A Comprehensive Report on Dangote Cement Plc and Stock Recommendation.

Macroeconomic Analysis

The Nigerian economy exited recession in Q4 2020 with a growth of 0.11% y/y growth (vs Q3 2020: -3.6% y/y). Although the growth was marginally positive, the growth was further strengthened in 2021 with an annual growth rate of 3.4% y/y (2020: -1.9% y/y). The IMF expects Nigeria to grow by 3.4% y/y in 2022 according to the April edition of its World Economic Outlook (WEO).

Similarly, inflationary pressures continue to persist, settling at 15.63% y/y as of December 2021 moderation. However, this was a decline from the 15.75% y/y inflation rate recorded for December 2020. Cement prices also rose over the past two years at an average rate of 15% per annum. So far, material cost increases have been shifted to consumers but in 2022 and 2023, it may be more difficult to shift because of general inflation burden and business uncertainties due to elections.

There was a boost of public sector demand for cement towards the end of 2021 after the COVID-19 induced slowdown that started in 2020. However, we may see another slow-down in 2022 as pre-election years usually have lower CAPEX implementation rates thus affecting public sector demand for cement. Currently, the public sector drives about 60% of total cement demand.

Industry Analysis

There are only three players in the industry – DANGCEM, BUA AND LAFARGE (WAPCO) all posted volume gains in 2021 due to surging demand in Nigeria. The industry is not a competitive one thus, each player has a large profit margin.

Also worthy of note is that the increased demand in 2021 was largely private sector driven which is a positive signal amidst the usual government overbearing demand for cement. The implementation of the RTIC (The Road Infrastructure Development and Refurbishment Investment Tax Credit Scheme 2019) has been a major reason for this rise. However, Lafarge is trailing others behind in the growth given their operational challenges. We expect DANGCEM to seize this opportunity to grow its volume more than the market average.

DANGCEM has also maintained its position as the market leader by a far margin in the past five years and we expect this to continue in the next five years (see appendix 3).

In 2022, we expect demand to still rise and have estimated a 5.0% growth on average between 2022E and 2026E. We have also estimated a slowdown in price increase to 6.0% on average over the same outlook period (vs 2017 to 2021 average: 7.6%).

Nonetheless, it has been a challenging time for Nigerian cement producers especially due to currency devaluation that affects inputs.

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