RMB Cement Initiation

RMB Nigeria Stockbrokers
Initiating Coverage
29 January 2018 Equity Research | CEEMEA | Nigeria | Construction and Materials
Nigeria Cement: Turning the corner Gbenga Sholotan
gbenga.sholotan@rmbstockbrokers.com.ng
Initiating coverage with a positive sector outlook: In this report, we present coverage of
Nigeria's cement sector, the largest cement market in sub-Saharan Africa, with a positive +234 1 463-7101
outlook. We think 2018e could be the beginning of the next growth cycle for cement
consumption in Nigeria (Figure 1). Our view is supported by Nigeria’s improving macro
fundamentals following macro headwinds in 2016/17 which impacted cement demand. We Company Rating TP (NGN)
estimate the next five-year cement volume CAGR at 12% (2012 -2017 : 1%) (Figure 3), based Dangote Cement OW 271
on our modified cement-GDP multiplier model (Figure 2). On a stock level, we initiate coverage Lafarge Africa UW 49
on the two largest cement names in Nigeria – Dangote Cement Overweight (OW, target price Dangote Cement
(TP): N271) and Lafarge Africa Underweight (UW, TP: N49). Key metrics FY16A FY17e FY18e
P/E (x) 22.9 17.8 15.3
EPS growth 4% 29% 16%
Double-digit sector volume and earnings growth are sustainable: In our view, Nigeria’s
EV/EBITDA (x) 18.0 11.9 10.8
cement sector is set to turn a corner in 2018e, with sector volume growth coming in at about EBITDA margin 42% 48% 47%
7% y/y to 20.4mt (2017e: 19.1mt, -16% y/y) (Figure 3). Beyond 2018e, we forecast sector EV/IC (x) 3.4 3.3 3.2
volume growth to average 11% y/y over 2019e-23e. On an earnings basis, we forecast sector ROIC - WACC
2018e earnings growth of +16% y/y (Figure 11), moderating to a CAGR of 12% (EBITDA) and (excess return) -2% 4% 4%
15% (EPS) over a five-year period – albeit at double digits. We see potential recovery in GDP Lafarge Africa
growth, easing inflation, expected interest rate easing, improved oil price and production as well Key metrics FY16A FY17e FY18e
as renewed focus on infrastructure, by the government, as supportive of our view. P/E (x) n/a 18.4 16.5
EPS growth n/a 46% 12%
EV/EBITDA (x) 22.8 11.5 9.0
Strong investment case hinged on infrastructure deficit: We estimate concrete roads and
EBITDA margin 13.2% 20.0% 23.5%
public-sector housing spend could unlock up to 53mt (Figure 7) and 24mt (Figure 41) of cement EV/IC (x) 1.8 1.2 1.1
demand, respectively, by 2020e. The planned recapitalisation of the Federal Mortgage Bank of ROIC - WACC
Nigeria to N500bn (from N2.5bn) could lead to a vibrant mortgage market improving Nigeria’s (excess return) -15% -8% -8%
Source: RMBNS
home ownership rate beyond the 25% (Figure 42), serving to boost cement sales. Furthermore,
Valuation date as at 26.01.2018
the structural upsides of Nigeria’s infrastructure deficit (US$3 trillion annually for 30 years),
improving government capex commitments (75% Implementation in 2016) and ongoing public-
private partnership Infrastructure financing initiatives are positives for cement demand.
2018e cement prices could decline by c12%. We also see some method in the
“madness”: Our cement price-free cash flow parity sensitivity model (Figures 19 and 20)
suggests Nigeria’s cement prices are more inclined for a cut (-12%), in 2018e (2017e: +58%
y/y), than an increase. The likelihood of BUA’s 3mt p.a. OBU II plant starting operations in 2018
further supports our view, given that historically, some price cuts have been implemented in the
sector when smaller players announce new capacity (Figure 23). Our price assumptions,
RMB Nigeria Stockbrokers (RMBNS) is a
however, remain unchanged over 2017e levels and have provided sensitivity analysis to member of the Nigerian Stock Exchange
highlight the risks to our estimates. (“NSE”). RMBNS does and seeks to do
business with companies covered in
Dangote Cement (OW, TP: N271) – Our preferred pick: We like that Dangote Cement’s 2018e
RMBNS Research. Investors should
cement volume could come in at 11% y/y (-c17% y/y; 2017e) to 24.5mt, with 2018e FCF growth consider RMBNS Research as only a single
robust at 55% y/y (N296bn), implying attractive FCF yield of 7%, on moderate capex needs. We factor in making their investment decision as
see EBITDA margin resilient at 47% going forward, EBITDA up 11% y/y in 2018e (EPS: 17%), this does not constitute advice. For analyst
helped by gains from the Pan-African operation (+c350 bps in 2018e to c22%). On our estimates, certification and other important
the stock is trading on a 2018e EV/EBITDA of 10.8x compared with Asian (11.0x) and Middle disclosures, refer to the Disclosure
Eastern (11.1x) peers obtained from Bloomberg. Our fair value implies an EV/EBITDA multiple of Section, located at the end of this report
11.2x. It is our view that higher-than-anticipated volumes and margins are supportive catalysts.
Please see the last page for the disclaimer 1

Table of Contents
Executive Summary ................................................................................................................................................................... 3
RMBNS research coverage ....................................................................................................................................................... 7
Valuation methodology............................................................................................................................................................. 10
Key sector assumptions ........................................................................................................................................................... 15
Pricing outlook: Our FCF margin parity model favours a 12% price cut in 2018e .................................................................... 16
Sector risks .............................................................................................................................................................................. 18
Sector Investment thesis .......................................................................................................................................................... 20
Dangote Cement: Initiate at OW, N271 TP .............................................................................................................................. 29
Lafarge Africa: Initiate with an UW, N49 TP ............................................................................................................................. 47
Appendix 1: Market structure ................................................................................................................................................... 59
Appendix 2: RMBNS Cement-GDP multiplier .......................................................................................................................... 61
Appendix 3: Market share and competition .............................................................................................................................. 62
Appendix 4: Pricing .................................................................................................................................................................. 63
Appendix 5: Cost structure ....................................................................................................................................................... 65
Appendix 6: Dangote Cement .................................................................................................................................................. 67
Appendix 6a: Financial statement ............................................................................................................................................ 67
Appendix 6b: Production costs profile ...................................................................................................................................... 69
Appendix 7: Lafarge Africa ....................................................................................................................................................... 70
Appendix 7a: Financial statement ............................................................................................................................................ 70
Appendix 7b: Shareholding structure ....................................................................................................................................... 72
RMB Nigeria Stockbrokers 29 January 2018 2

Executive Summary
In this report, we initiate coverage on Nigeria's cement sector, the largest cement market in sub-
Sahara Africa (SSA) with a positive view. On a stock level, we initiate coverage on Dangote
Cement (Overweight, TP: 271) and Lafarge Africa (UW, TP: N49). Together, these companies
account for 32% of Nigeria’s equity market capitalisation (26.01.18) and 90% of Nigeria’s cement
consumption, according to RMB Nigeria Stockbrokers’ (RMBNS) 2018e estimates.
In our view, 2018e could be the beginning of the next, double-digit, five-year growth cycle for
cement consumption in Nigeria (Figure 1). We believe that Nigeria’s improving macro
fundamentals and the government’s renewed focus on infrastructure are supportive of our view.
We estimate Nigeria’s next five-year (2018e-23e) cement consumption CAGR could come in at
12%, based on our modified cement-GDP multiplier model (Figure 2 and 3).
Figure 1: Nigeria’s cement consumption and GDP growth
14% 2018e -
2006 - 2011, 2023e, 12%
12% 2000 - 2005, 11%
10%
10%
8%
6%
4% 2012 -
2% 2017, 1%
0%
2000 - 2005 2006 - 2011 2012 - 2017 2018e - 2023e
Cement consumption, CAGR Average real GDP growth
Source: World Bank, RMB Africa Research, RMBNS analysis
In the short term, we forecast 2018e cement consumption growth at c7% y/y – a rebound from the-
c16% decline in 2017e (Figure 3). In our view, Nigeria’s cement sector is set for a period of
sustained volume growth, following the country’s exit from a recession.
Figure 2: Cement-GDP multiplier assumptions Figure 3: Cement consumption — Nigeria
15 30.0 Manufactured imported Y/y growth (RHS)

25%
20%
25.0
5 15%
20.0 10%
-5 Dangcem GDP multiplier (x) 5%
15.0
0%
Nigeria's GDP multiplier (x)
-15 10.0 -5%
GDP growth (%)
-10%
Lafarge Africa GDP multiplier (x) 5.0
-25 -15%
2010
2011
2012
2013
2014
2015
2016
2017e
2018e
2019e
2020e
- -20%
2007
2011
2014
2018e
2008
2009
2010
2012
2013
2015
2016
2017e
2019e
2020e
Source: Company data, RMBNS


We find Nigeria’s acute infrastructure gap to be a sustainable demand point for cement
consumption in the country. In addressing this gap, we like the current government’s public-private
partnership (PPP) financing approach, as we recognise the government cannot sufficiently fund
the gap. To put this funding gap into context, Nigeria’s debt office estimates the country’s annual
infrastructure need at US$3 trillion over the next 30 years, compared with current infrastructure stock
of 35% of GDP, (The Point, Nigeria’s infrastructure stock, put at 35% of GDP, worries DMO, 19
December, 2017), and a 2018e capex budget of c.US$7bn.
The National Planning Commission estimates the current infrastructure funding structure at 50:50
between the government and private sector, further making a case for the PPP arrangement. As
such, we believe the PPP arrangement is a more sustainable approach to infrastructure financing
going forward – and, by inference, supportive of cement consumption.
Some identified PPP projects that we believe would positively impact Nigeria’s cement consumption
include:
 The planned Apapa-Wharf toll gate in Lagos (Lagos state government/private investors) in
exchange for tax credits.
 The Bonny-Bodo Road (Federal government and Nigeria LNG Ltd).
 The N100bn Sukuk bond for the development of 25 roads (PPP).
 The Road Trust Collective Investment Scheme (RTCIS). The RTCIS will leverage off private
capital to build and maintain roads, with key focus on industrial clusters and federal roads in
exchange for tax credits.
Furthermore, we like that the current government has shown appreciable commitment to closing
Nigeria’s infrastructure gap, evidenced by improved capex implementation (75%) and spend
(N1.2 trillion) in 2016 (Figure 4). About N500bn has been set aside in the 2018 budget for targeted
infrastructure projects ranging from housing, bridges and roads. We also like that the government has
plans to recapitalise the nation’s federal mortgage bank to N500bn (from N2.5bn) by 2020e. We
believe this has the potential to lower mortgage finance costs and improve home ownership in Nigeria
beyond the current 25%.
Figure 4: Nigeria’s capex and implementation
80% Capex to budget 1.4

