Cement companies’ earnings ratio shrinks in first half as energy costs rise
The impact of soaring energy costs is hitting Nigerian manufacturers hard as Nigeria’s largest cement manufacturers, Dangote Cement PlcLafarge Africa Plc and BUA Cement Plc are facing a declining profitability ratio, according to BusinessDay findings.
Cement companies’ earnings before interest, tax, depreciation and amortization (EBITDA) margins narrow to 44.09% in the first half (H1) of 2022, from 48.12% in the same period of 2021, according to data from of the Nigerian Exchange Group (NGX).
According to Investopedia, EBITDA is an alternative measure of profitability to net profit. By removing non-cash amortization charges as well as taxes and debt costs dependent on the capital structure, EBITDA attempts to represent the cash profit generated from the company’s operations.
Overall, Dangote Cement (DangCem) experienced the largest year-over-year (y/y) decline in EBITDA margin of -470 bps to 46.18% in the first half of 2022 , compared to 50.8% in the first half of 2021.
The EBITDA margin of BUA Cement and Lafarge Africa contracted to 46.4% and 32.7% in the first half of 2022, compared to 32.7% and 36.1%, respectively, in the first half of 2021.
“Upward movements in cost drivers, such as raw materials and energy, explain the downward trend in the industry’s EBITDA margin,” adding that “the three cement companies, the cost of production per ton, energy cost per ton and distribution cost per ton increased year over year on average,” said a report from FBNQuest Capital.
The report further notes that distribution-related expenses recorded the largest increase following rising diesel costs.
“Since the beginning of the year, diesel prices have increased by an average of 2.5 times. Based on energy cost per tonne, Lafarge recorded the highest year-on-year increase of NGN 6,698/tonne to NGN 15,870/tonne in the second quarter of 2022. However, DangCem and BUA recorded percentage increases higher by 79% year-on-year. y and 106% y/y, respectively,” he said.
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Energy costs reported by BUA Cement increased by 64.64% to N43.58 billion in the first half of 2022 from N26.47 billion in the corresponding period of 2021. In the same vein, fuel and electricity consumed by Dangote Cement in the first half of 2022 was N129.96 billion compared to N98.98 billion in the first half of 2021.
The report stated: “For production, alternative fuels are now either more expensive or scarce. BUA’s energy bill moderated quarter-on-quarter (q/q) in Q2 22, but remains at relatively high levels. BUA’s significant exposure to increased price volatility is due to the company’s greater reliance on coal, LPFO and liquefied natural gas (LNG).
“DangCem and Lafarge were previously insulated from price volatility due to a greater reliance on piped natural gas. However, they were more exposed to price volatility in the first half due to production disruptions at oil and gas facilities in the Niger Delta,” said FBNQuest Capital.
Both companies were forced to increase the use of alternatives, which explains the increase in energy cost per tonne for DangCem and Lafarge from N7,514 per tonne and N8,340 per tonne to N10,700 per tonne and N11,116 per tonne, respectively,” according to FBNQuest Capital’s Cement Update Report.
Despite cost pressure, DangCem’s EBITDA increased by 6% to N373.16 billion in the first half of 2022 from N351.07 in the first half of 2021. Its peers, Lafarge and BUA, both recorded EBITDA improvements of 16.5% and 49.7%. y/y to 60.98 billion naira and 87.50 billion naira respectively in the first half of 2022.
Cement sector revenue improved by 23.47% to N1.180 billion in the first half of 2022 from N959.85 billion in the first half of 2021.
BUA, Lafarge and DangCem recorded growth of 51.72%, 28.67% and 17.01%, respectively, in the first half of 2022.
FBNQuest analysts in their Cement Update Report said that “robust growth was driven by prices as the industry continued to benefit from increases taken in 2022. We estimate that average prices rose by approximately +25% over one year to reach just above 60,000 N/tonne.”
Cement companies’ overall after-tax profit increased by 2.86% year-on-year on average to N270.87 billion. DangCem recorded negative growth of 10.19% year-on-year to reach N172.1 billion in the first half of 2022, reducing industry profits.
BUA posted the biggest year-on-year improvement, up 41.42% to N61.36 billion, while Lafarge’s profits rose 32.10% to N37.41 billion. naira.
Cash and cash equivalents reported by DangCem increased by 16.68% in the first half of 2022 to N108.89 billion from N93.31 billion in the first half of 2021.
Lafarge and BUA also increased their total cash and cash equivalents by 39.18% and 123.7% to reach N78.75 billion and N128.24 billion respectively.