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Cement Makers are Using Assets to Generate Higher Returns for Shareholders

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Cement makers who have turned in remarkable performance in the last few years are utilising their fixed assets in generating higher earnings and return on equity.

The average fixed asset turnover (FAT) ratio of the three dominant players-Dangote Cement, Lafarge Africa, and BUA Cement- rose to 0.56 in September 2021 from 47.75 as at September 2020, according to MoneyCentral calculations.

The fixed asset turnover ratio is an efficiency ratio that measures a company’s return on their investment in property, plant, and equipment by comparing net sales with fixed assets.

Dangote Cement, the largest producer of the building material and the most capitalised firm in the country, recorded a FAT ratio of 0.72, meaning for every Naira invested in fixed assets,a return of almost a naira is earned.

BUA Cement’s FAT ratio increased to 34.66 percent in the period under review from 34.15 percent the previous year.Lafarge Africa’s ratio moved to 63.44 percent in September 2021 from 50.10 percent the previous year.

Investors are eager to know how well their resources have been deployed to a reasonable return on their investment.

But the producers of the materials are not operating plants at full capacity as some assets are idle since there has not been a surge in construction activities needed to spur cement volumes.

These plants could be put to more use because construction activities are picking up in tandem with the gradual economic recovery as workers are back on site.

Also, the huge infrastructure deficit and the government planned capital expenditure spend are expected to accelerate demand for cement

Interestingly, Dangote Cement spent N153.02 billion on the acquisition of property plant and equipment, which is 7.02 percent of N1.46 trillion item of property plant in the balance sheet.

BUA Cement has not been embarking on capital expenditure spending since it merged two subsidiaries a few years ago. It spent N34.63 billion on the acquisition of property, plant and equipment, which is 72.72 percent lower than 2020’s N127.11 billion.

It is noteworthy that industry players are focused on capacity build-up to meet the growing market, But Lafarge Africa has been lagging peer rivals, which undermines its ability to compete favorably.

Analysts at Chapel Hill Denham in a recent note to clients said Lafarge Africa will need to raise a N100 billion bond to finance the acquisition of 3 million metric ton plants without overstretching its cash flows.

The plant will cost $350 billion, which translates to N144 billion, according to analysts at Chapel Hill Denham.

The good tidings for shareholders are that earnings will continue to be sturdy, thanks to a deleveraging of the balance sheet.

Investors should not get it twisted because cement makers are the star performers among NSE 30 firms (the most liquid and capitalized companies), and it must be recalled that they lifted the manufacturing sector out of the recession in the first quarter of 2021.

Investment houses have unanimously placed BUY recommendations on their stocks, citing consistent growth and strong balance sheet.

A low interest rate environment means the cost of borrowing will not spiral, which makes it pretty much easier for them to service their debts.

A favorable price helped lift cement markers’ margins as an oligopolistic market continues to favour them.

Dangote Cement, BUA Cement, and Lafarge Africa collectively grew net income by 32.43 percent to N384.55 billion in September 2021 from N290.36 billion.

They have been making profit from core operations while contemporaneously turning each Naira invested in sales into higher profit.

Combined operating income spiked by 44.16 percent to N564.15 billion in the period under review from N391.31 billion the previous year.

Industry average net margin increased to 36.97 percent in the period under review from 25.75 percent the previous year, according to calculations by MoneyCentral.

Owners of common stock of these firms are getting a higher rate of return. What this means is that companies have generated returns they received from their shareholders.

Dangote Cement’s return on equity (ROE) increased to 31.10 percent in September 2021 from 23.20 percent the previous year.

BUA Cement’s ROE rose to 17.60 percent in the period under review from 14.30 percent the previous year.

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