Capex implemetation
Capex spend -Actual (NGN, trn) - RHS 1.2
60%
1.0
0.8
40%
0.6
0.4
20%
0.2
0% -
2017e
2008
2009
2010
2011
2012
2013
2014
2015
2016
Source: Budget Office, RMBNS

Nigeria’s housing deficit (17 million units) is a low-hanging fruit for cement consumption, in
our view. That the home ownership rate – at 25% – is considered one of the lowest in Africa, makes
this a more compelling argument.
We estimate that an additional two million housing units by 2020e from the public sector alone (as
highlighted in the economic recovery plan), will unlock about 20-24 million tonnes (mt) of cement
over 2018e-2020e.
Based on our field trip in Lagos, we see a number of private-sector residential projects in infancy
stage. A notable residential project is the recently reclaimed 150-hectare Orange County Island
(Figure 5) and Periwinkle Estate (Figure 6), in Lekki Lagos. This Orange County Island is a JV
between the between Orange Island Development Company and the Lagos State Government and
will involve construction of a 1km land bridge. We believe this will support improved cement
demand.
Figure 5: Orange County Island aerial map
Source: Orange County Island
Figure 6: Periwinkle Estate aerial map
Source: Periwinkle Estate

Beyond housing, we see the emerging concrete road market as a potential source of increased
cement consumption. We estimate that concrete roads could unlock a latent cement demand of
up to 53mt, assuming that 40% of Nigeria’s unpaved roads are paved with cement and operate as
concrete roads (Figure 7).
Pilot cases for concrete roads in Nigeria: In Nigeria, we have seen renewed interest in investment
in concrete paved roads, with a few pilot cases underway or about to be executed. During the last
year, some of these are:
 The 24km Itori-Ibese concrete road by Dangote Industries Limited in Ogun State.
 Ijora-Apapa Wharf Road in Lagos State, using cement concrete, by Dangote Industries
Limited.
 The 42km Obajana-Kabba Road in Kogi State by Dangote Industries Limited.
 The 8km concrete road in Maiganga, Gombe State by Ashaka Cement
 The 7.5km UNICEM evacuation road in Calabar by Lafarge Africa
 The 20km Oban Road linking Calabar to Cameroun Road at the Mfamosing plant.
Figure 7: Potential cement demand (mt) for concrete roads
90
80
70
60
50
40
30
20
10
-
30%
45%
60%
10%
15%
20%
25%
35%
40%
50%
55%
65%
5%
Source: Channel checks, RMBNS
In our opinion, Nigeria’s cement consumption per capita of 104kg is sub-optimal for an economy
of its size and sub-optimal relative to EM peers and traditionally-favoured African investment
destinations (Figure 8). This supports our argument for a structural upside for cement consumption.
For Nigeria to attain South Africa’s 234kg-per-capita consumption, our estimates show that Nigeria
would have to consume 52mt of cement compared with the 36mt we forecast for 2023e.
However, we acknowledge that in most cases, a higher cement consumption per capita is often
reflective of higher income levels (GDP per capita). (Figure 9). Consequently, as Nigeria's
economic prosperity continues to improve, we expect cement consumption to increase.

Figure 8: Per-capita consumption of countries with GDP per Figure 9: Per capita data - select EM and Frontier markets
capita>=US$1,500
800 Per capita consumption (Kg) - RHS 12
6,000 GDP per capita, USD - LHS 400
Consumption per capita (Kg) 2016 GDP per capita (US$ '000) -LHS 10
5,000 Consumption per capita (Kg) 600
300 8
4,000
400 6
3,000 200
4
2,000 200
100 2
1,000
0 0
South africa
Mexico
Ethiopia
Turkey
Thailand
India
Nigeria
Egypt
Brazil
Pakistan
Sudan
Kenya
Philippines
- 0
Senegal
Tanzania
SSA
Zambia
Ghana
Sierra Leone
Ethiopia
Cameroun
Congo
Nigeria
South Africa
Source: World Bank, RMBNS Source: IFC, World Bank, RMBNS
RMBNS research coverage

Dangote Cement (OW, TP: N271) – Top pick
We initiate coverage on Dangote Cement with an Overweight rating and a target price of
N271 based on our five-year discounted cash flow (DCF) valuation.
Dangote Cement is Nigeria’s largest cement producer, with a 67% (2018e) market share and
cement operations in ten African countries, with an installed capacity of 45.6mt p.a. (Nigeria:
29.3mt).
On our numbers, the stock is trading on 2018e EV/EBITDA of 10.8x, a slight discount to
Asian (11.0x) and Middle Eastern (11.1x) peers. Our fair value multiple implies an
EV/EBITDA of 11.2x.
We envisage Dangote Cement is moving towards market consolidation and efficiency

optimisation strategy, after having invested more than US$8bn in cement plant capex,
energy and logistics over the last decade in its Nigerian and Pan-African operations. Hence
we see lower levels of growth capex – of c.US$1bn – relative to historical levels over 2018e-
23e from two grinding plants in Ghana and Cote D’Ivoire and a 2.5mt additional integrated
capacity in Ethiopia.
On this basis, we forecast Dangote Cement’s FCF to remain robust at N190bn (2017e),
improving to N296bn in 2018e. Our FCF estimate implies a FCF yield of 7%, in 2018e, averaging
10% over 2018e-2023e. Our CFO margin for 2018e is 41%.
We prefer to view Dangote Cement's low utilisation rate of c44% in Nigeria from a positive
perspective: the excess capacity offers Dangote Cement market protection via a high entry
barrier and strong pricing power and implies limited investment in growth capex in Nigeria
until 2020e (our estimate).

We like that the Pan-Africa EBITDA margin is improving and we forecast a further 350 bp margin
expansion in 2018e to c22% – mainly from improvements we see from Tanzania and Congo. We
assume an EBITDA margin of 10% for Tanzania in 2018e, when we expect its energy challenges
to be sorted and improving to 30% in 2019e, as production ramps up. We anticipate that Congo
could also come out of start-up losses in 2018e, delivering an EBITDA margin of 10% in 2018e.
Overall, we expect double-digit annual volume growth for Dangote Cement in 2018e
(+11% y/y), with a CAGR of 10% over 2019e-2023e. In the short term, we forecast c7% y/y
volume growth for Nigeria in 2018e, to 13.6mt, as economic prosperity resumes in the
country. Our expectation is for a 14% y/y volume growth for the Pan-African operations in
2018e, driven primarily by the improved volumes we see from Tanzania and Sierra Leone.
On our estimates, group earnings could more than double to N34/share in 2023e (2018e:
N15/share) with strong EBITDA CAGR of 12% over 2018e-23e. Unlike the 2017e EPS
growth of +29% y/y, helped by price increases, our EPS growth going forward is informed
mostly by volumes.
Key catalysts we see include a higher-than-expected i) margin expectation, ii) improved

cement price and volumes in Nigeria and margin re-rating from the Pan-Africa operation.
Key risks include energy risks, geopolitical risks and currency risks. We provide sensitivity
analysis to quantify the impact of these variables on our earnings and valuation.
Lafarge Africa (UW, TP: N49)

We initiate coverage on Lafarge Africa with an Underweight (UW) rating and a target price
of N49 based on our five year DCF valuation. Lafarge Africa is Nigeria’s second-largest
cement producer, with a market share of 25%. The company has an installed cement capacity
of 14.1mt (Nigeria: 10.5mt p.a.).
Our valuation has incorporated the additional 3.1 billion shares from the equity rights issue of
December 2017.
Our UW rating further reflects our view of the following:
 We see negative “excess return” of -8% (ROIC less WACC) for Lafarge Africa,
implying that growth adds no value. We would actually like to see an improvement in
Lafarge Africa’s ROIC to at least match its WACC for the stock to re-rate. We believe
the South African operation’s performance would have to improve significantly to for
ROIC to match WACC. Another option we see for ROIC to match WACC would be
divestment from a non-performing asset, the SA operation. However, we do not
see divestment as an immediate option for management, considering that the SA
business was only consolidated with the Nigerian operation in 2015. Hence our
underweight rating.
 Potential operational plant downtime from ageing plants and continued unfavourable
market dynamics in South Africa.
 Limited guidance on capex plans going forward, which increases cash flow forecast
and valuation risks.

From a catalyst perspective, we struggle to see a meaningful catalyst to support share-price
re-rating over the next 12 months – except for EBITDA-margin re-rating from the South Africa
(SA) operations, which is also prone to high risk.
Our analysis shows that a sustainable EBITDA margin of 15% for SA (2012: 22%, 2016: 4%,
9M 17:-5%), over 2018e-2023e, could add N130bn (N15/share) to our valuation (Figure 99).
Similarly, a 25% EBITDA margin from SA in 2018e could add N26bn to our NPV, implying
accretion of N3/share (Figure 98).
On a valuation basis, Lafarge Africa is trading on a 2018e P/E of 16.3x, on our estimates, a
premium to Dangote Cement’s 15.3x.
Lafarge Africa is currently restructuring its capital base through the N132bn equity rights
issue. We estimate this could lead to an improved net debt/equity ratio of 0.7x by 2018e
(2017e: 1.2x), resulting from pay down of the US$343m quasi-equity.
On a group basis, we model 2018e EBITDA margin improvement of 350bp, to 23.5%, attributing
150bp of this improvement to the SA operation.
On our estimates, Lafarge Africa’s group cement volumes could come in at +6% y/y in 2018e to
6.4mt, with Nigeria (+c8%% y/y, 2017e:-17%) and South Africa (SA) (+3% y/y, 2017e:-23%). We
estimate Nigeria’s 2018e cement volume at 4.8mt in 2018e (46% utilisation) and SA’s at 1.6mt
(45% utilisation).
We see five-year EBITDA and earnings CAGR of 11% y/y, and c18% y/y over 2018e-23e
Key risks include operational shutdowns from ageing Nigerian plants as well as volume and
margin underperformance, relative to our forecasts, from the SA operation.

