Cement Industry

Nigeria Equity Research
December 11, 2008
The Nigerian Cement

Industry
…in Search of Volumetric Growth
Meristem Equity Research

Saheed Bashir saheedbashir@meristemng.com
+234-802-4546-575
Kemi Adeneye kemi.adeneye@meristemng.com
Abiodun Keripe abiodun.keripe@meristemng.com

Nigeria Equity Research Nigeria Equity Research
Ahmed Razaq razaq.ahmed@meristemng.com
Sept 4, 2008 Sept 4, 2008
0|Page Correspondence: info@meristemng.com
TNigeria Equity Research
Nigerian Cement Industry
Content Highlights August 6, 2008
Report
Executive Summary 2
Macroeconomic Environment 4
Global Cement Industry 7
Nigerian Cement Industry 13
The Local Players 20
Comparative Performance Analysis 26
Technical Analysis and Stock Returns 33
Equity Valuations 36-43
Methodology 37
ASHAKA 38
BCC 39
CCNN 40
Lafarge WAPCO 41
Disclosures 43
1| Cemen t In d ustry Re p ort, D e ce mbe r 11,’08 Me riste m Re se arch

Nigerian Cement
August Industry
6, 2008
Report
Executive Summary
• The Nigerian cement industry has mirrored global trend especially in

consumption pattern. Growth in global consumption has tracked global
economic growth and in tandem with the trend, domestic demand has
hopped by about 13 percent CAGR between 2003 and 2007.
Nevertheless, there exists an inherent asymmetry in the system with
production significantly lagging behind consumption by about 80 percent;
the gap being bridged largely by import, accounts for cement price hitting
the roof.
• With accelerating industrialization and urbanization, efforts are continually

geared towards shifting the production frontier outwards in order to
explore the potentials in the economy while simultaneously meeting up the
growing domestic demand.
• We note that industry landscape has seen the attenuation of concentration

over the past 5 years but still remains on the high side. In furtherance of
efforts to dilute concentration, more companies are being granted operating
licences especially in the downstream.
• Our analysis shows a gargantuan leap in top line of the 4 quoted companies
in the cement sector with turnover CAGR ranging between 12.74
percent and 93.43 percent. This however did not translate to comparable
better performance in bottom lines due to highly prohibitive production
cost propelled by the need to provide alternative energy sources.
• The business risk analysis of the industry portrays a relatively high

exposure. While CCNN and Lafarge WAPCO exhibit similar business risk
exposure at 1.767 and 1.525 respectively as captured by operating profit
variability; ASHAKA Cement and BCC occupy the two extremes with BCC
having the highest earnings volatility with a coefficient of variation of
2.5. Similarly, with respect to financial risk, BCC maintains its lead as the
most levered with a debt equity ratio of 2.83x.

Nigerian Cement
August Industry
6, 2008
Report
Executive Summary
• A defining characteristic of cement sector in the Nigerian stock market is
its above market median volatility index. Stock liquidity, as measured by
average daily volume traded and float-adjusted market capitalization
reveals CCNN as the most liquid with a liquidity ratio of 1.02 x 10-3 while
ASHAKA ranks least with a ratio of 3.2 x 10-5.
• Premised on our outlook for the Nigerian cement industry and our
valuation methodologies, adequately disclosed in this report, we express
our OVERWEIGHT position on ASHAKA, CCNN and Lafarge
WAPCO as current market pricing presents significant undervaluation to
both intrinsic values and 12-month target prices, while we maintain a
HOLD on BCC.
• Sequentially, CCNN tops our ranking presenting 116 percent 12-month

upside potential followed by ASHAKA and WAPCO with 79 percent
and 75 percent 12-month upside potentials respectively. BCC presents
11 percent upside potential, less than our 20 percent benchmark for buy
recommendation. Hence, in our fair view, the stock is fully valued at
current market price.
• Outlook for the Nigerian Cement Industry looks very robust. Total
domestic demand of cement for general construction activities is estimated
to hit about 20 million metric tonnes per annum by 2010. Similarly
housing deficit is put at a ballpark figure of 12 million housing units
requiring 8 million metric tonnes of cement per annum for the next
30 years given that 400,000 housing units are built per annum. In the
same light, the industry is projected to grow at about 14-15 percent in the
next 5 years and is forecast to be worth slightly above N650bn (US$5.6bn)
7 years after.
PLEASE SEE IMPORTANT DISCLOSURES ON PAGE 43

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Nigeria
• Real output rises along declining
Macroeconomy interest rates
• Non-oil revenue shows strong

outlook
• Monetary policies deepen

financial system

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Nigeria Macroeconomic Profile
Fig 1: MPR showed significant long term downward trend Fig 2: Real GDP growth rate dwells in positive threshold
30.00 700 Real GDP (b'N) 12

MRR/MPR Real GDP growth rate
25.00 Prime Lending Rate 600 10
20.00 500
8
400
15.00 6
300
10.00
200
4
5.00 100 2
0.00 0 0
2002 2003 2004 2005 2006 2007 2008 Sept 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Source: CBN, Meristem Research
The downward primary trend of MPR (changed from The economy experienced a commendable upward
MRR in 2006) is sufficiently trailed by falling prime trajectory in real GDP, translating to a positive 10
lending rate. This called forth substantial growth in year average real GDP growth rate of 5.5 percent;
average monthly credit to the private sector which grew though less than the annual target growth range of
tremendously from N1.16 bn in 2003 to N3.71 bn in 13-15 percent, required to meet the MDGs of 2015
2007. This translates to an annual compound rate of and the country’s vision 2020.
34 percent.
Fig 3: Capital market reflects deepening financial system Fig 4: Long term Appreciation in Nominal Effective Naira Exchange Rate
135.00
Nominal Effective Naira Exchange Rate
25.00
21.01
20.00 Market Capitalization to real GDP 130.00
16.18
15.00 125.00
10.00 120.00
5.00 115.00
0.63
- 110.00
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2002 2003 2004 2005 2006 2007 2008 June
Source: CBN, Meristem Research June
With rising real GDP in the past decade, the Nigerian Strong oil revenues and prudent monetary
stock market grew appreciably in depth as revealed in the management framework have engendered significant
rising proportion of stock market capitalization appreciation in the nominal effective exchange rate of
relative to real GDP. In 2007, this ratio stood at 26x its the naira against the US dollar. Fig 4 captures the
1998 level hovering above the market capitalization exchange rate movement after the introduction of the
benchmark of $50bn required to attract emerging market Dutch Auction System (DAS) in 2002 and the
funds. At present, the Nigerian Stock Exchange remains Wholesale Dutch Auction System (WDAS) in 2006.
the 3rd largest in Africa.

