such brown-field expansion. We extrapolate using the cost of Benue Cement

Company‟s (now Dangote Cement) Gboko Plant brown-field expansion in 2008,

that the cost of CCNN‟s proposed 0.9 million tonnes capacity would cost around

$190 per tonne. This per tonne cost, which excludes the coal plant investment,

translates into approximately $171 million dollars (N25.65 billion), indicating the

huge funding needed. Despite possible access to debt financing through the

enlarged balance sheet of the parent company- BUA group, a substantial equity

investment would still be required. In our view also, another limiting factor to

accessing financing might be the absence of a core international investor in the

company after Heidelberg pulled out.

Without major expansion, CCNN

current production capacity is

grossly inadequate to position the

company competitively going

forward

Until CCNN adopts a cheaper fuel,

its energy costs would also

continue to exert pressure on

earnings growth

In our view, funding considerations

is most likely the key factor

delaying definite actions on CCNN‟s

expansion



Lafarge WAPCO was favoured in this regard as the loan obtained from Standard

Bank to fund the “Lakatabu” expansion was partly based on the credit worthiness

of the parent – Lafarge. Ashaka enjoys similar leverage – but in the form of

intercompany funding.

Business Overview

Cement Company of Northern Nigeria (CCNN) is a 51% owned subsidiary of the

BUA group, a growing indigenous conglomerate with interests in sugar and flour-

milling industry. The company owns a 500,000 tonnes production plant in Sokoto

North – West Nigeria. BUA group bought majority stakes CCNN via a

management investment vehicle - Damnaz, created by the management buy-out

of Heiderlberg majority stake in 2008. CCNN was originally established as a

government-owned entity before the company was privatised.

Production Dynamics

CCNN cement plant is one of the oldest in Nigeria, being about 25 years. Hence,

it‟s quite prone to operational challenges. Recently, the company spent close to

N436 million to replace its burnt electro-static filter for the control of dust

emission this year. The plant has a production capacity of 500,000 tonnes and

has operated at an average utilisation rate of 72% over the last four years. The

company reached its highest capacity utilisation rate in 2009. Similar to other

existing producers, CCNN‟s market share has shrunk since the entry of Dangote

Cement into local production. Based on FY‟09 data, CCNN only accounted for 3%

of total cement consumed, down from 11% as at 2005 respectively. Without

capacity expansion, our estimate indicates that CCNN‟s market share would

decline further to 1.7% by 2013.

Production costs

Historically, CCNN had the highest energy costs in the industry as it mainly

used heavy oil and LPFO in cement production until 2008. Following its right

issue in 2007, the company invested in a biomass plant and substituted

30% of its heavy oil consumption with biomass. This brought its energy

costs down to an average of 57% in 2008 and 2009 from 72% of sales in

2007. Without additional investment in cost-saving projects, the reduction

would not be significant enough to competitively position the company for

profitability going forward. The non-functional state of local refineries also

made the situation worse as producers made use of imported LPFO. CCNN‟s

production costs constitute c.65% (average of 2006 – 2009) of its sales

revenue.

According to management, the company incurred additional 40% in costs on

the transportation of imported LPFO. With the deregulation of the LPFO

market in 2009, the price of the product reached record highs. With CCNN

small production scale, its comparatively huge energy costs would be a

major albatross to profitability growth.

Since there are no definite plans on costs reductions, we project production

costs would continue to rise.

