Building materials sector: What to expect from full year results

Building materials sector operated on a better foundation for earnings performance in 2015 than the companies experienced in the preceding year. Like paints companies, the performance of the operators here reflects the state of the real estate and construction industries. Building and construction activities have slowed down in reflection of the general slide in economic activities but still remain better than most other sectors.

The operators here have succeeded in expanding operating capacities in recent years, which involves substantial cost saving. With improved operating capacity, sales revenue is expected to accelerate in the sector generally in 2015 and strong recovery and growth in profit is also expected. The year-on-year profit decline for some of the companies here in the third quarter is expected to change into positive growth at full year.

The strength of the companies in this sector lies in comparatively high profit margins. Some gains in profit margin can be expected in 2015, which will permit a stronger growth in profit than revenue. This is the advantage of local dependence on raw materials, which shields earnings in a situation of considerable exchange rate losses and exchange rate-induced increase in cost of sales.

 Ashakacem

Ashakacem has not been able to achieve a reasonable growth in sales revenue for the past five years running and that remained the operating story for the cement manufacturing company as at the end of the third quarter in 2015. The company has been applying cost saving measures to defend profit, which enabled it to lift profit by 62% in 2014 out of a 2.6% decline in sales revenue. Sales revenue looks likely to decline for the third year in 2015 but the company’s profit defensive strategies may still enable it to push profit up to a new high.

A drop of 15.8% in sales revenue in the third quarter was more than countered by drops of 39.3% in administrative expenses and 45% in interest cost. Some improvement in investment income also countered an increase of 25% in selling and distribution expenses during the period.

A successful balancing of costs and incomes is the summary of the company’s operating story at the end of the third quarter of 2015. This enabled the company to defend profit margin at 25.4%, sales revenue and profit went down at virtually equal pace. Based on the third quarter growth rate however, net profit is expected to grow by about 14% to a new peak for Ashakacem at full year.

CCNN

CCNN hasn’t been able to improve sales revenue since 2013 and its turnover figure in 2014 was exactly the figure it posted in 2012. Sales revenue has been hovering at a little above N15 billion since 2012 and it is expected to remain in that region at the end of 2015. A decline of 6.3% in turnover at the end of the third quarter is however expected to step up to a marginal improvement at full year.

The company grew its profit for the second year in 2014 despite a marginal decline in revenue and a further improvement looks likely in 2015. The company has not been able to match its profit peak of N2.30 billion in 2011 but shows some good prospects for doing so in 2015. Its after tax profit was down by 4.8% at the end of the third quarter but the full year outlook indicates a likely growth of 25%. Net profit margin is reasonably improved from 12.7% in the 2014 full year to 14.3% in the third quarter.

Dangote Cement

Dangote Cement Company experienced a year of strong earnings growth in 2015 in which sales revenue accelerated and profit is expected to rise from a drop in 2014 to a new high. The cement manufacturing company has maintained a record of strong growth in profit until 2014 when sales revenue was flat and profit dropped by about 21%. It is headed for a strong recovery in profit in 2015 with the third quarter profit almost at par with the full year figure in 2014.

Sales revenue grew by about 18% year-on-year at the end of the third quarter and an increase of 25% to about N490 billion is estimated for Dangote Cement at the end of 2015. This will be a much accelerated growth compared with a marginal increase of 1.7% in the preceding year. Major growths in finance and other incomes have helped to reinforce the accelerated growth in turnover in the 2015 interims.

The profit drop in 2014 followed a loss of profit margin, which was caused by a slowdown in sales revenue and an increase in cost of sales. By the third quarter report for 2015, the company has regained its profit margin following accelerated growth in sales revenue, a moderation in cost of sales and a big increase in interest income. Net profit margin was up from 40.7% at the end of 2014 to 43.2% at the end of the third quarter.

The company’ after tax profit of N158 billion at the end of the third quarter is almost at par with the full year figure of N159.5 billion at the end of 2014. A full year growth of well over 30% in after tax profit to a new peak is expected for Dangote Cement at the end of 2015.

Lafarge Africa

Lafarge Africa ended the preceding financial year’s consolidated operations with a marginal decline in sales revenue and a 43% drop in net profit. The company concluded the consolidation process in the acquisition of majority shares in Ashakacem in 2014 with a broken profit capacity. Profit capacity remained weak last year with a decline of 6.2% year-on-year at the end of the third quarter but the full year outlook is promising a rebound. Some major rising costs still pose a problem and could choke profit performance at the end of the year.

The prospects for some profit improvement in 2015 are brightened by improving sales revenue against a marginal decline in 2014 and a drop of 36% in interest expenses at the end of the third quarter. Contenting forces that are undermining the company’s profit capacity are equally strong. These include increases of 9% in cost of sales and 16% in administrative expenses – which led to a drop of 12% in operating income at the end of the third quarter. A drop of 45% in finance and investment income also undermined profit performance during the period.

Profit margin declined from 19.7% in the same period in 2014 to 17.6% at the end of September 2015. If the current revenue growth rate and the third quarter profit margin are maintained, an 11% improvement in after tax profit may be possible for Lafarge Africa at the end of 2015.