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Nigeria Macroeconomic Profile
Fig 5: Composite inflation rate (y-o-y) Fig 6: Bourgeoning external reserves position
35 70.00
All Items Index All tems less Farm Produce Food 10 Year CAGR = 25%
30 60.00
25 50.00
20 40.00
30.00
15
20.00
10
10.00
5
-
0 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
August
-52004 2005 2006 2007 2008
1 year prior to June 2008, prudent fiscal and monetary In the face of astronomic rise in the price of crude oil
policies have tamed inflation rate within single on the international market in the past couple of years,
digit ambience. However, recent soars observed in Nigeria’s external reserves position has grown in leaps
food and energy costs have surged inflation figure, and bounds, recording a 25 percent compound
which stood at 14 percent as at July 2008. annual growth in the last decade.
Fig 7: As federal revenue grows, non-oil contribution increases 2007
2004
22%
14%
Oil Revenue
2000
16% Oil
Oil Revenue Non Oil-
Revenue Revenue
Non Oil-
Non Oil- 78%
84% Revenue 86%
Revenue
Total federally collected Federal revenue grew to N3.92tr Federal revenue continued on
revenue in year 2000 grossed in 2004, representing 19.80 percent primary upbeat trend, save in
N1.91tr (US 18.69bn at 4-year compound annual growth 2006. Total federal revenue stood
1USD=N102) with overall rate. While the non-oil
at N5.72tr, translating into a 3-
budget deficit equivalent to contribution shrank to 14 percent,
the overall deficits stood at year annual compound growth
negative 1.5 percent of GDP.
negative 1.5 percent of 2004 rate of 13.4 percent.
GDP.

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• Global players embrace

Global integration as demand shoots up
• Supply network is fragmented

Cement and highly concentrated
Industry • Nigeria trudges along …

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Global Cement Industry: Output and Consumption set to surge
For years, global cement industry consumption has been growing steadily at a rate
approximating world’s economic growth rate with regions that boast large
infrastructure and housing programs accounting for the strongest growth in recent
times. Accompanying countries’ rising consumption profiles is steady increase in global
annual output which is expected to rise strongly by over 32 percent of current annual
output of 2700 to 3500 million tonnes by 2012.
Fig 8: Global Distribution of Cement Output
USA, 3.40% Other

America, 6.20%
CIS*, 3.40%
European
Union, 9.70%
Other
Europe, 2.40%
Asia, 70.10%
Africa, 4.40%
Oceania, 0.40%
India, 6.10%
Japan, 2.40%
Other
Asia, 12.90%
China, 48.70%
Sources: The European Cement Association, Meristem Research
*CIS: Commonwealth of Independent States

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Global Cement Industry:
Report
Output and Consumption set to surge
However, it is expected that the rate of consumption expenditure in China will

slow down considerably thereby leading to slower growth in cement demand.
Product demand in India, the second largest national market for cement, is
expected to climb at the fastest rate of any major market. Although small,
Indonesia, Malaysia, Nigeria, Vietnam and the UAE are all expected to record
gains in excess of seven percent per year. In the developed areas of the US,
Japan and Western Europe, cement sales increases will lag the global average.
Fig 9: Cement Consumption per capita (kg)
Saudi Arabia 900
China 610
Mauritous 600
South Africa 280
Angola 105
Nigeria 75
Source: Meristem Research
In the US, the market is expected to benefit from a recovery in residential

building activity, as well as strong government spending on non-binding
construction through 2012. In Western Europe, a rebound in construction
activity will benefit cement markets in countries such as Germany and Portugal.
Similarly, a pick-up in construction spending in Japan following an extended
period of decline will help bolster overall developed world market growth.

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Global Cement Industry: Output
Report
utput and Consumption set to surge
Supply
ly network is fragmented and highly concentrated
As a consequence of a relatively low minimum efficient plant,
plant and high transportation
cost, global cement production is highly fragmented.
fragmented. It is estimated that there are
about 1,500 integrated
tegrated cement production plants in the world. Although the industry has
seen the emergence of strong global players, there is a moderately high degreeegree of
fragmentation as the five largest firms account for over 23 percent of the overall
global production.. The global leaders in the industry include Lafarge (France),
Holcim (Switzerland), Cemex (Mexico), Heidelberg Cement (Germany) and
Italcementi (Italy) while other multinational companies and global players include:
Anhui Conch Cement (China),
hina), Taiheiyou Cement
C (Japan) and Votorantim (Brazil).
Fig 10: Distribution of major global

industry players
layers
Lafarge
Heidelberg Holcim
Taiheiyou
Cemex
Anhui Conch
Votorantim
10 | Ce me n t I nd u stry Re p ort, D e cembe r 11,’08 Me riste m Re se arch

Nigerian Cement
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Global Cement Industry: Output and Consumption set to surge
Global Industry Structure is being shaped by integration
Changes in industry configuration over the last decade show
significant consolidation and vertical integration which in turn seem
to be intensifying industry concentration. In the drive towards vertical
integration, a number of large cement manufacturers have acquired
construction companies that produce ready-mixed concrete, case in point,
the purchase of UK-based construction company Hanson by the German
cement producer Heidelberg Cement in 2007. Many international cement
producers are also capitalizing on the strong growth in Asian markets
particularly China and India including the Middle East often through joint
venture with local producers. We expect synergetic benefits via industry
consolidation to effectively contribute to cement producers' bottom
line, in addition to their organic capacity growth.
…but there are serious environmental concerns

The industry has had to grapple with environmental issues in its quest to
expand production capacity. Cement plants already account for over 5 percent
of global emission of carbon dioxide, the principal cause of global warming.
The use of energy saving technologies, alternative fuels and recycled raw
materials is being canvassed as environmentally friendly production methods.
Also, the application of recycled waste products incorporating inputs such as
pulverized fuel to power cement plants is expected to stem the negative
externalities and adverse environmental impact of cement manufacturing.
Typically, cement is highly energy intensive with energy cost accounting for 29
percent. Although, individual company reserves are subject to exhaustion,
cement raw materials, especially limestone, are geologically widespread and
copious; overall shortages are improbable in the future.