Sector valuation
Valuation methodology
We value both Dangote Cement and Lafarge Africa with a five-year (2018e-2023e) discounted cash
flow model.
The main assumptions underlying our DCF valuation include:
 A long-term growth rate of 12%, reflective of our view of a long-term real GDP growth of 3%
and inflation of 9%.
 Beta of 0.9 and 1.3 for Lafarge Africa and Dangote cement respectively (Bloomberg).
 A discount rate of 14.0%, reflective of our view on the long-term yield on a 10-year Nigerian
government pager.
 Equity risk premium (ERP) of 6.5% for Dangote Cement and 7.5% for Lafarge Africa. The
100bp add-on to Lafarge Africa’s ERP represents our view on the difference in disclosure
between the two companies.
We set our discount rate at 14%

Following the decline in yields of Nigerian government bond (Figure 10), consensus
expectation of rate easing in 2018, and a steady decline in Nigeria’s headline inflation, we set
our equity discount rate at 14%.
To put the relationship between yields and the Nigerian equities market into perspective, from
September 2017 when the first material yield decline was noticed (-90 bps) to 24 Jan 2018,
Nigeria’s equity market has re-rated considerably, appreciating 26% over the period. We
believe this implies a re-balancing of portfolio by investors.
Figure 10: Bond yield and Nigeria equity performance
49,000 Nigeian All Share Index Yield (%) of 2027 Nigeria govt. bond, RHS 18.0
44,000 17.0
16.0
39,000
15.0
34,000
14.0
29,000 13.0
24,000 12.0
Jul-17
Jun-17
Nov-17
Dec-17
Jan-18
Apr-17
Aug-17
Sep-17
Oct-17
Mar-17
May-17
Source: Bloomberg

A tale of two stocks
Both Dangote Cement and Lafarge Africa have been subject to cyclical downturns – especially in
2016/2017e, when Nigeria’s cement demand collapsed c17% y/y, no thanks to subdued economic
activities, the rescheduling of government infrastructure projects due to weak public finances, a
weak oil price and currency and high interest rates, among others. Our current fair value assumes
an improving macroeconomic situation for Nigeria, which we believe will be supportive of both
private and public-sector investments.
Our fair-value estimate for Dangote Cement is N271/share with an Overweight (OW) rating. We
value Lafarge Africa at N49/share and initiate coverage with an Underweight (UW) rating.
Our fair-value estimates imply a one-year forward EV/EBITDA of 9.6x and 8.0x for Dangote
Cement and Lafarge Africa respectively (Figure 11).
Figure 11: RMBNS sector valuation (26.01.2018)
PE (x) EPS grow th EV/EBITDA (x) EV/IC (x) ROIC

TP
Stock (NGN) Rating 2016A 2017e 2018e 2016A 2017e 2018e 2016A 2017e 2018e 2016A 2017e 2018e 2018e
Dangote Cement 271 OW 22.9 17.8 15.3 4% 29% 16% 18.0 11.9 10.8 3.4 3.3 3.2 24%
Lafarge Africa 49 UW n/a 18.4 16.5 n/a 46% 12% 22.8 11.5 9.0 1.8 1.2 1.1 10%
Average 22.9 18.1 15.9 4% 38% 14% 20.4 11.7 9.9 2.6 2.3 2.2 17%
Weighted avg. n/a 17.8 15.4 n/a 31% 16% 18.5 11.9 10.6 3.2 3.1 3.0 23%
EBITDA EPS Sales ROIC -

EBITDA m argin EV/Capacity ($/ (m t)) EV/Output ($/ (m t)) CAGR CAGR CAGR WAC
TP 18e- 18e-
Stock (NGN) Rating 2016A 2017e 2018e 2016A 2017e 2018e 2016A 2017e 2018e 18e-23e 23e 23e 2018e
Dangote Cement 271 OW 42% 48% 47% 285 282 282 551 577 524 12% 15% 12% 4%
Lafarge Africa 49 UW 13% 20% 23% 159 159 159 253 309 287 11% 17% 10% (8%)
Average 28% 34% 35% 222 221 221 402 443 405 11% 16% 11% (2%)
Weighted avg. 39% 46% 45% 274 271 271 523 552 502 12% 15% 12% 3%
Dangote Cement deserves to trade at a premium to GEM

It is our view that Dangote Cement should be trading at a premium to these peers based on superior
margin profile and growth prospects. On our estimates, Dangote Cement is trading on a 2018e
P/E of 15.3x, at a discount of 24% to GEM peers’ c21x (c17x peer median) and a slight premium of
9% to GEM peers’ 10.2x 2018e EV/EBITDA of 11.1x. (Figure 12). However, our implied fair value
EV/EBITDA multiple of 11.2x is broadly in line with the 11.1x Middle Eastern peers are trading on,
and the 11.0x of Asian peers obtained from Bloomberg (Figure 14).
We particularly like that Dangote Cement's multiple expansion has been driven by improved
fundamentals – sustainable earnings growth and margin re-rating, a 51% EBITDA growth and a
650bp EBITDA margin expansion in 2017e. We expect further EBITDA growth of 11% and 12% y/y
in 2018e and 2019e respectively, and a resilient 47% EBITDA margin profile over our forecast
horizon. We also believe that the high level of infrastructure underinvestment in key African markets
where Dangote Cement has operations, evidenced by low infrastructure stock is supportive of our
view.

Similarly, on a EV/sales basis, the stock appears to be trading at a premium to peers – this is
however justified by the superior EBITDA margin profile we forecast for the company going forward
(Figure 13).
Figure 12: 2018e EV/EBITDA valuation Figure 13: 2018e EV/sales valuation
11.5 6.0
Middle East
Dangote Asia Middle
5.0 Africa ex- East
Cement Dangote
(x)
2018e EV/EBITDA
10.5 Asia Nigeria

South Cement
2018e EV/Sales (x)

4.0
America
GEM Africa Global
9.5 3.0
Lafarge
Africa Africa ex- 2.0 Europe South
8.5 Africa Global Nigeria Ameria
1.0 Lafarge GEM
Europe Africa
0.0
7.5
20.0 30.0 40.0 50.0 60.0 70.0
7.0 12.0 17.0 22.0 27.0
EBITDA margin (%)
2019e EBITDA growth
Source: Bloomberg, RMBNS Source: Bloomberg, RMBNS
Figure 14: Regional EV/EBITDA multiple
Asia Middle East DCF valuation

2018e EV/EBITDA (x) 11.1 11.2
2018e EBITDA - Nig (NGN, bn) 376 376
2018e EBITDA - Pan-Africa (NGN, bn) 67 67
2018e EBITDA 430 430 430
EV (NGN, bn) 4,760 4,797 4,810

Net debt (NGN, bn) (198) (198) (198)
Fair equity mkt value (NGN, bn) 4,562 4,599 4,612
No of shares outstanding (bn) 17 17 17
EV based TP (NGN) 268 270 271
Implied fair EV/EBITDA (x) 11.1 11.2 11.2
Source: Bloomberg, RMBNS’ estimates and analysis
Lafarge Africa’s valuation is relatively rich

On the other hand, Lafarge Africa is trading on a 2018e P/E of 16.3x, on our estimates, in-line with
its peak multiple over the last 5 years, compared with the 15.3x Dangote Cement is currently trading
on.
In our view, Lafarge Africa’s P/E multiple is unjustified as we don’t believe Dangote Cement’s
earnings multiple should be trading at a discount to Lafarge Africa’s especially given the differences
in operational efficiencies and margin performance.
Our analysis shows there is a structural downside shift in Lafarge Africa’s valuation over the
last year (Figures 15), touching new lows. We suspect that these new trough valuation levels are
the “price of risk” the market has attached to the stock from the company’s exposure to c.US$600m
USD-denominated loans, operational challenges and an unimpressive South Africa operation.

Figure 15: 1-year forward P/E multiple
40.0 18.0
15.0
30.0
12.0
20.0 9.0
6.0
10.0
3.0
Lafarge Africa, LHS Dangote Cement
- -
Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18
Source: Bloomberg, RMBNS
Relative valuation
Figure 16: Summary of relative valuation by region (26.01.2018)
3 year 2017e 2019e EBITDA

2017e 2018e EPS EV/EBIT 2018e EBITDA 2018e EBITDA m argin next
Regions P/E (x) P/E (x) CAGR (%) DA EV/EBITDA grow th (%) EV/Sales m argin (%) 3 years ROE (%)
Global 23.1 13.9 22.6 10.4 8.6 15.6 2.4 22.1 22.1 10.1
Africa 26.1 13.2 24.4 10.0 8.6 12.6 2.5 39.9 30.1 9.5
Africa ex-Nigeria 37.1 12.5 29.3 10.4 8.5 21.4 2.5 48.7 30.9 0.7
Asia 23.1 18.4 18.5 13.3 11.0 15.6 2.3 19.6 20.7 10.1
Europe 16.5 12.6 22.6 9.3 8.1 14.7 1.8 20.0 21.9 11.5
Middle East 21.3 20.8 n/a 12.0 11.1 7.7 5.4 50.9 62.7 14.4
South America 43.8 23.8 29.1 12.0 10.2 17.0 2.4 22.1 22.1 6.4
Nigeria 15.2 13.9 19.4 9.6 8.6 3.8 2.5 31.0 29.3 18.3
GEM 26.1 20.8 26.7 12.0 10.2 12.6 2.5 39.9 30.1 9.5
Dangote Cement 18.4 15.9 15.4 12.3 11.1 12.5 4.5 47.0 46.9 27.6
Lafarge Africa 18.4 16.5 23.4 11.5 9.0 11.6 1.7 23.5 22.1 6.1

Figure 17: Relative valuation (26.01.2018)
3 year EPS EBITDA EV/Sales EBITDA m argin

