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Friday, March 24, 2023

Cement Makers Profit Margins Shrink Despite Higher Sales

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Cement makers whose top lines (revenue) growth have been driven by upward adjustment in the price of key products are able to deploy their fixed assets in generating higher sales, but cost pressures whipsaw profit margins.

The average fixed asset turnover (FAT) ratio of dominant players Dangote Cement, BUA Cement, and Lafarge Africa increased to 0.92 percent in December 2022 from 0.76 the previous year, according to MoneyCentral calculations.

There has been a slew of hikes in the price of cement by sector players who control price because of the oligopolistic structure of the market and need to shed themselves from inflationary pressures, currency devaluations, and a challenging operating environment.

An improvement in export sales due to the closure of land borders and broader economic recovery from the pandemic that reinvigorated construction activities also helped underpin sales, and there is room for more improvement infrastructure deficit, government capital expenditure spend, and private sector investment are expected to accelerate the demand for building materials.

However, rising input costs arising from higher energy costs prevented the top line growth of companies from translating into double digit bottom line growth.

The average net profit margins of the three dominant players fell to 22 percent in the period under review from 26.24 percent as at December 2021, according to MoneyCentral calculations.

Their combined cost of sales were up 23.86 percent to N1.03 trillion, and the increment is higher than the 21.23 percent January inflation print.

As a result of a myriad of challenges, these firms are unable to generate more profits for their owners as the average industry return on equity (ROE) reduced to 25.18 percent in December 2022 from 25.34 percent as at December 2022.

With an average cost of sales ratio of 47.78 percent, cement makers spent less on input costs to produce each N1 unit of products than other sectors in Nigeria.

Dangote Cement Plc, the largest producer of the building material and the most capitalised firm in Nigeria saw net margin fall to 23.64 percent in the period under review from 26.34 percent the previous years at its Pan-African business suffered heavy loss that weighed on Group’s bottom line.

“Beyond the top line, cost pressures overshadowed revenue growth, eventually slowing profitability growth due to persistent inflationary pressures. More significantly, cement players suffered the impact of higher energy costs following the spike in selling and distribution costs,’’ said analysts at Cordros Securities.

“Our expectations for revenue growth in 2023 are skewed towards further price increases amid another volume decline. We believe the rising energy costs amid the increased difficulties with acquiring raw materials will influence intermittent price increases from industry players as they move to protect margins,” said analysts at Cordros Securities.

It appears rising interest rates stoked by central bank aggressive stance in the face of red-hot inflation discouragingly undermines private investment and it is also a stumbling block for sector players who will be paying more to service debt in their books.

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