Nigerian Cement
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The Nigerian Cement Industry
Report
The • Gross disequilibrium in

demand-supply dynamics
Nigerian • Energy crisis cripples capacity
expansion
Cement • Import dependency remains a
concern
Industry

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The Economics of Nigerian Cement Industry
The Growth Impediments…
Infrastructural gap remains one of the greatest challenges of Nigerians and has
been a cog in her wheel of progress. Capacity utilization and operational efficiency
of heavy and small industries remain well below optimality. This has continued to
contain the latent opportunities in the real sector and its contributions to the
national output over the years.
The cement industry is among the key growth drivers that have been enmeshed in
energy crisis and infrastructural decay. We propose the need for an across-the-
board infrastructural re-invention in the country to support the local production
of cement. This is seen as a much longer-term panacea to the current ‘self-serving’ and quick
fix measures.
Gap Analysis: Dis-equilibrium

Domestic demand for cement hopped by a compound annual growth of about 13
percent between 2002 and 2007 while production only managed to climb up by
12.3 percent over the same period. Thus, the gap has continued to widen year on
year .The surge in domestic demand for cement is obviously in tandem with the
rise in construction works and housing projects over same interval. This is
induced largely by a paradigm shift in fiscal and monetary reforms ushered in by
the new democratic government in early 2000. The upshot is a widening excess
demand situation and continuous upward price movements in recent times.

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Deliberate efforts of governments across board have stimulated appreciable
growth in overall GDP which have also positively impacted on the aggregate
demand for cement. The boom has also attracted both local and international
financial institutions by allocation of appreciable credit facilities to large scale
housing projects via strategic partnerships with corporate developers and/or
direct participation in real estate financing via subsidiaries.
Increased construction activities in Nigeria, buoyed by a relatively stable socio-

socio
political environment and the consequent economic push, have impacted
positively on cement consumption. From an early statistics of about 8.1
million metric tonnes in 2001, consumption grew to more than 12 million
metric tonnes in 2007.
Fig 11: Inadequate domestic

omestic production creates substantial supp
30.00
Supply Gap
Domestic Demand (in mm tonnes)

25.00 Domestic Production
20.00
15.00
10.00
5.00
0.00
2003 2004 2005 2006 2007 2008f 2009f 2010f 2011f 2012f

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Despite the spiky supply gap in the face of beckoning strong economic
fundamentals and growth prospects, the Nigerian cement industry has been
one of the worst hit victims of infrastructural decay and policy summersaults of
the central government.
It is no gainsaying that the level of infrastructural development cannot support

the current and required economic growth pattern of the nation. Some experts
have suggested the urgent need to resort to public-private sector partnership to
accelerate growth and development in key areas.
Activities in Upstream & Downstream

The four (4) local plant owners are Dangote Group (comprising BCC and
Obajana Cement), LafargeWAPCO Cement, ASHAKA Cement and
Cement Company of Northern Nigeria. Recently in mid 2008, fresh licences
were granted to 13 plant owners in the upstream and some other end users in the
construction industry to import the product. Amongst the beneficiaries are big
players such as Dangote, Lafarge Group, Flour Mills, Ibeto, Eastern
Bulkcem and some new investors in the upstream such as Quacem, Westcom,
Purechem and Topcem. The approval is expected to gross the national supply
to about 12 million metric tonnes in 2008. Similarly, another set of downstream
operators- Minaj, BUA Group, Lababibi and Regan and Madewell, were granted
licences to import about 6 million metric tons of cement in branded 50kg bags.
All these attempts were considered as further interventions to relieve the supply
pressures that have seen cement prices hit the roof in recent times. However, we
are of the opinion that as wary as the palliative measures may seem, it could turn
out an ill-wind against local cement producers. We advocate decisive and sincere
efforts of the government via continuous investment in infrastructure and
supportive policy initiatives to ease the tension for upstream operators.

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Fig 12: OLS Forecast of Average Cement Price per tonne (Naira)
35,000
30,000
25,000
20,000
15,000
10,000
5,000
-
2003 2004 2005 2006 2007 2008 2009F 2010F 2011F 2012F 2013F
Source: Company Annual Report & Meristem Research
Demand Drivers and Cycles of Local Demand

Industrialization and urbanization continue to expand the demand for cement
products. The key market forces that drive the industry are not unconnected with
the level and intensity of activities in the construction sector determined by
consumer spending, population growth, manufacturing sector growth, inflation
rates, and the government’s monetary and fiscal policies. The construction &
building materials sector usually follows the growth in a country’s GDP, with the
main drivers of demand being real estate, tourism and infrastructure projects.
Industrial expansions also have a positive effect on demand for cement. During
expansionary periods, demand for building materials (including cement) tend to
surge at a higher rate than GDP growth, while an economic slowdown severely
affects demand for building materials.

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The construction sector has experienced a stable growth path with inflation-
adjusted construction spending rising steadily year-on-year by a 5-year CAGR of
12.01 percent since 2001 and accounting for an average of 1.54 percent of
national output over the same period. The current real estate and
construction boom is likely to continue in the near future, together with the
growth in demand for cement and other building materials.
Fig 13: Construction activities remain growth propellant for the cement sector
14.0 Building Construction output(bn) Demand for Cement(m'mt)
12.0
10.0
8.0
6.0
4.0
2.0
-
2003 2004 2005 2006 2007
Although cement consumption is closely tied to overall construction industry

performance, cement is somewhat protected from extreme cycles because cement
is used in nearly every type of construction. While individual construction markets
have their own distinct business cycles, at any given time cement is usually needed
by at least one segment of the construction industry. The industry is also regional in
nature with industry players operating in major regions of the country.

