Cement makers to remain unwavering despite rise in debt to equity ratio

Cement makers will remain unwavering despite a projected increase in the proportion of debt in their capital structure. This is because the major players in the cement space- a subsector of building material Industry- had raised equity capital to navigate financial risks, but the outlook for some them is bleak.

According to data from Bloomberg Terminal, full year 2018 debt to equity (D/E) ratio for NSE Industrial Goods Index- lists of the most capitalized and liquid firms- is expected to touch down at 107.43 percent, from 86.42 percent as at December 2017.

The ratio has been growing since 2016 as companies borrowed aggressively to fund expansion with a view to increasing market share.

In 2016, Lafarge Africa consummated the acquisition of United Cement Company of Nigeria (Unicem) Limited from Flour Mills of Nigeria Plc, but suffered N28 billion foreign exchange loss due to dollar based debt of its subsidiary. The Naira weakened that year while external reserves fell due to the precipitous drop crude oil price that saw the country slip in its first recession in 25 years.

“A high D/E ratio doesn’t mean they are exposed to risk because none of them is at risk of default. There have been a couple of debt issuances, mostly in commercial papers,” said Onyeka Ijeoma, equity research analyst at With Vetiva Capital Management.

“Lafarge did around N10 billion while Dangote Cement has done N100 billion in issuance. Lafarge has also added N132 billion rights issue to equity. Also Cement Company of Northern Nigeria (CCNN) has added N300 billion to equity. A higher D/E ratio for these manufacturers is not worrying,” said Ijeoma.

The cumulative average times coverage ratio of -Dangote Cement, CCNN, and Lafarge Africa- stood at 69.10 times operating profit, which means they have enough earnings to cover interest expense, according to data gath- ered by Markets Intelligence.

Combined long term debtboth long and short term- fell by 13.24 percent to N557.79 billion, according to data gleaned from Markets and Intelligence

While Lafarge Africa has embarked on capital raising with a view to reducing leverage ratio, data gathered from Bloomberg Terminal shows full year D/E ratio will touch down at 214.62 percent, from 150.76 percent the previous year.

Procrastinators are sanguine that the cement sub sector of the industrial goods industry will outperform the industry as they are poise to take advantage of the infrastructure deficit and expected growth in cement volume to jerk up revenue.

“We expect the Cement subsector to finish 2018 on a strong note as fourth quarter numbers have historically contributed to the largest share to overall output,” said analysts at United Capital Research Capital Ltd.

“More so, the New Orders Index, as gauge from central bank’s monthly PMI- for Cement sector showed faster acceleration in Oct-18 and Nov-18 respectively, underscoring further growth in the sector,” said analysts at United Capital Ltd.

Cement makers are strengthening strategies that will give them the leeway to taking advantage of the above fiscal policy opportunities.

For instance, Cement Company of Northern Nige- ria (CCNN), owners of the 500,000 metric tonnes per annum Sokoto Cement Plant, merged with Kalambaina Cement Company Limited Plant- which owes 1.5 million metric tonnes per annum- to form a combined entity with 2 million metric tonnes per annum cement plant. Both firms are owed by BUA Group of companies.

Lafarge Africa, the second largest cement producer, with a market share f 25 percent, bought a plant in Calabar, in southeastern Nigeria, that can produce 5 million metric tons of cement a year and is also investing in its South African operation as it seeks to increase capacity to 17.5 million tons from 14 million tons across the continent.