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Cement War: Buy Lafarge, Dangote or BUA

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People may not really look at brand names while purchasing cement, they may just focus on prices. But not when it concerns making investments decisions though; because for this, the brand factor is crucial.

The cement business is lucrative and that’s a fact. People are fascinated with investing in building structures, perhaps because of the long-term flow of income it offers, especially for a developing economy like Nigeria’s.

The lucrativeness of this industry is evidenced in the amount of gross revenue earned in 2020. Take for example, Lafarge Africa, BUA Cement and Dangote Cement. They all earned well above N200 billion, with strength of demand responsible for these astronomical numbers.

What this establishes is that, because of demand, cement companies can venture into increasing the prices of their output without sales plummeting pointedly. As an investor, the guarantee that this provides is that, these companies will consistently do better than break-even and frankly that’s all that should matter to you.

Nigeria’s cement industry appears to be tilting towards some form of oligopoly. Three companies, Lafarge Africa, BUA Cement and Dangote cement are the big boys. They generated a combined N1.5 trillion at full year of 2020, oozing class while at it and displaying diverse degrees of efficiency.

BUA Cement of the three, came slightly late to the party. Their swagger became notable when they merged in 2020. They have shown aggressiveness and quality ever since to become the second highest market capitalized cement company in Nigeria.

One of the many reasons why BUA cement is so attractive to anyone looking to invest is its efficiency. BUA Cement has displayed elite level of proficiency in its cost management, let me sight an example with the performances from 2020 in comparison with Dangote Cement and Lafarge Africa.

These are the gross earnings for 2020

Dangote cement plc- N1.034 trillion
Lafarge Africa plc- N230.6 billion
BUA cement plc- N 209.4 billion
Whilst these are the profit after tax for the period.

Dangote Cement- N276 billion
Lafarge Africa plc- N30.8 billion
BUA Cement plc- N 72.3 billion
If you compute profit after tax as a percentage of the gross earnings (eliminating the cost component) you’ll notice that BUA’s percentage (35%) is way higher than even Dangote’s at 27% not to mention Lafarge Africa. This is cost proficiency at its finest.

The impression of proper cost management on businesses and the concern for investors is that, it lifts yield level. And a higher profit position gives rise to the prospect of a higher dividend payout.

Cost level optimization is not their only strength. BUA cement has been all-round impressive, from amount of and consistency in dividends payment to a delightful price-earnings ratio, share prices and many more.

Essentially, the outcome of the scheme of merger between Obu Cements and Cement Company of Northern Nigeria in 2020 established BUA as the second largest cement company in Nigeria by volume. Another feather.

BUA cements dividends payment policy is extraordinary and Investors, as well as shareholders, love this. The company has paid out 97.2% of all their profit from the last two years as dividends and has a price-earnings ratio of 35.78%.

On the flip side, however, one concern that could be raised against BUA’s success story may be their inability to generate enough revenue like their counterparts. Let’s see another comparison, this time with Lafarge.

In 2020 full year, Lafarge generated revenue of N230 billion, BUA cements posted N209 billion. In Quarter 1 of 2021, Lafarge had N71 billion, BUA N61 billion. Quarter 2 of 2021, Lafarge made N73.5 billion, BUA cements made N63 billion.

Yes, you may say at the end of the day profit still looks better for BUA (like we showed previously) but, if you are always outshone by your peers in terms of revenue generation, it gives the sense that you are maybe not as aggressive or not as solid a brand as you think are.

For a cement manufacturing company, sales mean people are buying. Nothing depicts brand-acceptance better than this.

Lafarge Africa on the other hand, now a subsidiary of LafargeHolcim by virtue of a name change resolution passed earlier this year, have their share price around N23.7.

They are doing wonderfully in terms of dividends payment too, having paid N16 billion as dividends to their shareholders in 2020 and already declared a similar amount for the 9months period of 2021. The management of Lafarge Africa have shown that they are bold, daring and keen to reclaim at the very least, their position as second largest cement producer in Nigeria by volume (a position they occupied since 2017 and have since surrendered to BUA cement). They have cleared most of the debts that have blunted their impacts in the past to a large extent, have let go of problematic subsidiaries and have repositioned this brand to deliver optimum results.

Lafarge Africa repeatedly beats BUA Cement when it comes to Revenue generation. This could be down to either the difference in the prices of their cement, (Lafarge Africa retail price of a bag of cement presently is N4000, BUA N3,300) or may be indicative of a larger customer base. Whatever be the case, Lafarge Africa appears an equitable investment to majority of analysts and investors. The one thing Lafarge Africa needs to get under control in order to maximize the benefits of its recent upturn in fortunes is cost management. There really is not much point in having an enormous revenue if it fails to impact the bottom line.

Now Dangote Cement. Master in its league; for now at least and by some significant distance. Turnover of N1 trillion while the competitions surf around N200 billion. Share price of N265, with main competitors BUA Cement at N74.5 and Lafarge Africa at N23.7. Dangote Cement paid dividends of N272 billion in 2020 alone, far above the gross earnings of virtually all of its contemporaries.

Despite these gargantuan figures, Dangote Cement can still do better. They can look to improve bottom line, by achieving a better cost to income ratio than BUA cement especially.

For every investor, cherry-picking to decide on which of these companies to invest in, these companies all have their strengths and respective weaknesses, most of which are highlighted already. But the guarantee in this is, come what may and all things being equal in the Nigerian market, these 3 companies are more likely to make a profit than merely breakeven; not to mention having a loss position.

Hammed Tajudeen is the editor in-chief of Blaze News, holds Higher National Diploma(HND) in Mass Communication, graduated from Osun State Polytechnic, Iree.

TMC

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