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Capital and Energy intensity
The cement industry is characterized by high capacity building and modification
costs. The cost of a new cement plant is equivalent to around 3 years of
turnover. This ranks the cement industry among the most capital-intensive
industries. Long gestation periods are therefore needed before investments can
be recovered and plant modifications have to be carefully planned to take
account of the long-term nature of the industry. The industry is also highly
energy intensive. Each tonne of cement produced requires 60 to 130 kg of
fuel oil or its equivalent. We believe that despite huge energy and energy
intensity, lower production costs are achievable given the higher efficiency of
newer facilities, expected economies of scale arising from capacity additions and
consolidations, and the likely benefits from foreign technical partnerships.
Fig 14: Cement Production Typical Cost
12%
29%
Energy
Raw material
Labour
32%
Depreciation
27%

Import Dependency remains a concern
One observed trend in the cement industry behaviour is that volume of cement
entering world trade has traditionally been low relative to overall production and
consumption. However, currently in Nigeria, there is a low level of installed
capacity that does not meet up to 20 percent of local demand so there is a
heavy dependence on import. We believe that widespread availability of raw
materials and the link between economic growth and cement consumption are
factors that should favour domestic production rather than importation of
cement.

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Local Players and Industry Analysis
• Industry Concentration
declines as competition heats
up
Local Players • The Landscape is changing
• Players seek capacity

expansions

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Local players and Industry Analysis
…Concentration Still on the High side but declining
The Nigerian Cement industry is characterised by an oligopolistic market

structure with few dominant players operating together with a large group of
fringe players having infinitesimal market share. Though industry concentration
has been diluted over the past 5 years, it is still on the high side. Given the high
market share commanded by the quoted companies and the inadequacy of
relevant data on the fringe players, our analysis borders on LafargeWAPCO Plc
(WAPCO), Ashaka Cement Company Plc (ASHAKA), Benue Cement
Company Plc (BCC) and Cement Company of Northern Nigeria Plc (CCNN).
Fig 15: Trend in NHHI and Equivalent number of firms (2000-2007)
NHHI Equivalent
no of Firms
0.30 3
0.20 2
0.10 1
0.00 0
2000 2001 2002 2003 2004 2005 2006 2007
Normalized Herfindahl-Hirschman Index Equivalent no of firms
Using the Normalized Herfindahl-Hirschman Index (NHHI) as a measure of

industry concentration we observed, as shown in Fig.15, that for the past 8
years, concentration has been diluted indicating a move towards a more
competitive industry. The index declined from 0.289 in 2000 to 0.197 and
0.193 in 2003 and 2007 respectively. After declining between 2000 and 2003, the
index recorded a volatile trend each year though at a low standard deviation of
0.043. This observable decline, though rather small, shows gravitation
towards a more equitable distribution of market share. Hence, the
‘equivalent’ number of firms increased from 2.1 to 2.5 firms.

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Industry Analysis/Environmental Scanning
Giving cognizance to the dynamics of both external and internal environments of
the cement industry, some strategic processes are quite instructive. Adopting
Adop a
modified version of Porter’s 5 Forces Competitive Model,
Model we observed that
an array of economic and regulatory factors shapes the landscape of the industry
disproportionately. These factors are diagrammatically coached in the figure
below.
Fig 16: Modified Porter’s 5 Forces Competitive Model for Nigerian Cement industry.
Bargaining Power of Suppliers

Barriers to entry
1. Licenscing of limestone reserves
1. Input Specificity (limestone reserves)
2. High energy costs
2. Huge capital costs
3.Dependency on imported clinker
3. Long gestation period
Overall: High
Overall: High
Industry Competition
1. Few large producers
2. Numerous bagging firms (importers)
3.Geographic market share distribution
Overall: Moderate
Bargaining Power of Consumers Supply-Demand

1. Producers/Sellers market 1. Low domestic production
2. Weak brand loyalty 2. Imports by liscenced bagging firms
3. Large market (demand) 3. Huge net/unmet demand
Overall: Weak Overall: Lopsided

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Fig 17: SWOT Analysis; Nigerian Cement Industry.
STRENGTHS OPPORTUNITIES
Increasing selling price and hence profitability owing to Construction boom and real estate development in
supply gap Nigeria
Natural hedge from outside competition due to high Possible entry of multinational companies,
transportation costs increasing efficiency and opening new export
routes
Capital intensity with long gestation period creating
natural barriers to entry Falling oil prices leading to lower costs of
production
WEAKNESS THREATS
Fragmented regional players with minimal scale Unpredictable government policies
economies
Deteriorating infrastructure
Rising operating costs
Rising & prohibitive energy costs
Loose trade restrictions on imported cement
Mounting environmental concerns and challenges

of sustainable development

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Outlook for the Nigeria Cement Industry:
Demand, Capacity & Gap
Housing deficit in Nigeria is somewhat put at about 12 million and experts opined
Nigeria will have to build at least 400,000 housing units per annum for the next 30
years to meet its housing needs. We project that meeting this lofty target will require
about 8.5 million metric tonnes of cement per annum. We also estimate that total
domestic demand for cement for construction of residential, commercial and other
infrastructural projects would reach about 20 million metric tonnes per annum by the
year 2010.
Fig 18: High Infrastructural deficiency supports rising cement consumption Structure
30.00
25.00
20.00
15.00
10.00
5.00
0.00
2002 2003 2004 2005 2006 2007 2008f 2009f 2010f 2011f 2012f
The Nigerian construction industry has displayed impressive growth over the past few
years. Reason for this is logical as it is in tandem with the stable rise in the nation’s
GDP. There has been a steady rise in construction expenditure in the country; partly
induced by growing Oil-GDP. Average growth hovers around 13 percent while
the growth statistics is projected at around 14-15 percent in about 5 years’ time.
The construction industry is forecast to be worth slightly above N650bn (US$5.6bn)
by 2012. Moreover, increased investment levels and more public-private partnership
arrangements are anticipated in the coming years.