P/E (x) CAGR (%) EV/EBITDA (x) grow th (%) (x) (%)
Continent Country Cem ent com panies 2017e 2018e 2017e 2018e 2019e 2018e 2018e 3 yr avg. ROE (%) ROIC (%)
Africa NIGERIA Dangcem 18.4 15.9 15.4 12.3 11.1 12.5 4.5 47.0 46.9 27.6 25.6
Africa NIGERIA CCNN 9 9.4 n/a 5.0 5.7 -12.8 1.2 22.5 19 21.2 5.8
Africa NIGERIA Lafarge Africa 18 16.5 23.4 11.5 9.0 11.6 1.7 23.5 22 6.1 8.2
Mean 15.2 13.9 19.4 9.6 8.6 3.8 2.5 31.0 29.3 18.3 13.2
Median 18.4 15.9 19.4 11.5 9.0 11.6 1.7 23.5 22.1 21.2 8.2
Africa SOUTH AFRICA PPC Ltd 21 14.1 n/a 8.8 6.5 21.2 1.5 19.7 n/a 4 2.0
Africa EGYPT Misr Cement Co 85 7.6 29.3 7.3 5.3 37.5 1.3 n/a n/a n/a n/a
Africa MOROCCO Ciments du Maroc 26 25.3 n/a 12.9 12.6 2.0 5.9 77.8 54 -1 16.8
Africa KENYA Bamburi Cement Co Ltd 16 15.4 n/a 7.6 7.3 4.3 1.5 n/a 21 18 15.5
Africa KENYA ARM Cement Ltd n/a - n/a 15.3 10.8 41.9 2.1 n/a 18 -18 n/a
Mean 37.1 12.5 29.3 10.4 8.5 21.4 2.5 48.7 30.9 0.7 11.5
Median 23.5 14.1 29.3 8.8 7.3 21.2 1.5 48.7 20.7 1.5 15.5
Asia INDIA Ambuja Cements Ltd 35.5 27.9 23.4 14.9 11.8 25.7 2.0 15.5 17 8 6.2
Asia INDONESIA Indocement Tunggal Prakarsa Tb 38.0 31.4 21.2 22.1 18.7 18.6 4.6 19.9 33 9 7.7
Asia INDIA ACC Ltd 35.8 28.3 29.2 19.0 14.6 30.1 2.1 13.0 13 7 6.7
Asia CHINA Huaxin Cement 7.1 6.1 n/a 6.1 5.4 13.7 1.3 n/a 21 13 8.6
Asia INDIA India Cements 19.5 11.9 n/a 9.0 7.2 25.5 1.2 15.2 15 3 4.5
Asia CHINA Anhui Conch Cement 12.8 11.8 7.8 7.3 6.9 4.6 2.4 33.6 31 16 13.3
Asia THAILAND Siam Cement PCL/The 11.3 11.0 n/a 9.1 8.9 2.2 1.7 18.4 18 22 11.0
Asia INDIA Ultratech Cement Ltd 47.3 33.5 38.2 25.8 16.9 31.0 3.6 20.8 20 12 7.5
Asia HONG KONG China Resources Cement Holding 10.6 9.9 12.2 7.4 7.0 5.8 1.8 n/a 21 11 6.8
Asia TAIWAN Taiw an Cement Corp 18.8 14.9 9.6 10.2 9.5 7.1 2.1 21.7 21 6 4.1
Asia TAIWAN Asia Cement Corp 17.3 16.2 6.7 15.0 14.0 7.0 2.8 18.4 17 4 2.2
Mean 23.1 18.4 18.5 13.3 11.0 15.6 2.3 19.6 20.7 10.1 7.2
Median 18.8 14.9 16.7 10.2 9.5 13.7 2.1 18.4 19.6 8.6 6.8
Europe TURKEY Akcansa Cimento AS 17 12 20 7.3 6.6 10.4 1.5 20.2 28 14 15.0
Europe TURKEY Cimsa Cimento Sanayi VE Tica 10 9 21 8.9 7.5 18.5 2.1 23.3 25.2 30.5 8.4
Europe FRANCE Lafarge SA 21 17 26 n/a n/a 12.0 n/a 17.9 21.1 3.2 2.1
Europe GERMANY HeidelbergCement AG 16 13 23 8.9 8.2 9.3 1.6 16.4 17.9 6.5 2.9
Europe GREECE Titan Cement Co SA 29 18 27 9.9 8.9 11.2 1.8 18.2 20.3 -2.7 3.6
Europe ITALY Buzzi Unicem SpA 19 15 26 9.2 8.4 n/a 1.8 n/a 15.4 -2.5 n/a
Europe FRANCE Vicat 20 17 19 9.2 8.6 7.6 1.6 18.1 23.4 6.4 4.4
Europe TURKEY Cimsa Cimento Sanayi VE Tica 10 9 21 8.9 7.5 18.5 2.1 23.3 25.2 30.5 8.4
Europe TURKEY Akcansa Cimento AS 17 12 20 7.3 6.6 10.4 1.5 20.2 18.6 15.9 15.0
Europe TURKEY Adana Cimento Sanayii TAS 7 5 n/a 13.9 10.3 34.4 2.4 21.9 23.9 13.1 n/a
Mean 16.5 12.6 22.6 9.3 8.1 14.7 1.8 20.0 21.9 11.5 7.5
Median 16.9 12.2 21.4 8.9 8.2 11.2 1.8 20.2 22.2 9.8 6.4
Middle East SAUDI ARABIA Southern Province Cement Co 20 17 n/a 14.2 12.5 13.3 6.5 54.8 60 13 11.0
Middle East SAUDI ARABIA Yamamah Saudi Cement Co 27 26 n/a 10.8 10.5 3.1 4.5 46.5 65 n/a n/a
Middle East SAUDI ARABIA Qassim Cement/The 17 20 n/a 11.1 10.4 6.7 5.3 51.5 64 15 14.2
Mean 21.3 20.8 n/a 12.0 11.1 7.7 5.4 50.9 62.7 14.4 12.6
Median 20.1 19.7 n/a 11.1 10.5 6.7 5.3 51.5 63.6 14.4 12.6
North America MEXICO Cemex SAB de CV 14 14 22 8.6 7.9 8.3 1.6 19.7 17 13 7.4
South America COLOMBIA Cementos Argos SA 97 41 n/a 15.8 12.7 24.7 2.4 17.1 18 1 3.5
South America PERU Cementos Pacasmayo SAA 21 16 36 11.7 10.0 17.9 3.2 29.4 31 5 4.6
Mean 43.8 23.8 29.1 12.0 10.2 17.0 2.4 22.1 22.1 6.4 5.2
Median 20.6 16.5 29.1 11.7 10.0 17.9 2.4 19.7 18.4 5.3 4.6
Source: Bloomberg, RMBNS. Only Dangote Cement and Lafarge Africa are covered by RMBNS as at valuation date

Key sector assumptions
Figure 18: Key assumptions
2017e 2018e 2019e 2020e

Cem ent price ('000 NGN/t)
Dangote Cem ent, Group 37 38 38 39
Dangote Cement, Nigeria 43 45 45 45
Dangote Cement, Rest of Africa 28 28 30 32
Lafarge Africa, Group 39 41 41 41

Lafarge Africa, Nigeria 45 46 46 46
Lafarge Africa, South Africa 23 27 26 28
Cem ent price (USD/t)

Dangote Cem ent, Group 113 106 102 98
Dangote Cement, Nigeria 133 127 120 113
Dangote Cement, Rest of Africa 87 80 80 81
Lafarge Africa, Group 121 116 109 104

Lafarge Africa, Nigeria 138 129 122 114
Lafarge Africa, South Africa 72 76 70 70
GDP forecast, Nigeria 2.0% 2.5% 3.0%
Cem ent GDP m ultiplier (x)

Lafarge Africa, Nigeria n/a 3.7 3.7 3.7
Dangote Cement, Nigeria n/a 3.6 3.6 3.6
Currencies vs USD
NGN, Nigeria 323 354 375 399
ZAR, South Africa 13 13 13 13
CDF, Congo 1,607 2,063 2,393 2,393
GHS, Ghana 4 4 5 5
TZS, Tanzania 2,237 2,237 2,196 2,213
ZMW, Zambia 10 10 10 10
XOF, Senegal 581 578 568 558
SLL, Siera Leone 7,652 8,923 8,923 8,923
ETB, Ethiopia 27 28 30 31
XFA, Cameroon 554 563 561 549
XOF, Cote D'Ivoire 554 563 561 549
Capex, USD/t
Greenfield (Integrated), Nigeria 150 150 150 150
Greenfield (Integrated) , outside Nigeria 200 200 200 200
Brow nfield (Integrated) 100 100 100 100
Grinding plant 66 66 66 66
Project delivery, turnkey (m onths) 24
Population grow th, Nigeria 2.6% 2.6% 2.6% 2.6%

Source: EIU, RMB Research, RMBNS

Pricing outlook: Our FCF margin parity model
favours a 12% price cut in 2018e
Based on our analysis, we find that Nigeria’s cement prices are more inclined to decline than
increase in 2018e, based on our FCF margin parity model (Figures 19 and 20). We estimate
that Dangote Cement, the sector price setter, could cut cement prices in Nigeria by 12% in 2018e,
and still maintain a free cash flow (FCF) margin at a peak level of 29% as it was over 2011-2017e.
We have, however, kept our cement price estimate for Nigeria unchanged over our forecast horizon.
On the other hand, our EBITDA margin parity model, however, suggests that prices should increase
+35% y/y in 2018e to maintain EBITDA margin at mean levels over 2011-2017). We, however,
discount the findings of our EBITDA margin parity model, as we consider the results impractical.
Management of Dangote Cement, the sector’s price-setter, had disclosed that the company’s
strategy is profitability over volumes, with a focus on maintaining cash flow. This was followed
through in 2017e, leading to an average 58% y/y increase in cement prices in 2017e.
We take cash flow to mean free cash flow (FCF), cash flow from operations (CFO) and EBITDA. As
such, we attempt to measure the plausible direction of cement prices in Nigeria based on our cash
flow-cement price parity model using certain measures of cash flow – free cash flow (FCF), cash
flow from operations (CFO) and EBITDA margins.
Figure 19: Cash flow margins Figure 20: Nigeria cement-price sensitivity to cash flow margins
95% 45% 60%
75% 50%
30%
55% 40%
15%
35% 30%
15% 0% 20%
25%
5%
0%
30%
20%
15%
10%
-5%
-15%
-10%
-20%
-25%
2011 2012 2013 2014 2015 2016 2017e2018e2019e
CFO margin
EBITDA margin CFO margin EBITDA margin FCF margin
*Avg. CFO margin (11- 17e)
Source: Company data, RMBNS Source: RMBNS
But timing of price change still unpredictable

Over the last 30 months to December 2017, cement prices in Nigeria have been very volatile,
changing about 20 times during the period (Figures 21 and 22) – all initiated by Dangote Cement.
We ascribe some price movements to the naira devaluation, especially in 2016 and 2017. In NGN
terms, cement prices are up c60% on a year-on-year basis in 2017.