The BUA bought majority stakes in

CCNN from Damnaz- a

management investment vehicle

created by the management buy-

out of Heidelberg in 2008

CCNN is the smallest cement

producer (by capacity size) and

operates one of the oldest cement

plant

Though CCNN‟s energy cost has

somewhat reduced following its

investment in LPFO and diesel

plants in 2007, its energy costs is

still high relative to other cement

producers




Without considering expansion plans, we project that CCNN would account for

only 2% of total industry output by 2013, implying has the least potential for

revenue growth in the industry. Our forecasts imply a 4-year (2009 – 2013E)

CAGR of 4.8%, as we project that revenue would grow to N14.29 billion by 2013

from N11.87 billion as at FY‟09. This revenue growth is even predicated on a

rather bullish assumption that the existing plant would operate at a peak

capacity utilisation rate of 96%, despite the fact that the company‟s highest

capacity utilisation in the last five years is 82%. (See figure 86 below)

We project that EBITDA margins would close to 18% by FY‟13 from 14% at

FY‟09. Also, we expect EBIT margins move towards 14% by 2013 from 11% as

at FY‟09.

Figure 88: CCNN Revenue (N‟Mn) and Capacity utilisation rates (%)


Figure 89: EBITDA per tonne (N), EBITDA margin and

EBITDA growth (%)


Figure 90: EBIT per tonne (N), EBIT margin and EBIT

growth (%)

22%

-17%

24% 8%

17%

-20%

-10%

0%

10%

20%

30%

3800

4200

4600

5000

2009 2010E 2011E 2012E 2013E


26%

-20%

29%9%

19%

-30%

-15%

0%

15%

30%

0

1500

3000

4500

2009 2010E 2011E 2012E 2013E

EBIT per tonne EBIT margin EBIT growth

76%

82%

77%

82%

86%

94%

50%

75%

100%

0

4000

8000

12000

16000

2008 2009 2010E 2011E 2012E 2013E

Revenue Capacity utilisation rates

With no expansion, CCNN would

only account for 2% of industry

output by 2013



Based on the company‟s current long term debt, we expect minimal interest

payments, barring any increase in leverage, which we believe is quite inevitable

for the company to invest in capacity expansion. Thus, we anticipate that pre-

tax profit margin will decline towards 13% by 2013, from 19% as at FY‟09. In a

similar manner, we expect after tax profit margin to dip to c.9% by FY‟13, from

15.3% (as at FY‟09); our FY‟10 estimate stands at 14%.

Also, we expect ROAE and RoAA to follow the expected declining trend in

profitability.

18%

-57%

6%10%

21%

-60%

-40%

-20%

0%

20%

40%

0

1000

2000

3000

4000

5000

2009 2010E 2011E 2012E 2013E

PAT per tonne PAT margin PAT growth

38%

-51%

32%

10%

21%

-60%

-35%

-10%

15%

40%

0

1600

3200

4800

6400

2009 2010E 2011E 2012E 2013E

PBT per tonne PBT margin PBT growth

Figure 91: PBT per tonne (N), PBT margin and PBT growth

(%)

Figure 92: PAT per tonne (N), PAT margin and PAT

growth (%)


0.00

0.40

0.80

1.20

1.60

2009 2010E 2011E 2012E 2013E

EPS DPS

0%

5%

10%

15%

20%

2009 2010E 2011E 2012E 2013E

ROAA ROAE

Figure 93: PBT per tonne (N), PBT margin and PBT

growth (%)

Figure 94: PBT per tonne (N), PBT margin and PBT

growth (%)




In our view, CCNN is highly likely to take up additional debt in the 2 – 3 years to

pursue its expansion plans. Whilst we do not have clarity on the funding

considerations for the projects, it‟s possible, based on CCNN‟s history, the

company embark on equity issue. In view of the huge financing required for

cement plants however, a substantial amount of leverage would still be needed

to augment the equity issue. As we earlier highlighted, close to N26 billion ($171

million) would be need for the cement plant expansion. This project sum would

even be higher if we factor in the cost of the coal plant, implying therefore the

enormous financing required by CCNN for its proposed capital project.

Valuation

We use a blend of the Discounted Cash-flow and EV/EBITDA relative

methodologies for our valuation. Our overall fair value however is

significantly weighted to the DCF valuation (80% vs 20%) given the relatively

lower volatility of the DCF method relative to market multiples. Our overall

fair value range for CCNN is N7.90 – N9.60 implying a midpoint of N8.70.