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Outlook for the cement industry is radiant as intentions for expansion of basic physical
infrastructure remain positive and high on the agenda of government at all levels. Prime
focus is on power generation, construction and renovation of road projects. Upgrading
and expansion of the country's airports and railway network are also planned.
Despite all odds, analysts foresee Nigeria as one of the potential largest construction
markets in Africa. Therefore, it is logical to conclude that future demand for cement in
Nigeria will continue to trend up, as increased cement production capacity is a formidable
catalyst to propel growth in the infrastructure sector. We project a moderate 14 percent
growth in demand in the next 5 years.
Estimates show that at present, about 70 to 80 percent of cement consumed in Nigeria is

imported. Even though cement consumption in Nigeria increased from 8 million metric
tonnes in 2001 to 11 million tonnes in 2006 and projections for 2008 is put between 17
and 18 million metric tonnes, on per capita basis, domestic cement consumption is said
to be low compared to some other countries.
The enormity of growth potential is supported with a 13-15 per cent growth forecast for
the country's GDP, which is known to have a strong positive impact on cement
consumption. High GDP growth leads to high cement consumption, which is partly
induced by population growth and rising per capita consumption.

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• Industry turnover experiences

sharp rise
Comparative • Net margin shrinks as

operational risks heighten
Analysis • Industrial-wide growth patterns

variable.

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Key Industry Players: Comparative Analysis
Growth Patterns and Prospects

For factors partly connected to growing domestic demand for cement and the established
supply gap inherent in the industry, the 4 quoted companies have shown appreciable
turnover growth momentum in the past 4 years. While the driver of this growth cannot be
entirely explained by increased domestic capacity, the price effect has been relatively mild
with average price per tonne experiencing a gentle compound annual growth of 9.9 percent
since 2004. With total domestic installed capacity of about 12.3 millions and 2008
estimated demand of 17million metric tonnes, even 80 percent capacity utilization
leaves production at a substantial lag of about 7 million metric tonnes behind
domestic demand.
Fig 19: 5-year turnover growth patterns (CAGR) by companies
93.43%
24.99% 24.89%
12.74%
BCC LafargeWapco CCNN Ashaka
Source: Companies’ Annual Reports and Meristem estimates

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Comparative Analysis of Industry Key Players
Profitability
With the exception of ASHAKA Cement, profitability position of the industry has been
mixed in the past 5 years. While all companies remain profitable in 2007, there was
significant drop in profitability measures across board compared to 2006. This was
largely due to tightening operating environment, swelling energy cost, event risk and
very high price of imported clinker. With a nationally coordinated solution looking
blurred in the short-term horizon, company-specific efforts geared at arresting the
prevailing energy crises have been stiffening production, thereby eroding net margin.
Compared to 2006, BCC and ASHAKA both experienced more than 50 percent margin
squeeze in 2007.
Fig 20: 2-year comparative net profit margins by companies
60%
50%
2007
40% 2006
30%
20%
10%
0%
LafargeWapco BCC Ashaka CCNN
-10%
Source: Companies’ Annual Reports
Risk Exposure. Business and financial

Overall, ASHAKA Cement and BCC occupy the two extremes in terms of earnings
variability. BCC’s business risk, as measured by the degree of variability in operating
profits, revealed very high earnings volatility, with a coefficient of variation of 2.5.
This perfectly mirrors the company’s past record of high profit gyrations. However,
the company’s current capacity expansion programme with an annual production
target of 3 million tonnes, coupled with extensive factory refurbishments, makes the
odds much likely that this historical performance might not be replicated in the near
time.

Nigerian Cement
August Industry
6, 2008
Report
Fig 21: Business risk exposures by companies
CCNN 1.767
Ashaka 0.377
BCC 2.493
LafargeWapco 1.525
0.00 0.50 1.00 1.50 2.00 2.50 3.00
Source: Companies’ Annual Reports and Meristem Research
The level of financial risk exposure as captured by equity multipliers points to

similar direction. BCC is the most levered with an equity multiplier of 3.83x,
translating into debt to equity ratio of 2.83x. This implies that the company’s
total debt obligation as at 2007 FYE, was 283 percent of its total equity.
Fig 22: Degree of financial risk exposures by companies
5.00
4.00 3.83
2.90
3.00 Ind Avg, 2.59
2.08
2.00
1.54
1.00
0.00

Nigerian Cement
August Industry
6, 2008
Report
From the two perspectives of risk measures, business and financial, BCC is at
the forefront of exposure while ASHAKA and Lafarge WAPCO are the least
exposed in that order.
Assets, Growth and Distribution

While the consolidated total assets of the four major players have grown by 21
percent CAGR in the last 4 years, a growth not unconnected with the dare need
to expand production capacity to meet surging domestic demand for cement,
company-wise growth patterns have been grossly variable. In the same time
reference, ASHAKA Cement and CCNN have been growing at a rate perched
in the threshold of 19 percent while BCC and Lafarge WAPCO have shown
dialectical growth momentums, with the former shooting upward by 63 percent
annually and the latter by a single digit mark of 9 percent. This growth pattern is
understandable given the broad asset base of Lafarge WAPCO.
Fig 23: Industry total asset distribution and growth
2007
LafargeWapco 8%
BCC
2006
Ashaka 19% 2005
8% 7%
CCNN 42% 8% 2004
17%
20%
47% 20
50% %
28% 60
31% 23% 12
%
%