Figure 21: Nigeria cement prices, USD/t Figure 22: Nigeria cement prices, NGN’000/t
200 0% 60 0%
50
160
-4% -4%
40
120
-8% 30 -8%
80
20
-12% -12%
40 10
0 -16%
- -16%
May. 16
May. 15
Nov. 14
Feb. 15
Aug. 16
Apr. 17
Oct. 15
Jan. 14
Jan. 17
Nov. 17e
Sept. 17
May. 15
May. 16
Aug. 16
Jan. 14
Nov. 14
Feb. 15
Oct. 15
Jan. 17
Apr. 17
Nov. 17e
Sept. 17
EX-VAT EX-VAT
Ex-VAT post rebate Ex-VAT post rebate
% discount / rebates - RHS % discount / rebates - RHS
Source: Company data, RMBNS analysis Source: Company data, RMBNS analysis
Price movements: Method to the madness

In our view, it appears that two key changes to cement prices – both of them cuts – were made to
deliberately deter competition (Figure 23). On the other hand, the increases in August 2016 and
after that were driven primarily by the need to maintain margins due to pressure from NGN
devaluation.
Figure 23: Nigeria cement price movements
50 190
45
170
BUA BUA Naira devaluation driven
40 announces commissions price increase
upgrade of its OBU I 150
cement plant
35 CCNN's in Edo State
capacity 130
30 in Oct.
2014 110
25
20 90
Aug-14
Sep-14
Aug-15
Sep-15
Aug-16
Sep-16
Aug-17
Sep-17
Jul-14
Jul-15
Jul-16
Jul-17
Jun-15
Jan-14
Jun-14
Jun-16
Oct-16
Jun-17
Feb-14
Nov-14
Dec-14
Jan-15
Mar-14
Apr-14
Oct-14
Oct-15
Nov-15
Dec-15
Jan-16
Nov-16
Dec-16
Jan-17
Nov-17
Dec-17
May-14
Mar-15
Apr-15
Mar-16
Apr-16
Mar-17
Apr-17
Oct-17
Feb-15
May-15
Feb-16
May-16
Feb-17
May-17
NGN, 000 / t USD / t, RHS
Source: Bloomberg, Lafarge Africa, Industry checks, RMBNS

Sector risks
Cement volume and GDP growth: Our cement volume growth for Nigeria is based primarily on our
modified cement-GDP multiplier. As such, a material negative deviation from our GDP forecast could
impact our investment case for the sector and coverage universe.
Pricing: A cut in cement price is a risk to our forecasts.
Broadly, Lafarge Africa’s earnings are more sensitive to price and volume changes relative to Dangote
Cement’s. For Dangote Cement, (Figures 24 and 25), we find that +/-15% change in our 2018e cement
price estimate for Nigeria could lead to a -/+31% change in group EPS.
Figure 24: Dangcem, EPS sensitivity to Nigeria’s cement prices Figure 25: Dangcem EPS sensitivity to Nigeria’s cement vols.
40% 40%
0% 0%
-20% -15% -10% -5% 0% 5% 10% 15% 20% -20% -15% -10% -5% 0% 5% 10% 15% 20%
2018e 2019e 2020e 2018e 2019e 2020e

-40%
-40%
Source: Company data, RMBNS Source: Company data, RMBNS
For Lafarge Africa, we find that a +/-15% change in our 2018e cement volume forecast for Nigeria
could lead to a +/- (34%, 29% and 29%) decline in our EPS estimates for 2018e, 2019e and 2020e in
this order (Figure 27). Our sensitivity shows that a +/-5% change in the cement price from current
levels could lead to a +/-28% change in our 2018e EPS (Figure 26).
Figure 26: Lafarge Africa, Earnings sensitivity to Nigeria’s Figure 27: Lafarge Africa, Earnings sensitivity to Nigeria’s
cement prices cement volumes
150% 50%
100%
25%
50%
0% 0%
-20% -15% -10% -5% 0% 5% 10% 15% 20% -20% -15% -10% -5% 0% 5% 10% 15% 20%
-50%
-25%
-100%
-150% -50%
2018e 2019e 2020e 2018e 2019e 2020e

Energy risk: Cement manufacturing is an energy-intensive activity. As such, disruption to gas supply,
the dominant energy source for cement manufacturers in Nigeria, could negatively impact earnings
Currency risk: Exchange-rate variations over time are a potential source of risk to cross-border
financial obligations and trade-related transactions. Nigerian cement players are exposed to currency
risks from a number of sources such as the importation of raw materials.

Sector Investment thesis
Nigeria’s cement sector
In this report, we initiate coverage on Nigeria's cement sector, the largest cement market in sub-
Sahara Africa (SSA) (Figure 28), with a positive sector view. On a stock level, we initiate coverage
on Dangote Cement and Lafarge Africa, these companies together accounting for 32% of Nigeria’s
equity market capitalisation (26.01.2018) and 90% of cement consumed in Nigeria, on our 2018e
estimate. We rate Dangote Cement Overweight (OW) with a target price of N271 and rate
Lafarge Africa Underweight (UW) with a N49 target price.
We believe Nigeria’s share of cement consumption in SSA will improve 60bp to 17.1% in 2018e
(still below the peak level of 23% in 2010 (Figure 28), however), as sustainable economic growth
returns to Nigeria following challenging macro headwinds of 2016 and 2017. We are of the view
that Nigeria’s cement sector is now in a recovery phase (Figure 29) following a weak demand
cycle in 2017e; we estimate that volumes declined c-19% y/y on challenged macro fundamentals,
leading to a five-year average growth of -2% y/y. In our view, if Nigeria’s economic prosperity
continues, the country’s cement consumption market share of SSA could re-rate to peak levels.
SSA cement consumption growth is expected to moderate to 4% y/y in 2018e (from 6% in 2017e)
(Figure 29).
Figure 28: Cement consumption market share Figure 29: Cement consumption growth
100% 25% 25%
80% 23% 15%
60% 21%
5%
40% 19%
2011 2012 2013 2014 2015 2016 2017e 2018e
-5%
20% 17%
0% 15% -15%
2017e
2018e
2015
2010
2011
2012
2013
2014
2016
SSA Nigeria
-25%
SSA Nigeria Nig as % of SSA
Source: Company data, RMBNS.

Source: Company data, RMBNS.
Over 2018e-202e, we forecast Nigeria’s average cement consumption growth at 11% y/y (Figure
30).
Our cement consumption growth forecast for Nigeria is based on our modified cement-GDP
multiplier model: we arrive at a 3.4x cement-GDP multiplier for Nigeria (Figure 31). We
acknowledge that a 7% y/y consumption growth in 2018e could be conservative, considering the
base effects from subdued demand in 2017e (-19% y/y). Hence, there could be an upside risk to
cement consumption in Nigeria over our forecast horizon.

Figure 30: Cement consumption, Nigeria Figure 31: Cement-GDP multiplier assumptions
30.0 Manufactured imported 25%

Y/y growth (RHS) 15
20%
25.0
15% 5
20.0 10%
5% -5
15.0 Dangcem GDP multiplier (x)
0%
10.0 -5% -15
GDP growth (%)
-10%
5.0 Lafarge Africa GDP multiplier (x)
-15% -25
2015
2010
2011
2012
2013
2014
2016
- -20%
2020e
2017e
2018e
2019e
2017e
2018e
2019e
2020e
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
Structural upsides support cement consumption

Beyond the immediate improving macro context, we see structural upsides from Nigeria’s
infrastructure and housing deficits, an emerging concrete road market and Nigeria's low per-capita
consumption relative to peers as implicit of sustainable cement consumption growth.
Nigeria falls short on many infrastructural benchmarks. According to the National Planning
Commission, Nigeria’s infrastructure stock of c25% (Figure 32) compares unfavourably with
emerging market benchmark of 70%. In our view, this implies further upside for cement
consumption.
Figure 32: Infrastructure stock Figure 33: Nigeria’s infrastructure-spend split
100%
80% Others, ICT, 28%

30%
60%
40%
20%
0%
South Africa
Poland
India
China
Nigeria
Brazil
Indonesis
Energy, Transport,
19% 23%
Infrastructure stock International Benchmark
Source: National Planning Commission Source: National Planning Commission

We particularly like that the current Nigerian government has renewed its commitment to fund and
grow capex investments – and, by implication, plug the nation's infrastructural deficit.
We like the momentum of capex spend and implementation we have seen from the current
government, which has reported Nigeria’s highest absolute annual capex spend of N1.2 trillion, in
2016, achieving a 75% capex implementation (Figure 34). As at October 2017, Nigeria’s capex
implementation was at 21% of the budgeted N2.2 trillion, improving to 55% in December following
the release of an additional N750bn by the government for capex.
Nigeria’s low expenditure as a share of GDP relative to peers (Figure 35) is also indicative of
underinvestment in infrastructure in our view.
Figure 34: Nigeria’s capex and implementation Figure 35: Expenditure as a % of GDP
80% Capex to budget 1.4 50%

Capex implemetation
Capex spend -Actual (NGN, trn) - RHS 1.2
40%
60%
1.0
0.8 30%
40%
0.6 20%
0.4
20%
10%
0.2
0% - 0%
2017e
2009
2008
2010
2011
2012
2013
2014
2015
2016
Advanced Emerging Ermerging SSA Nigeria

economies markets Asia
Source: Budget Office, Federal Ministry of Finance, RMBNS Source: Federal Ministry of Finance, RMBNS
In the 2018 budget, the government has specifically identified key capex projects to be
implemented. These, projects, which we believe will drive public-sector cement consumption,
include
 N10bn for the second Niger Bridge.

 N35bn for the national housing programme.
 N300bn for road projects.
 Transmission lines and substations (N12bn).
 N10bn for the construction of the Mambilla hydro power project, among others.
 N8.3bn for a second Abuja runway for 2018, as disclosed by Nigeria’s Minister of Budget
and National Planning

Figure 36: Nigeria’s key capex spend (% share of N2 trillion budgeted)
Water Resources Industry,

5% Trade Interior
and 3% Niger Delta Ministry:
Agriculture and Rural Investme 3%
Education North East
Development nt
6% 3% Universal Basic Intervention Fund
4% Education 2%
Defence
7% Commission
5%
Special
Intervention
Programmes Zonal
7% Intervention
Other Projects
20% 5%
Transportation
13% Niger Delta
Federal Capital Development
Territory: Commission
2% Health 4%
4%
Power, Works and
Housing
27%
Source: Ministry of Budget and National Planning, RMBNS
While recognising government efforts in closing the infrastructure gap, we also acknowledge
public-sector funding constraints.
According to Nigeria’s National Planning Commission, Nigeria spends US$10bn annually on

infrastructure, funded equally between the private and public sectors. The current US$10bn spend
is well below the required annual US$3 trillion over a 30-year period, according to the debt office.
We do, however, like the government’s attempts at diversifying its revenue base. According to
the Chairman of Nigeria’s tax body, Mr. Tunde Fowler, N17bn has been realised through the
Voluntary Assets and Income Declaration Scheme (VAIDS), with another N16bn by the end of
December, 2017 (Vanguard, N17bn had been realised under VAIDS – FG, 08 December. 2017).
Other forms of potential revenue generation in 2018e include the realisation of N311bn from
privatisation proceeds (N306bn), as well as asset sales (N5bn) in 2018, according to the Minister
of Budget and National Planning (Punch, 2018 budget: FG targets N311bn from asset sale,
privatization, 15 November 2017). We expect this to support investment in infrastructure and cement
consumption.
Other private-public partnership schemes such as the Road Trust Collective Investment Scheme
(RTCIS) (Figure 37) and public asset sale should be supportive of infrastructure funding.
The RTCIS will leverage off private capital to build and maintain roads, with a key focus on
industrial clusters and federal roads in exchange for tax credits. We expect this to be supportive of
cement consumption. The Manufacturing Association of Nigeria is expected to come up with a list
of industrial clusters that will qualify for participation in the RTCIS.