DCF assumptions -

Our valuation is based on the Discounted Cash-Flow with forecasts spanning

through a 6 year period.

We have excluded additional capacity from our revenue forecast for CCNN.

All assumptions made on revenue growth are based on its current 500,000

tonne and are summarised in figure 93 below;

2010E 2011E 2012E 2013E 2014E 2015E

Utilisation (%) 77.0 82.0 86.0 94.0 98.0 98.0

Output (%) 0.385 0.410 0.430 0.470 0.490 0.490

Selling Price (N „000) 29.09 29.09 29.09 29.09 29.09 29.09

Revenue (N‟Bn) 11.19 11.93 12.51 13.67 14.25 14.25

Also in deriving our forecasts for production costs, we excluded the use of

coal, and project that energy costs would be on the uprise from the

increasing use of heavy oil and LPFO. Using the average of the last two

years, we project that would be 57% of sales in our forecasts.

We assumed a long-term CAPEX to sales ratio of 5% and average

depreciation period of 25 years.




For the CCNN to fully pursue its

expansion plan, we expect some

substantial increase in CCNN‟s

leverage in the next 2 to 3 years

Our fair value mid-point for CCNN is

N8.70





Tax rate 32.0%


Beta 0.80



Shareholders Equity/Total Capital 87.0%

WACC 13.76%

DCF value N7.34


Final fair value range: N7.90 – N9.60; implied mid-point: N8.70

Rating

We maintain an “Underweight” rating on CCNN, despite raising our fair value to

N8.70. The stock is trading at a downside potential of 42% relative to the mid-

point of our new fair value range.








We maintain an “underweight”

rating on CCNN





Turnover 8,042 9,878 11,868 11,200 11,927 12,509

Cost of Sales (5,759) (5,709) (6,704) (6,664) (7,097) (7,380)

Gross Profit 2,283 4,169 5,164 4,536 4,830 5,129

Operating Expense (591) (640) (762) (661) (716) (751)


EBITDA 138 1,611 1,964 1,635 1,729 1,876


EBIT/Operating Profit (183) 1,268 1,595 1,273 1,342 1,463


Interest received - - - - - -

Profit Before Taxation 172 1,681 2,317 1,146 1,216 1,337

Taxation (34) (150) (505) (367) (389) (428)

Profit After Taxation 138 1,531 1,812 779 827 909


Non-Current Assets Fixed Assets 4,017 4,655 4,950 5,452 5,795 6,605

Capital work in progress 439 4 66 - - -

Current Assets Inventories 3,016 2,424 2,510 2,823 3,006 3,126

Debtors 775 717 1,002 1,066 1,135 1,191

Bank and cash balances 284 400 626 447 667 968

Other Receivables and Current Assets 588 597 649 739 787 826

Total Current Assets 4,663 4,137 4,787 5,075 5,595 6,110

TOTAL ASSETS 9,118 8,795 9,803 10,526 11,390 12,715

Current Liabilities Creditors & Accruals 4,982 2,500 3,447 3,124 3,340 3,503

Other Creditors - - - - - -

Short Term Loan 553 1,092 671 1,218 1,218 1,218

Taxation 40 39 210 367 389 428

Total Current Liabilities 5,575 3,631 4,327 4,709 4,947 5,148

Non-current Liabilities Long-Term Loans - 633 507 380 253 126

Provision for Gratuity 320 360 490 802 1,041 1,727

Deferred Taxation 76 195 262 - - -

Total Non-Current Liabilities 396 1,188 1,259 1,182 1,294 1,853


Net Assets 3,148 3,976 4,217 4,635 5,149 5,714




INCOME STATEMENT (USD‟Mill) 2007 2008 2009 2010 F 2011 F 2012 F

Turnover 68 79 81 75 77 81

Cost of Sales (49) (46) (46) (44) (46) (48)