Nigerian Cement
August Industry
6, 2008
Report
These diverse growths have had significant impacts on asset redistribution in the
industry. The dominant position of Lafarge WAPCO has been under challenge
shrinking from 60 percent in 2004 to 42 percent in 2007. This shrinkage has been
largely captured by the growing asset base of BCC which swelled from 12 percent
in 2004 to 31 percent in 2007.
Riding on the back of the current and planned capital expenditures of these
companies (the quoted cement companies) in their capacity expansion
programmes, the odds are that Lafarge WAPCO maintains its dominant position
in terms of assets base. The company’s management has hatched an expansion
plan to boost production capacity from the current 2.2 million tonnes p.a. to 6.2
million tonnes p.a. in 2011
Efficiency, Asset and Employee

In terms of efficiency in asset utilization, CCNN stands tall in the industry,
turning over its low share of industry total asset base (approximately 8 percent)
0.88x in 2007. At this level of efficiency, the company would have generated
N45bn, N32bn and N20bn in turnover with the asset base of Lafarge WAPCO,
BCC and ASHAKA Cement respectively as against N39bn, N5bn and N16bn
generated by the respective companies. While it could be asserted that the
efficiency level of BCC will be bolstered after its plants (under refurbishment)
are put into full operational use, the current figure does not deviate significantly
from historic average.
Fig 24: Company-wise asset utilization rate
0.882
0.740 0.764
Ind Avg, 0.634
0.149
Ashaka BCC CCNN Wapco

Nigerian Cement
August Industry
6, 2008
Report
While BCC remains the largest employer of labour as at 2007 FYE, with a total
workforce of 797, it has the least labour efficiency rate as measured by absolute
turnover per employee. Compared to 2006, Lafarge WAPCO recorded a
significant improvement of 24 percent in labour productivity largely attributable
to 21 percent cut in labour force from 960 in 2006 to 759 in 2007.
Fig 25: Company-wise employee productivity rates
60,000,000
50,000,000 2007
2006
40,000,000
30,000,000
20,000,000
10,000,000
-

Nigerian Cement
August Industry
6, 2008
Report
Technical
• Sector returns look robust in the
Analysis long term
• Stocks’ paths exhibit co-
and Stock movements
Returns

Nigerian Cement
August Industry
6, 2008
Stock Trajectories and Returns
Report
The Cement industry is characterized by an average volatility index of above
market as captured by the industry median beta of 1.11. Aside tracking the
directional movement in the NSE ASI, the industry has demonstrated more
than an average responsiveness to overall market pulses. At the current level,
the industry price trajectory seems to be below its long term trend as depicted
by the logarithmic trend in fig 26.
Fig 26: Comparative performance: Cement industry and NSE ASI (Jan 2003 = 1)
7.00
6.00 NSE ASI

Cement Industry
5.00
Cement Industry Long Term Trend R² = 0.686
4.00
3.00
2.00
1.00
0.00
2-Jan-03 2-Oct-03 2-Jul-04 2-Apr-05 2-Jan-06 2-Oct-06 2-Jul-07 2-Apr-08
Source: The Nigerian Stock Exchange and Meristem Research
Zeroing in on individual stock’s performance, there has been relatively strong

co-movement among the stocks’ paths reflecting the strong resemblance in the
respective companies’ business models. However, from May 2008, activities
intensified on BCC resulted in more price volatility than peers. Considering
liquidity, as measured by average daily volume traded and float-adjusted market
capitalization, CCNN remains the most liquid with liquidity ratio of 1.02 x 10-3
while ASHAKA occupies the rear position with liquidity ratio of 3.2 x 10-5

Nigerian Cement
August Industry
6, 2008
Report
Fig 27: Comparative share price performance of key players (October 2007 = 1)
1.60 Ashaka
BCC
1.40
CCNN
1.20 WAPCO
1.00
0.80
0.60
0.40
O-07 N-07 D-07 J-08 F-08 M-08 A-08 M-08 J-08 J-08 A-08 S-08 O-08
Putting historical annual returns to shareholders into perspective, ASHAKA has

maintained a consistent track record of corporate benefit declarations except in
2008 while WAPCO has been steadfast on dividend declaration since 2006 with
an average dividend yield of 1.88 percent. CCNN and BCC have mixed
experience of corporate benefit. Details are enunciated in Table 1.

Nigerian Cement
August Industry
6, 2008
Report
Table1: Holding Period Return Profiler
Ashaka BCC CCNN WAPCO

2003 Price Appreciation 29.00% 0.00% -15.64% 32.21%
Dividend Yield 4.36% na na na
Total Returns 33.36% 0.00% -15.64% 32.21%
2004 Price Appreciation 30.74% -14.41% 65.50% -40.05%
Total Returns 40.51% -14.41% 65.50% -40.05%
2005 Price Appreciation 48.70% 58.54% 14.22% 45.87%
Bonus 2 for 3 na na na
Total Returns 61.09% 58.54% 14.22% 45.87%
2006 Price Appreciation 62.24% 469.23% 180.13% 208.51%
Dividend Yield 6.84% na 1.30% 1.71%
Total Returns 69.09% 469.23% 181.43% 210.23%
2007 Price Appreciation -3.42% 37.84% 6.63% 47.81%
Bonus 1 for 6 1 for 8 na na
Dividend Yield 2.73% na na 1.85%
Total Returns -0.69% 37.84% 6.63% 49.66%
2008 (YTD) Price Appreciation -61.47% -57.92% -74.17% -68.67%
Bonus 1 for 6 1 for 8 na na
Dividend Yield na na 0.46% 2.08%
Total Returns -61.47% -57.92% -73.71% -66.59%

Nigerian Cement
August Industry
6, 2008
Report
Equity
Valuations

Nigerian Cement
August Industry
6, 2008
Report
Equity Valuation
Methodologies and Assumptions
In arriving at fair values for the individual stocks in our coverage, we have employed a
combination of discounted cash flow (DCF) and relative valuation methodologies.
We utilised the three (3) possible per share data, namely; earnings per share (trailing 12-
month), book value per share (as at last FYE) and sales per share (trailing 12-months) to
current market prices of the stocks.
In order to capture market mood and sector dynamics in stock valuation, our benchmark
price multiple is an average of industry multiple and overall market multiple. Our
DCF valuation combines the Gordon Growth and the Residual Income Valuation
methodologies. Both intrinsic valuation methods are premised on the following
fundamental assumptions:
• A risk free rate of 12.75 percent proxied by 10-year Nigeria FG bond rate.
• A terminal growth rate of 8 percent consistent with the expected short/medium
term growth rate of the economy.
• A risk premium of 6 percent, closely consistent with emerging market standard
• Average ROE over a five year forecast horizon.