Figure 37: RTCIS operational model
Source: Nigeria’s Industrial Policy and Competitive Advisory Council
Concrete roads
We see opportunities for improved cement consumption in Nigeria through the adoption of concrete
paved road technology. Currently, only about 30% of Nigeria’s 195,000km road network is paved,
according to the Director General of ICRC. In addition to this, many of the paved roads are in poor
condition due to inadequate maintenance as they have been constructed with asphalt or bitumen.
We estimate the potential demand from paved concrete roads in Nigeria to be as high as 53mt
(Figure 38) assuming that 40% of Nigeria’s unpaved road is to be paved with concrete paving. Our
estimate assumes 1km of dual-lane concrete roads with a width of 10m and depth of 30cm.
To put the potential demand from concrete roads into context, Nigeria’s current installed capacity of
44mt will be insufficient to meet the demand from concrete roads.
Figure 38: Potential cement demand from concrete roads
90
60
30
-
20%
10%
15%
25%
30%
35%
40%
45%
50%
55%
60%
65%
5%
Source: Channel checks, RMBNS

Other than concrete roads driving cement demand, we see compelling reasons for the government
and private sector to invest in concrete paved roads.
From a cost perspective, concrete roads, though more expensive c28% initially, are 20%-25%
cheaper than asphalt or bitumen roads on a life-cycle-costs basis. We believe that concrete
roads, 10%-15% cheaper on the gallon, could help drive this market, given Nigeria’s urgency to
eradicate gasoline subsidies.
Later studies, comparing the costs of asphalt and concrete roads (Figures 39 and 40), have shown
that in some cases, “Concrete pavement not only costs less over the life cycle of a roadway,
but since 2008, also outperforms asphalt [hot mix asphalt (HMA) or warm mix asphalt (WMA)]
on initial cost for many roadways.” (America Cement Manufacturers).
Figure 39: Initial bid paving costs ($1m per 2 lane road mile) – Figure 40: Life-cycle paving costs (US$1m per two lane road
Urban mile) – Urban
Source: America Cement Manufacturers Source: America Cement Manufacturers
Housing: Low-hanging fruit

Based on RMB Nigeria Stockbroking's (RMBNS) in-house survey, we estimate that adding two
million housing units by 2020e from public spending alone, will unlock about 20mt-24mt of
cement consumption in Nigeria (Figure 41). We believe that the Nigerian government's renewed
focus on housing via the ERGP 2017-20 will be supportive of cement demand.
Figure 41: Potential cement demand from housing in Nigeria – 3-bedroom flat
40 3.0
30
2.0
20
1.0
10
0 0.0
Actual 100k units 500k units Historic annual ERGP, 2017 -
target 20
Potential cement demand, mtpa - LHS Housing units (m) - RHS
Source: Ministry of Budget and National Planning, RMBNS

Nigeria’s housing deficit is supportive of improved cement consumption, in our view, and, we
believe, an immediate source of cement demand. Nigeria’s housing deficit is estimated at 17
million units.
Nigeria’s home ownership rate of 25%, is considered the lowest in Africa. This is according to the
MD of the Federal Mortgage Bank of Nigeria (FMBN) (Figure 42) (Vanguard, Mortgage dearth:
Nigeria’s homeownership lowest in Africa, 08 July, 2013). In our view, this has been enormously
impacted by the lack of a robust mortgage financing system and high financing costs.
We expect the planned recapitalisation of the Federal Mortgage Bank of Nigeria (FMBN) to
N500bn, from N2.5bn (Figure 43), as stated in the Economic Recovery and Growth Plan 2017-
2020, to be supportive of improved home ownership and cement consumption in Nigeria going
forward.
Figure 42: Home-ownership rate Figure 43: Recapitalisation of FMBN, NGN, bn
100% 600
2020e, 500
80% 500
400
60%
300
40%
200
20%
Singapore
Kenya
Nigeria
Republic
Libya
Indonesia
South Africa
100
Benin
2017, 2.5
0
2017 2020e
Source: Vanguard, Federal Mortgage Bank of Nigeria Source: Ministry of Budget and Planning
Per-capita consumption
In our opinion, Nigeria's cement consumption of 104kg per capita is sub-optimal for an
economy of its size. Our review of select SSA countries affirms this view: SSA economies with a
GDP per capita of >=US$1,500 have an average cement consumption per capita of 203kg (Figure
44) – nearly double than the 104kg for Nigeria. As such, we argue that Nigeria’s economy is
supportive of sustainable cement consumption.
Our analysis shows that for Nigeria to attain 234kg (South Africa's 2017e) per capita in 2023e,
cement consumption would need to improve to 52mt by 2023e, compared with the 36mt we
forecast for the same period.
While we argue for improved cement consumption in Nigeria based on per-capita consumption, we
acknowledge that in most cases, a higher cement consumption per capita is often reflective
of higher income levels (GDP per capita). (Figure 45). Consequently, as Nigeria's economic
prosperity continues to improve, we expect cement consumption to go up.

Figure 44: Per-capita consumption of countries with GDP per Figure 45: Per-capita data – select EM and African peers
capita >=USD1,500
800 Per capita consumption (Kg) - RHS 12
6,000 GDP per capita, USD - LHS 400
Consumption per capita (Kg) 2016 GDP per capita (US$ '000) -LHS 10
5,000 Consumption per capita (Kg) 600
300 8
4,000
400 6
3,000 200
4
2,000 200
100 2
1,000
0 0
South africa
Mexico
Ethiopia
Turkey
Thailand
India
Nigeria
Egypt
Brazil
Pakistan
Sudan
Kenya
Philippines
- 0
Senegal
Tanzania
SSA
Zambia
Ghana
Sierra Leone
Ethiopia
Cameroun
Congo
Nigeria
South Africa
Source: World Bank, RMBNS Source: IFC, World Bank, RMBNS analysis
On our estimates, Nigeria’s cement-per-capita consumption could improve moderately to 116kg in

2018e from 100kg in 2017e, based on volume growth reflected in our cement-GDP multiplier model
assumptions.
Over 2018e-19e, we forecast cement consumption in Nigeria increasing to 110kg per capita (Figure
46). Our analysis shows that for Nigeria to attain 234kg per capita in 2023e, cement consumption
would need to improve to 52mt by 2023e.
Figure 46: Nigeria’s cement consumption
140
120
100
80
60
40
20
-
2007
2008
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2009
2010
2011
2012
2013
2014
2015
2016
2017e
2018e
2019e
Consumption per capita (Kg) Average consumption per capita (Kg)
Source: World Bank, company data, RMBNS and analysis
While Nigeria’s cement-per-capita consumption compares with the average for the Sub-Sahara
African peers (109kg) (Figure 47), it is low when compared to similar economies such as South
Africa (234kg) and emerging market peers’ average of 380kg in Figure 48.

Figure 47: Per-capita consumption – African peers Figure 48: Per-capita consumption – Emerging market peers
400 800
Per Capita consumption (kg)
Consumption per capita (Kg)
Average per capita consumption (kg)
300 600
SSA consumption per capita
200 400
100 200
0 0
Philippines
India
Turkey
Vietnam
Thailand
Pakistan
Nigeria
Mexico
Egypt
Brazil
Ethiopia
Sierra Leone
Tanzania
Zambia
Cameroun
Nigeria
Ghana
Senegal
South Africa
Congo
Source: Company data, RMBNS Source: IFC, Dangote Cement, RMB Nigeria Stockbrokers
Rate of urbanisation: Broadly higher than similar African economies

Nigeria’s high urbanisation rate of c3% (relative to c2% for key African economies) implies the need
for investment in infrastructure in the urban areas, and, implicitly in cement consumption. By our
estimates, urban population could increase to c190m by 2040 based on a current urban population
of 48%.
Figure 49: Average annual rate of change of the urban population, 2010-2050 (%)
6.0
5.0
4.0
3.0
2.0
1.0
0.0
2010-2015 2015-2020 2020-2025 2025-2030 2030-2035 2035-2040 2040-2045 2045-2050
Nigeria Ghana Algeria Egypt

Libya Angola Kenya South Africa
Source: United Nations, RMB Nigeria Stockbrokers Research

Dangote Cement: Initiate at OW, N271 TP
Dangote Cement DANGCEM NL We like the diversification benefits of Dangcem’s cement portfolio, which helped group
Stock Rating Overweight volumes come in at only -7% y/y in 2017e, despite Nigerian volumes declining by 16% y/y
Target price 271 (Our estimate). We forecast a robust FCF of N190bn (2017e), improving to N296bn in
Share price, close (N) 260 2018e, implying a FCF yield of 7%, (10% average over 2018e-2023e). On our estimates,
52 week range (N) 149-273
Dangcem is relatively ungeared on a ND/EBITDA of 0.5x (2018e) providing upside for debt
Market cap. (N, bn) 4,432
financing for further expansion – especially in Ethiopia where we see immediate
Market cap. (US$, bn) 12.3
EV (N, bn) 4,630 opportunity. On our estimates, Dangote Cement is trading on a 2018e P/E of 15.9x and
EV (US$, bn) 12.9 EV/EBITDA of 11.1x a 24% discount to GEM peers obtained from Bloomberg. Our N TP
Avg. value traded (US$, m) 1.3 implies a 2018e EV/EBITDA fair value of 11.2x which is comparable to Asian (11.0x) and
Free float (%) 9 Middle Eastern (11.1x) peer multiples derived from Bloomberg.
Double-digit cement-volume growth: On a group basis, we forecast 11% y/y volume
Gbenga Sholotan growth in 2018e to 24.5mt, with Nigeria accounting for 56% of group volumes. We forecast
Equity Analyst Dangcem’s Nigeria volume growth to be at c7% y/y in 2018e (13.6mt, 2017e: 16% y/y) on a
Gbenga.Sholotan@rmbstockbrokers.com.ng 47% utilisation rate, delivering a 12.5% CAGR over 2018e-23e. We believe Pan-Africa will
continue on its growth trajectory, delivering 14% y/y volume growth in 2018e (+10% in
Stock price performance vs Nigeria 2017e) as Tanzania, Congo and Sierra Leone ramp up production, helping Pan-Africa’s
300 All Share Index (NASI) rebased utilisation rate to 67% (2017e: 59%). In our view, there is the likelihood of an upside risk to
260 cement consumption in Nigeria over our forecast horizon. We determine this to be plausible
220 if the momentum of capex implementation by the government continues and private-sector
180 investment increases.
140 Robust EBITDA growth (12% CAGR), margin (47.0%) and EPS growth (15% CAGR):
100 Broadly, we forecast 2018e group EBITDA growth of 11% to N430bn (2017e: N387.6bn),
Jan-15 Jan-16 Jan-17 Jan-18
with margin declining 126 bp to 47% on our weaker-naira assumption. Over this period, we
Dangcem NASI (rebased)
project Nigeria’s EBITDA margin at c60% (-345bp y/y in 2018e), and Pan-Africa EBITDA
Stock price performance relative to NASI
margin improving +347bp to c22% in 2018e. We expect the EBITDA margin to average
1M 3M 6M 12M YTD
Absolute 8% 19% 6% 56% 13% 47% and 26% for Nigeria and the Pan-African operation respectively, over 2018e-2023e. In
Relative to NASI -6% -1% -13% -11% -1% addition to the robust +29% y/y EPS growth forecast we have for Dangcem in 2018e, we
Source: Bloomberg, NSE, RMBNS expect a 17% y/y EPS growth in 2018e, moderating to a mean of 15% over 2018e-2023e.
Investment risks: The key downside risks we identify are: i) price risks from Nigeria, ii)
geo-political risks from Nigerian operations across Africa, iii) cement volume risks, iv)
further devaluation of the naira and iv) energy risks.
Catalysts: Specifically, we view first profitability in 2018 from Tanzania – as well as Congo
– as a catalyst. In addition, higher-than-expected volumes, a stable naira and higher
cement prices could lead to a re-rating, in our view.
Key estim ates 2014A 2015A 2016A 2017e 2018e 2019e