Gross Profit 19 33 35 30 31 33

Operating Expense (5) (5) (5) (4) (5) (5)

Core Operating Profit 14 28 30 26 27 28

EBITDA 1 13 13 11 11 12


EBIT/Operating Profit (2) 10 11 8 9 9


Interest received - - - - - -

Profit Before Taxation 1 13 16 8 8 9

Taxation (0) (1) (3) (2) (3) (3)

Profit After Taxation 1 12 12 5 5 6

BALANCE SHEET (USD'Mill) 2007 2008 2009 2010 F 2011 F 2012 F

Non-Current Assets Fixed Assets 34 37 34 36 37 43

Capital work in progress 4 0 0 - - -

Current Assets Inventories 26 19 17 19 19 20

Debtors 7 6 7 7 7 8

Bank and cash balances 2 3 4 3 4 6

Other Receivables and Current Assets 5 5 4 5 5 5

Total Current Assets 40 33 32 34 36 39

TOTAL ASSETS 78 71 67 70 73 82

Current Liabilities Creditors & Accruals 42 20 23 21 22 23

Other Creditors

- -

Short Term Loan 5 9 5 8 8 8

Taxation 0 0 1 2 3 3

Total Current Liabilities 47 29 29 31 32 33

Non-current Liabilities Long-Term Loans - 5 3 3 2 1

Provision for Gratuity 3 3 3 5 7 11

Deferred Taxation 1 2 2 - - -

Total Non-Current Liabilities 3 10 9 8 8 12

TOTAL LIABILITIES 51 39 38 39 40 45

Net Assets 27 32 29 31 33 37




2007 2008 2009 2010F 2011F 2012F

Growth (%)

Turnover growth 26.2% 22.8% 20.1% -5.6% 6.5% 4.9%

Growth in EBITDA 1066.6% 21.9% -16.7% 5.8% 8.5% 16.6%

Growth in PBT 878.3% 37.8% -50.5% 6.1% 9.9% 21.2%

Growth in PAT 1012.4% 18.3% -57.0% 6.1% 9.9% 21.2%

Profitability (%)



EBITDA Margin 1.7% 16.3% 16.5% 14.6% 14.5% 15.0%

EBIT Margin -2.3% 12.8% 13.4% 11.4% 11.3% 11.7%




Quick ratio 0.30 0.47 0.53 0.48 0.52 0.58

Cash ratio 0.05 0.11 0.14 0.09 0.13 0.19

Current ratio 0.84 1.14 1.11 1.08 1.13 1.19




Activity Ratios (x)

Sales to cash 28.29 24.71 18.95 25.05 17.89 12.92




Production Data



Average Utilization 68.5% 76.0% 81.6% 77.0% 82.0% 86.0%

Revenue/tonne (N'000) 23.48 25.99 29.09 29.09 29.09 29.09

Per Share Data

Earnings/share 0.12 1.22 1.44 0.62 0.66 0.72

Dividend/share 0.10 0.90 0.90 0.23 0.25 0.27

Net Asset/share 2.51 3.17 3.36 3.74 4.15 4.60

Sales/Share 6.40 7.86 9.45 8.92 9.50 9.96

Valuation Multiples

P/E (x) 118.90 11.48 9.70 22.56 21.27 19.35

P/B (x) 5.59 4.42 4.17 3.74 3.37 3.04

Dividend Yield (%) 0.7% 6.4% 6.4% 1.7% 1.8% 2.0%

EV/EBITDA (x) 127.38 10.92 8.96 10.75 10.17 9.37



Non-listed Companies

United Cement Company of Nigeria Limited (UniCem)

UniCem was formed in 2002 by Holcim Trading S.A and Flour Mills of Nigeria Plc.