Nigerian Cement
August Industry
6, 2008
Report
Valuations and Recommendations
ASHAKA
Our DCF Valuation methodologies yielded an average intrinsic value of N18.84k
for ASHAKA, which makes the current market price (N16.20: December 10, 2008)
a bargain value. On a relative valuation basis, we derived a 12-month target price of
N29.04k, representing 79 percent 12-month upside potential. Premised on the
above, we place a BUY recommendation on the stock.
Discounted Cash Flow Valuation

Residual Income Model 2008e 2009f 2010f 2011f 2012f Terminal @ 8%
Projected EPS 2.65 2.91 3.17 3.43 3.70
Projected BVPS 0.07 0.83 1.65 2.56 3.53
Projected DPS 1.89 2.08 2.27 2.46 2.65
Equity Charge 0.01 0.16 0.33 0.51 0.70
Forecast Residual Income 2.63 2.75 2.84 2.93 2.99 3.23
Discounting factor 0.83 0.70 0.58 0.48 0.40
PV of RI 2.20 1.91 1.65 1.42 1.21 10.98
Intrinsic Price(Ngn) 19.43
Gordon Growth Model Beta = 1.19, Cost of Equity = 19.89%

Terminal Growth Rate 8.0%
Five year forecast ROE 32.2%
Justified BVPS 2.26
Forecast BVPS 8.07
Intrinsic price (Ngn) 18.24
Relative Valuation
P/E Valuation P/S Valuation P/BV Valuation
Benchmark P/E 15.11 Benchmark P/S 1.68 Benchmark PBV 2.64
Forecast EPS 2.65 Forecast SPS 15.36 Forecast NAPS 8.07
Valuation 39.99 Valuation 25.81 Valuation 21.32
Relative Valuation Summary

P/BV 21.32
P/E 39.99
P/S 25.81
Target Price (Ngn) 29.04

Nigerian Cement
August Industry
6, 2008
Valuation and Recommendation
Report
BCC
BCC looks fairly valued at the current market price. Our simple average target
price obtained from relative valuation methodologies is N23.55k. Our DCF
valuation methodologies yielded an intrinsic value of N24.08k. At current price, BCC
narrowly meets our criteria for a HOLD recommendation.

Projected EPS 2.81 4.33 5.39 6.12 6.97
Projected BVPS 3.07 4.90 7.49 12.01 17.18
Projected DPS 0.99 1.73 2.70 3.06 3.49
Equity Charge 0.57 0.91 1.39 2.22 3.18
Discounting factor 0.84 0.71 0.59 0.50 0.42 9.50
PV of RI 1.89 2.41 2.37 1.94 1.59 16.27
Intrinsic Price (Ngn) 29.54

Justified BVPS 3.80
Forecast BVPS 4.90
Intrinsic price (Ngn) 18.62
Relative Valuation

P/E 42.53
P/S 15.18
P/BV 12.93

Nigerian Cement
August Industry
6, 2008
Report
CCNN
Using DCF valuation methodologies on a comprehensive 5-year forecast, we arrived at
an average intrinsic value of N7.66k for CCNN. On a relative valuation basis, the
stock’s 12-Month target price stands atN10.31k, representing a 116 percent 12-
month upside potential to the current market price (N4.81k: December 10, 2008).
Premised on the above, we place a BUY recommendation on the stock.

Residual Income Model 2008f 2009f 2010f 2011f 2012f Terminal @ 8%
Projected EPS 0.75 0.84 0.96 1.20 1.44
Projected BVPS 2.96 3.46 4.04 4.76 5.62
Forecast ROE 0.26 0.24 0.24 0.25 0.26
Excess Returns 0.10 0.09 0.08 0.10 0.10
PV of RI 0.29 0.26 0.25 0.29 0.31 4.43

Justified BVPS 2.21
Forecast BVPS 2.96
Relative Valuation

P/E 11.40
P/S 11.73
P/BV 7.81
Target Price(Ngn) 10.31

Nigerian Cement
August Industry
6, 2008
Report
WAPCO
Using DCF valuation methodologies on a comprehensive 5-year forecast, we
arrived at an average intrinsic value of N29.60k for WAPCO. On a relative
valuation basis, the stock’s 12-Month target price stands at N39.97k,
representing a 75 percent 12-month upside potential to the current market
price (N26.00k: November 28, 2008). Premised on the above, we place a
BUY recommendation on the stock.

Projected EPS 3.97 4.17 4.41 4.80 9.65
Projected BVPS 10.93 13.31 15.61 19.56 24.32
Projected DPS 1.59 1.88 1.76 1.92 3.86
Equity Charge 2.03 2.48 2.90 3.64 4.52
PV of RI 1.63 1.20 0.90 0.59 2.19 22.27
Projected Price (Ngn) 39.71

Justified BVPS 1.86
Forecast BVPS 13.31
Intrinsic price(Ngn) 18.25
Relative Valuation

P/E 55.99
P/S 24.78
P/BV 35.14

Nigerian Cement
August Industry
6, 2008
Report
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Nigerian Cement
August Industry
6, 2008
Report
Appendix
Analyst’s Certification and Disclaimer