Revenue, Nbn 391.6 491.7 615.1 802.4 913.8 1,015.5
EBITDA, Nbn 223.3 262.4 257.2 387.6 429.9 483.5
Net income, Nbn 159.5 181.3 186.6 256.2 282.2 325.3
EPS , current (N) 9.36 10.86 10.95 15.04 16.56 19.09
DPS, N 5.7 8.0 8.5 11.0 11.9 13.6
P/E (x) 27.6 24.0 22.9 17.8 15.3 13.3
EV/EBITDA (x) 20.7 17.6 18.0 11.9 10.8 9.6
Net debt/EBITDA (x) 1.0 0.8 1.0 0.7 0.5 0.1
FCF yield 0.5% 3.2% 3.6% 4.3% 6.7% 8.9%
Div. yield 2.2% 3.1% 3.3% 4.2% 4.6% 5.2%

Investment summary
We initiate coverage on Dangote Cement (DANGCEM NL), an Africa-focused cement player with an
aggregate installed capacity of c46mt p.a. across ten African countries (Nigeria, Ghana, Sierra Leone,
Senegal, Congo, Zambia, South Africa, Ethiopia, Tanzania and Cameroon) (Figure 50). We initiate
coverage on Dangote Cement with an Overweight rating and set our target price at N271, based
on our five-year DCF methodology.
Figure 50: Nigeria’s cement-capacity profile
Country Capacity (m tpa) Plant type Location Date operational

Nigeria 29.3 Integrated Obajana, Ibese and Gboko Since 2007
Cameroon 1.5 Grinding Doula 2015
Ghana 1.0 Import and bagging Tema 2011
Republic of Congo 1.5 Integrated Mfila Q1 2017
Senegal 1.5 Integrated Pout 2014
Sierra Leone 0.7 Import and bagging Freetow n Q1 2017
Ethiopia 2.5 Integrated Mugher 2015
South Africa 3.3 Integrated Aganang, Delmas 2014
Tanzania 3.0 Integrated Mtw ara 2016
Zambia 1.5 Integrated Ndola 2015
Total 45.8
Source: Company data
Within our coverage universe, we have a preference for Dangcem as we believe the company is
best-positioned to capture growth from infrastructure investments in Africa, having operations in ten
high-growth sub-Saharan African markets, including Nigeria.
We believe Dangote Cement will continue to consolidate its market-share gains across Sub-Saharan
Africa (SSA), increasing 100 bp of the region's market share to 20% in 2018e (Figure 51 and 52) as
group volumes increase 11% y/y in 2018e, while maintaining a market share in excess of 60% in
Nigeria.
Figure 51: SSA cement consumption, mt Figure 52: Dangcem’s increasing share of SSA cement market
120 100%
100 80%
80
60%
60
40%
40
20%
20
- 0%
2010 2011 2012 2013 2014 2015 2016 2017e 2018e 2010 2011 2012 2013 2014 2015 2016 2017e 2018e
SSA ex Dangcem Dangcem Group

SSA ex Dangcem Dangcem Group
Source: Company data, RMBNS analysis Source: Company data, RMBNS analysis

We view the company’s competitive advantage of more efficient, newer cement plants, strong
pricing power and strategy execution as sustainable, with the organisation having captured 27%-
50% market share in its various markets outside Nigeria within three years of market entry (Figure
53).
Figure 53: Dangote Cement’s market share in its African markets

70%
60%
50% 2016 2017e
40%
30%
20%
10%
0% Ghana
Ethiopia
Senegal
Leone
Congo
Nigeria
South Africa
Tanzania
Cameroon
Zambia
Sierra
Double-digit volume growth anticipated

We expect group volumes to show some recovery in 2018e, as volumes from Nigeria rebound after
a troubled macro in 2016/2017. On our estimates, group volumes could come in at 24.5mt in 2018e
(+11% y/y) (Figure 54). Beyond 2018e, we expect group volume growth to average 10% y/y over
2019e-2023e.
Figure 54: Volume growth
60%
40%
20%
0%
2016A 2017e 2018e 2019e 2020e 2021e 2022e 2023e
-20%
Nigeria Pan-africa Group

Our 2018e volume estimates imply a utilisation rate of 54% (2017e: 48%) (Figure 55), on improved
volumes from Nigeria and an additional production ramp-up from new operations in (Congo, Sierra
Leone) including Tanzania.
Over the years, the Pan-African operation’s contribution to volume has increased from 5% in 2013,
to 43% in 2017e (Figure 56). While the 43% share of volumes in 2017e was flattered by subdued
volumes in Nigeria, we believe that the Pan-African momentum will be maintained at current levels
as new plants and operations ramp up production.
Figure 55: Group production volumes (tonnes) Figure 56: Share of cement volumes sold
40,000,000 75% 100%

Group volumes Group utilisation rate
35,000,000 70%
80%
30,000,000
65%
60%
25,000,000
60% 95% 93%
20,000,000 40%
71%
55% 65%
15,000,000 57% 56% 56% 54% 57% 59% 61%
20%
50%
10,000,000
45% 0%
5,000,000
2013A
2014A
2015A
2016A
2017e
2018e
2019e
2020e
2021e
2022e
2023e
- 40%
2015A
2016A
2017e
2018e
2019e
2020e
2021e
2022e
2023e
Nigeria Pan-Africa
Within Dangote Cement’s Pan-Africa operations, we see Ethiopia and Tanzania as key markets,
together contributing 34% of the segment’s volumes in 2018e, and about 30% over our forecast
horizon.
Figure 57: Share of volumes within Pan-Africa operations

2017e 2018e 2019e 2020e 2021e 2022e 2023e
South Africa 19% 18% 16% 15% 13% 13% 12% 12%
Senegal 14% 14% 12% 11% 11% 11% 12% 12%
Zambia 10% 8% 8% 7% 6% 6% 7% 7%
Tanzania 7% 8% 14% 16% 17% 17% 16% 16%
Republic of Congo 0% 1% 6% 6% 5% 6% 6% 7%
Ethiopia 24% 23% 20% 19% 22% 21% 21% 21%
Cameroon 13% 13% 11% 10% 9% 9% 9% 8%
Ghana 13% 14% 12% 13% 12% 11% 12% 12%
Cote D'Ivoire 0% 0% 0% 2% 4% 4% 5% 4%
Sierre Leone 0% 1% 1% 1% 1% 2% 2% 2%
100% 100% 100% 100% 100% 100% 100% 100%
Source: RMB Nigeria Stockbrokers’ estimates and analysis

We estimate Nigeria’s 2018e volumes at 13.6mt, reflecting a 7% y/y increase on a 47% utilisation
rate (Figure 58). Our volume forecast over 2018e-2023e implies a CAGR of 12%.
For the Pan-Africa operations, we forecast volume growth of 14% y/y, to c11mt in 2018e on a 67%
utilisation rate (Figure 59). We expect a five-year volume CAGR of 7%.
Figure 58: Nigeria production and utilisation rate Figure 59: Pan-Africa production and utilisation rate
25.0 80% 20.0 70%
65%
16.0
20.0 70% 60%
12.0 55%
15.0 60%
8.0 50%
45%
10.0 50% 4.0
40%
- 35%
5.0 40%
2015A
2016A
2021e
2017e
2018e
2019e
2020e
2022e
2023e
2015A
2016A
2017e
2018e
2019e
2020e
2021e
2022e
2023e
Nigeria vols (mt) Utilisation, RHS Pan-Africa vols (mt) Utilisation, RHS

Free cash flow could grow 55% y/y in 2018e

We believe Dangcem will continue to generate robust free cash flow forward – helped partly by
the limited need for immediate growth capex in Nigeria [utilisation rate of c47% (2018e)] and the
improved volumes that we forecast. Consequently, we forecast a robust FCF of N190bn (2017e),
improving to N296bn in 2018e, implying a FCF yield of 7%, (10% over 2018e-2023e) (Figures 60
and 61). Our 2017e FCF of N191bn implies an 18% y/y growth. In addition to the limited need for
immediate growth capex relative to historical capex investment levels, improving cement volumes is
supportive of a robust FCF.
Figure 60: Free cash flow profile Figure 61: Free cash flow yield
450 60% 10%

50%
350
8%
40%
250 30%
6%
20%
150
10% 4%
50 0%
2016 2017e 2018e 2019e 2%
2016 2017e 2018e 2019e
FCF (NGN, bn) -LHS FCF growth y/y -RHS

Group EBITDA set to double over 2017e-23e,
implying CAGR of 12%
Our expectation is for Dangote Cement’s group EBITDA to deliver an almost two-fold increase in
EBITDA to N763bn in 2023e, from 2017e EBITDA of N388bn (Figure 62). We see the most absolute
EBITDA increment for Nigeria, over this period at +N297bn, with an absolute increment of +N89bn
coming from the Pan-Africa operations over the same period.
From an EBITDA growth perspective, we forecast a 12% EBITDA CAGR for the group (2018e:
+11% y/y). We see the most EBITDA growth of 15% CAGR, over 2018e-2023e, from the Pan-Africa
(2018e: +46% y/y), as we anticipate margin expansion at 529bp over the period. Our estimates
imply an EBITDA growth of 6% y/y for Nigeria in 2018e, and a CAGR of and 13% over 2018e-
2023e.
Figure 62: EBITDA contribution per segment in NGN, m Figure 63: EBITDA growth and margin – Group
800,000 60% EBITDA margin EBITDA growth - RHS

Nigeria Pan-Africa 50%
55% 40%
600,000
30%
400,000 50%
20%
10%
45%
200,000
0%
40% -10%
-
2017e
2018e
2019e
2020e
2021e
2014
2015
2016
2022e
2023e
2015A
2016A
2017e
2018e
2019e
2020e
2021e
2022e
2023e

Pan-Africa margins to improve

Our margin outlook for the Pan-Africa scenario is much more positive, relative to Nigeria’s (Figure
64), as we expect margin improvements from the 18% we forecast in 2017e, to a high of 27% in
2023e (2018e:22%).
We are of the view that as the Pan Africa operations ramp up production, the segment’s profitability
will improve. Also, as Tanzania and Congo become profitable, margin expansion should be
supported. .
However, we expect Nigeria to remain the most profitable operation over the period, with EBITDA
margin at 61% in 2018e, and a share of EBITDA averaging c86% over our forecast horizon and
trough EBITDA of c60% (Figure 65).
We forecast Nigeria’s EBITDA margin to moderate from c65% in 2017e, to c60% in 2023e. Our
expected margin contraction for Nigeria has factored in our expectation of a weaker naira. As such,
we reckon EBITDA growth will be driven mostly by improved volume throughput for Nigeria, as we
have an unchanged outlook on the price of cement.

