A Fortune Cookie – Possible Offerings From The Cement Players


There has been quite some fuzz about the striking prospect of the cement sector and its dominant players, given the anticipation of some tailwinds. There are two ways to dimension the positive industry outlook, consisting of various overlapping drivers.

Firstly, there is the infrastructure narrative. Larger spending on infrastructural projects will lift the sales of cement, given the crucial role it plays in various construction activities. Hence, the attractiveness of the industry’s outlook feeds off reasonable expectations of larger spending on infrastructure by both the private and public sector, given the drive to close the country’s infrastructure deficit.

Moody’s, a leading rating agency, estimates the deficit at $3 trillion. The 2021 appropriation bill offered an early signal as to the improved commitment of the government to tackle this infrastructure problem, which should translate to an uptick in cement consumption.

The bill proposed a record amount to be allotted to capital expenditure within the year, as the N4.12 trillion proposed is significantly higher than the budgeted Capex in the last decade. While one must nest some level of concern regarding the historical Capex budget performance, the base-case scenario puts the Capex performance for 2021 at about 50% (or N2.06 trillion), which would still bode well for the cement producers.


In addition, in examining the actual amount spent on capital expenditure between 2016 and 2019, one would observe that the anticipated impact on the performance of the cement sector is well evidenced in the time frame. Hence, in years when larger amounts went into Capex, the cement sector recorded an improvement in its real growth rate, and the reverse was witnessed in years where there was a drop in Capex.


Secondly, the GDP growth numbers tell a story. In examining the movement trend of the construction, real estate, and cement sectors, one would notice some degree of correlation.

The relationship between these three sectors was pronounced during the 2020 pandemic, as the shuttering impact of Covid-19 on the construction and real estate sectors became visible in the cement sector performance for Q1’2020. Likewise, a recovery was recorded in all three sectors in the later quarters of the year.

Accordingly, when there is a slowdown in the construction and real estate sectors, this would translate into a weaker performance in the cement sector, as cement serves as a necessary input for the other operations of both sectors. 2021 has started off on a positive note for all three sectors, and we expect this trend to persist, on the back of an anticipated broad-based economic recovery.


Notes from the fortune cookie

After elucidating the broad macro-outlook for the cement sector, it is important to note that all three listed cement producers are well poised to benefit from this positive outlook. However, we still have a few concise but interesting insights on each player.

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Note 1: WAPCO (for the patient) – The stock is the most attractively priced of all three stocks, and our fair value estimate of N28.11 gives an upside opportunity of 37.12% at the current market price.

The caveat here is the patience required. The historical price trend of Wapco shows some stickiness as the price approaches N30.00. Over the last year, the stock price touched the N30.00 mark only a few trading sessions in January 2021.  Nevertheless, corporate restructuring moves particularly with respect to its balance sheet optimization, and cost reduction strategies have continued to bode well for Wapco.

Despite its relatively attractive valuation, the stock price has remained sticky; hence, a buy strategy on this stock has to be of a long-term play.

Note 2: Buacement (for the bold) – Buacement is trading the farthest away from its intrinsic value, and the stocks are only attractive to risk loving investors that have a deep interest in technical signals and apathy towards fair value estimates.

To put this in better perspective, the stock has a price-to-earnings ratio of 35.54x, as against the industry average of 19.40x. The stock has been up to a rocky fundamental start since its listing, after it carried out a 1 for 1 share conversion, equating old shares of CCNN worth N18.01 per share to the new shares of Buacement priced at N35.00.

Our fair value estimate for the stock is N41.92, which means that the stock is trading at a 43.35% premium to its intrinsic value. The stock is well overpriced from a fundamental standpoint, but remains attractive to technical traders, as the relative strength index is slightly above the oversold region, at 46.95.

Note 3: Dangcem (for the bulls) – The price of Dangote Cement climbed above N200 due to one major driver, and that is the share buyback program commenced in December 2020. The program sought to buy back up to 10% of the company’s issued 10.04 billion ordinary shares, but the cement giant ended up buying just 0.24% in the first tranche.

With the recent renewal of the share buyback program, interested investors in Dangote Cement have very bullish expectations as to the impact of the next tranche of the buyback program. Given the attractiveness of its fundamentals and the sector outlook, our fair value estimate is put at N236.16.

However, this gives a little upside opportunity of 7.35%. Dangote Cement remains in the hold region in our books, but the temptation to buy would mostly arise from optimism around a buyback program that still has no definite timeline.