This research report has been prepared by the research analyst(s), whose name(s) appear(s) on the cover of this report. Each research
analyst hereby certifies, with respect to each security or issuer covers in this research that:
(1) all of the views expressed in this report accurately reflect his or her personal views about any and all of the subject securities or issuers
(the Issuer); and
(2) no part of any of the research analyst’s compensation was, is, or will be directly or indirectly related to the specific recommendations
or views expressed by the research analyst(s) in this report. Research analysts’ compensation is determined based upon activities and
services intended to benefit the investor clients of Meristem Securities Limited (the Firm). Like all of the Firm’s employees, research
analysts receive compensation that is impacted by overall Firm profitability, which includes revenues from other business units within the
Firm.
(3) each research analyst and/or persons connected with any research analyst may have interacted with sales and trading personnel, or
similar, for the purpose of gathering, synthesizing and interpreting non-material non-public or material public market information.
As at the date of this report, any ratings, forecasts, estimates, opinions or views herein constitute a judgment, and are not connected to
research analysts’ compensations. In the case of non-currency of the date of this report, the views and contents may not reflect the
research analysts’ current thinking. This document has been produced independently of the Issuer. While all reasonable care has been
taken to ensure that the facts stated herein are accurate and that the ratings, forecasts, estimates, opinions and views contained herein are
fair and reasonable, neither the research analysts, the Issuer, nor any of its directors, officers or employees, shall be in any way
responsible for the contents hereof, and no reliance should be placed on the accuracy, fairness or completeness of the information
contained in this document. No person accepts any liability whatsoever for any loss howsoever arising from any use of this document or
its contents or otherwise arising in connection therewith.
Important Disclosure
Analysts’ Compensation: The equity research analysts responsible for the preparation of this report receive compensation based upon
various factors, including the quality and accuracy of research, client feedback, competitive factors, and overall firm revenues, which
include revenues from, among other business units, Investment Banking.
Legal entity disclosures: Meristem Securities Limited is a member of The Nigerian Stock Exchange and is authorized and regulated by
the Securities and Exchange Commission to conduct investment business in Nigeria.
Investment Ratings
Fair Value Estimate
We estimate stock’s fair value by computing a weighted average of projected prices derived from intrinsic and relative valuation
methodologies. The choice of relative valuation methodology (ies) usually depends on the firm’s peculiar business model and what in the
opinion of our analyst is considered as a key driver of the stock’s value from a firm specific as well as an industry perspective. However,
we attach the most weight to discounted cash flow valuation methodology.
Ratings Specification
BUY: Fair value of the stock is above the current market price by at least 20 percent
HOLD: Fair value of the stock ranges between -20 percent and 20 percent from the current market price.
SELL: Fair value of the stock is more than 20 percent below the current market price.
Copyright 2008 Meristem Securities Limited. All rights reserved. This report or any portion hereof may not be reprinted, sold or
redistributed without the written consent of Meristem Securities Limited.

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Nigeria Equity Research

December 11, 2008

The Nigerian Cement

…in Search of Volumetric Growth

Meristem Equity Research

Kemi Adeneye kemi.adeneye@meristemng.com

Abiodun Keripe abiodun.keripe@meristemng.com

Global Cement Industry 7

Nigerian Cement Industry 13

The Local Players 20

Comparative Performance Analysis 26

Technical Analysis and Stock Returns 33

Equity Valuations 36-43

1| Cemen t In d ustry Re p ort, D e ce mbe r 11,’08 Me riste m Re se arch

• The Nigerian cement industry has mirrored global trend especially in

• With accelerating industrialization and urbanization, efforts are continually

• We note that industry landscape has seen the attenuation of concentration

• The business risk analysis of the industry portrays a relatively high

2| Cemen t In d ustry Re p ort, D e ce mbe r 11,’08 Me riste m Re se arch

• Sequentially, CCNN tops our ranking presenting 116 percent 12-month

PLEASE SEE IMPORTANT DISCLOSURES ON PAGE 43

3| Cemen t In d ustry Re p ort, D e ce mbe r 11,’08 Me riste m Re se arch

• Non-oil revenue shows strong

• Monetary policies deepen

4| Cemen t In d ustry Re p ort, D e ce mbe r 11,’08 Me riste m Re se arch

30.00 700 Real GDP (b'N) 12

5| Cemen t In d ustry Re p ort, D e ce mbe r 11,’08 Me riste m Re se arch

Fig 7: As federal revenue grows, non-oil contribution increases 2007

Source: CBN, Meristem Research

6| Cemen t In d ustry Re p ort, D e ce mbe r 11,’08 Me riste m Re se arch

• Global players embrace

• Supply network is fragmented

Industry • Nigeria trudges along …

7| Cemen t In d ustry Re p ort, D e ce mbe r 11,’08 Me riste m Re se arch

USA, 3.40% Other

Sources: The European Cement Association, Meristem Research

*CIS: Commonwealth of Independent States

8| Cemen t In d ustry Re p ort, D e ce mbe r 11,’08 Me riste m Re se arch

However, it is expected that the rate of consumption expenditure in China will

Saudi Arabia 900

South Africa 280

Source: Meristem Research

In the US, the market is expected to benefit from a recovery in residential

9| Cemen t In d ustry Re p ort, D e ce mbe r 11,’08 Me riste m Re se arch

Fig 10: Distribution of major global

Source: Meristem Research

10 | Ce me n t I nd u stry Re p ort, D e cembe r 11,’08 Me riste m Re se arch

…but there are serious environmental concerns

11 | Ce me n t I nd u stry Re p ort, D e cembe r 11,’08 Me riste m Re se arch

The • Gross disequilibrium in

12 | Ce me n t I nd u stry Re p ort, D e cembe r 11,’08 Me riste m Re se arch

Gap Analysis: Dis-equilibrium

13 | Ce me n t I nd u stry Re p ort, D e cembe r 11,’08 Me riste m Re se arch

Increased construction activities in Nigeria, buoyed by a relatively stable socio-

Fig 11: Inadequate domestic

Domestic Demand (in mm tonnes)

Source: Meristem Research

14 | Ce me n t I nd u stry Re p ort, D e cembe r 11,’08 Me riste m Re se arch

It is no gainsaying that the level of infrastructural development cannot support

Activities in Upstream & Downstream

15 | Ce me n t I nd u stry Re p ort, D e cembe r 11,’08 Me riste m Re se arch

Source: Company Annual Report & Meristem Research

Demand Drivers and Cycles of Local Demand