The company acquired the assets Calcemco, a state owned cement company sold

by the Nigerian government after liquidation. On acquisition, UniCem embarked

on a two phase project; the rehabilitation of Calabar Grinding Station and the

production of cement. In 2004, the company initiated the construction of a 2.5

million tonnes green-field plant in Calabar, with the construction of the plant

contracted to Orascom industries (Egypt) and FLSmidth (Denmark). The Dangote

Group also became a shareholder in UniCem in 2005.

Lafarge acquired Orascom Cement in 2007. Thus, Orascom operations, which

included the UniCem plant (then under construction) in Nigeria, became a part of

the Lafarge group. Subsequently, Lafarge became a shareholder in UniCem. The

cement plant was commissioned in 2009.

With the departure of the Dangote Group, the current shareholders of UniCem

are Nigerian Cement Holding B.V (NCH) and Flour Mills of Nigeria Plc. NCH is the

majority shareholder and is controlled by Holcim Limited Switzerland and Lafarge

S.A France.

Production

The company‟s plant, located at Mfamosing Calabar, Cross-River State (South-

South Nigeria), started production in 2009 and reached a capacity utilisation rate

of about 25%. According to insights from management, the company intends to

achieve a utilisation rate of 48% by 2010 and 72% by 2011. Due to UniCem‟s

location, the South-East and South-South Regions are its major market. Its

major competitor is Dangote Cement which has 9 depots in the South East/South

South region. Apart from Dangote Cement, Eastern Bulk Cement (imports) is

also a major brand in the region. UniCem‟s plant was primarily built to operate

on gas, although the kiln can also be fired with LPFO (dual-firing). The company

gets its gas supply from East Horizon Gas Company (EHGC), a special purpose

vehicle set up by Oando Plc, to develop, finance, construct and operate gas

transmission pipeline linking the Calabar cluster of industries to the Nigerian Gas

Company (NGC) grid in Akwa-Ibom State. UniCem is the primary customer, as

EHGC was set up to supply c.20% of its daily capacity gas to the company.

UniCem is owned by Nigerian

Cement Holding B.V (NCH) and

Flour Mills of Nigeria Plc

Unicem‟s 2.5 million tonnes (annual

capacity) plant in Mfamosing

Calabar -South South Nigeria

commenced operation in 2009 and

only reached a 25% capacity

utilisation in the same year



Investment Recommendations

Vetiva uses a 5-tier recommendation system for stocks under coverage: Buy, Accumulate, Neutral, Reduce and Sell.

Buy/Overweight ≥ +25% expected absolute price performance

Accumulate +10% to +25% expected absolute price performance

Neutral/Hold +/-10% range expected absolute price performance

Reduce -10% to -20% expected absolute price performance

Sell/Underweight ≤ -20% expected absolute price performance

Definition of Ratings

Buy/Overweight recommendation refers to stocks that are highly undervalued but with strong fundamentals and where

potential return in excess of or equal to 25% is expected to be realized between the current price and analysts‟ target

price.

Accumulate recommendation refers to stocks that are undervalued but with good fundamentals and where potential

return of between 10% and 25% is expected to be realized between the current price and analysts‟ target price.

Neutral/Hold recommendation refers to stocks that are correctly valued with little upside or downside where potential

return of between +/- 10% is expected to be realized between current price and analysts‟ target price.

Reduce recommendation refers to stocks that are overvalued but with good or weakening fundamentals and where

potential return of between -10% and -20% is expected to be realized between current price and analysts‟ target price.

Sell/Underweight recommendation refers to stocks that are highly overvalued but with weak fundamentals and where

potential return in excess of or equal to -20% is expected to be realized between current price and analysts‟ target price.

Disclosures: Analyst Certification

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the specific recommendations, estimates or opinions expressed in this report.

Other Disclosures

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securities or related investments discussed in this report, potentially giving rise to a conflict of interest which could affect

the objectivity of this report. Material interests which Vetiva may have in companies or securities discussed in this report

are herein disclosed:

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