Analysts see downside risk for cement players in 2020

Analysts have warned that investors’ optimism about the cement industry could remain damped for a while as the wrought caused by the coronavirus pandemic paralysed construction activities across Nigeria.

United Capital Research Limited in a latest report titled “Up In The Air” notes that 2020 could be difficult for operators in the industry, as lockdown policy disrupted the supply chain.

The research house says while the unrelenting effort of the Federal Government toward infrastructural development in the country appears like a plus for the industry, history has shown that the percentage of implementation of capital expenditure in Nigeria averages c52.7 percent in the last 7 years.

Over the a decade ago, investors were optimistic that the country’s middle class and huge infrastructure deficit would spur cement demand and add impetus to companies’ earnings

However, a protracted economic downturn since 2017 - a year after the country exited its first recession in 25 years - has cast a pall over the future of the industry

The cement industry has always felt the pang of an economic downturn over the past few years, owing to reduced fiscal spending on capital projects as well as reduced private investments in capital formation due to feeble macro conditions.

In 2016, when the economy went into a recession, the construction sector declined by 5.9 percent compared to the growth of 4.4 percent recorded in 2015.

As a result of the devastating impact of the coronavirus pandemic on the economy, the federal government has slashed capital expenditure spending by 15 percent in the 2020 budget, a whammy for an industry growing at a slow pace.

Despite a myriad of challenges, the three major players in the industry-dangote Cement, BUA Cement, and Lafarge Africa- saw combined revenue and profit increased by 7.48 percent and 7.45 percent to N366.84 billion and N82.58 billion as at March 2020 respectively, largely driven double digit growth at the top line by BUA Cement and Lafarge Africa.

However, profit margins have been deteriorating, as companies have been unable to translate top line (sales) impressive performance into bottom line growth.

“Tough times ahead for them because there were minimal construction activities in the first quarter, the will see more rains in the third quarter, but activities will gradually recover in the fourth quarter,” says Johnson Chukwu, managing director/ CEO of Cowry Asset Management Limited.