Figure 64: EBITDA margin – Nigeria and Pan-Africa Figure 65: Share of EBITDA – %
66% 30% 100%
64%
25% 80%
62%
60% 20% 60%
58%
15% 40%
56%
54% 10% 20%

2014 2016 2018e 2020e 2022e
EBITDA margin - Nigeria

0%
EBITDA margin - Pan-Africa 2015A 2017e 2019e 2021e 2023e
Nigeria Pan-Africa
The company’s economies of scale, newer and more efficient cement plants than its peers, the
control of its own logistics and the search for cheaper alternative fuels have made Dangcem one of
the most profitable cement companies globally (Figure 66).
Figure 66: EBITDA margin profile of global cement players
70
EBITDA margin, next 3 year avg Median, next 3 year EBITDA margin avg.
60 Mean, next 3 year EBITDA margin avg.
50
40
30
20
10
0
East African Portland…
China Resources Cement…
Cimsa Cimento Sanayi…
Adana Cimento Sanayii…

Cimpor Cimentos de…
Southern Province…
Bamburi Cement Co Ltd

Vicat
PPC Ltd
Dangcem
ACC Ltd
Holcim Ltd
Lafarge SA
Ambuja Cements Ltd
Cemex SAB de CV
Buzzi Unicem SpA
Akcansa Cimento AS
CCNN
HeidelbergCement AG
Akcansa Cimento AS
Qassim Cement/The
Ciments Francais SA
Titan Cement Co SA
Huaxin Cement
Holcim Indonesia Tbk PT

Asia Cement Corp
Sinai Cement
Ciments du Maroc
Lafarge Africa
Sibirskiy Cement OAO

Anhui Conch Cement
Siam Cement PCL/The
Italcementi SpA
Cementos Pacasmayo SAA
Taiwan Cement Corp
Ultratech Cement Ltd
China Shanshui Cemen

We expect +16% y/y EPS growth in 2018e
In addition to the robust +29% y/y EPS growth forecast we have for Dangcem in 2017e, we forecast
2018e EPS growth at 17% y/y (Figure 78). Beyond 2018e, we forecast EPS momentum to remain
attractive, averaging 15% y/y over 2019e-2023e
Unlike 2017e’s EPS growth, which was driven mostly by a c60% y/y price increase in Nigeria, we
expect 2018e EPS growth to be impacted by improved cement consumption in Nigeria.
The risk to our EPS growth profile remains the group’s effective tax rate. We forecast a tax rate
of 12% for 2017e, in line with guidance, and assume a 15% tax rate over our forecast horizon.
Figure 67: EPS growth profile Figure 68: EPS (NGN) step change
40% 35
30
30% 25
20
20% 15
10
10% 5
2023 eEPS
2019e
2,016
2017e
2018e
2020e
2021e
2022e
2023e
0%
2017e
2015
2016
2023e
2018e
2019e
2020e
2021e
2022e
Sales to grow by 14% y/y in 2018e

On our estimates, we expect Dangote Cement’s Nigeria operation to continue contributing more
than 60% of the group’s sales over our forecast horizon (Figure 69).
We forecast group sales growth of 14% y/y to N913.8bn in 2018e (Figure 70), with a CAGR of c12%
over 2018e-2023e.
For Nigeria, we forecast a 12% y/y sales growth in 2018e (Figure 71), helped by a 7% y/y volume
growth and a 5% y/y price increase. Based on our cement-GDP multiplier model, we estimate that
volumes will grow by a further 9% in 2019e, before double-digit growth resumes in 2020e.
For the Pan-African operations, we see sales growth moderating over our forecast horizon (Figure
72). We forecast 17% y/y growth in 2018e (2017e: 35%), moderating to c3% in 2023e.

Figure 69: Segmental sales share Figure 70: Group sales and sales growth
100% 2,000,000 40%

Group sales, NGN m, LHS Group sales, Y/y
31% 33% 33% 35% 36% 34% 31%
80% 38% 1,600,000
30%
60%
1,200,000
20%
40%
69% 67% 67% 65% 64% 66% 69% 800,000
62%
20% 10%
400,000
0%
2016A 2017e 2018e 2019e 2020e 2021e 2022e 2023e
- 0%
Nigeria Pan-Africa
Figure 71: Sales (NGN, m) and growth, Nigeria Figure 72: Sales (NGN, m) and growth, Pan-Africa
1,200,000 30% 600,000 450%

28% 415%
Pan-Africa sales Pan-Africa, Y/y
1,000,000 Nigerian Cement Sales Nigeria sales, Y/y 500,000
360%
800,000 20% 400,000

270%
600,000 300,000
14%14%14%
12% 180%
400,000 11% 10% 200,000
9% 9%
88% 90%
200,000 100,000
5%
35%
17% 16% 25%
- 5% 5% 3%0%
- 0%
2023e
2015A
2016A
2017e
2018e
2019e
2020e
2021e
2022e
2019e
2015A
2016A
2017e
2018e
2020e
2021e
2022e
2023e

We are conservative relative to consensus
Broadly, it appears the market is expecting a much lower tax rate in 2018e (7.7%) and 2019e
(10.1%) compared with the 15% we are looking for in 2018e/19e (Figure 73). As such, our EPS
estimates are an average of 5% lower over 2018e-2019e.
On a margin basis, we are conservative relative to Bloomberg – by 368 bp and 163 bp on a gross
and EBITDA margin basis respectively, over 2018e and 2019e. Consensus trend shows that gross
margin is expected to improve over 2018e-2019e. We suspect the market is either implying no naira
weakness or potential price hike in 2018e to support margin expansion.
Figure 73: RMB’s estimates vs. Bloomberg’s market consensus, in NGN million except stated
2017e 2018e 2019e
Bloomberg RMB RMB vs Bloomberg RMB RMB vs Bloomberg RMB RMB vs
Cons. ests. Cons. Cons. ests. Cons. Cons. ests. Cons.
Revenue 815 802 -2% 925 914 -1% 1,036 1,016 -2%
Gross margin 57.2% 56.6% -61bps 58.1% 54.7% -334bps 58.6% 54.6% -402bps
EBIT 286 306 7% 344 356 3% 376 402 7%
EBITDA 392 388 -1% 454 430 -5% 505 484 -4%
EBITDA margin 48.1% 48.3% 24bps 49.1% 47.0% -210bps 48.8% 47.6% -117bps
PBT 282 291 3% 332 335 1% 388 380 -2%
Taxes (22) (35) 63% (26) (50) 96% (39) (57) 46%
-effective tax rate 7.6% 12.0% 7.7% 15.0% 10.1% 15.0%
EPS (NGN) 14.7 15.0 2% 16.9 16.7 -1% 20.6 19.0 -8%
FCF 226 191 -16% 344 296 -14% 401 394 -2%
Gearing is improving
We forecast Dangote Cement’s gearing to improve going forward. We expect both debt/equity and
net debt to equity to moderate to 0.3x and 0.2x respectively in 2018e.
Figure 74: Debt/equity Figure 75: Debt/EBITDA
1.2 0.5
1.0
0.4
0.8
0.3
0.6
0.2
0.4
0.2 0.1
- -
2015 2016 2017e 2018e 2015 2016 2017e 2018e
Debt/Equity Net debt/Equity Debt/EBITDA Net debt/EBITDA

We also like that economic growth is across the ten SSA markets in which Dangote Cement
operates, that 2018 real GDP growth is projected to be robust at 1.9%- 9% and that low cement
consumption per capita in the majority of these countries provides upside for sustainable cement
consumption (Figure 76).
Figure 76: Per-capita measures

800
Turkey
700
600
Egypt
500 Vietnam
Thailand
Cement consumption per capita, kg
400
Congo Brazil
300 Mexico
Senegal South Africa

200 Ghana
India Philippines
Cameroun Pakistan
Ethiopia Nigeria
100 SSA
TanzaniaZambia
Sierra Leone
0
- 2,000 4,000 6,000 8,000 10,000 12,000
GDP per capita, USD
Source: World Bank, RMBNS

Share-price catalysts
Nigeria’s cement price and volumes
Key catalysts we see for Dangote Cement in 2018e include higher-than-expected cement volumes,
as well as higher realisable cement prices.
On our estimates, a +/-15% change in our 2018e Nigeria cement price, relative to our base case,
could lead to a -/+24% change in group EPS (Figure 77) and supports share-price re-rating in our
view.
Similarly, a +15% increase in Nigeria’s cement volumes, relative to our base case, could lead to a
c20% change in our 2018e EPS (Figure 78).
Figure 77: EPS sensitivity to Nigeria’s cement prices Figure 78: EPS sensitivity to Nigeria’s cement volumes
40%
40%
0% 0%
-20% -15% -10% -5% 0% 5% 10% 15% 20% -20% -15% -10% -5% 0% 5% 10% 15% 20%
2018e 2019e 2020e 2018e 2019e 2020e

-40% -40%
EBITDA improvement from Pan-Africa operations

Specifically, we view first profitability from Tanzania as well as Congo in 2018e, as a catalyst.
Tanzania has been operating at a loss due to energy challenges.
A Pan-Africa EBITDA margin of 25%, compared with our c22% in 2018e could lead to an EBITDA
accretion of N10bn, implying N0.6 EBITDA/share.
Risks
Currency and EPS
We view currency as another risk to our earnings, given exposures from raw materials import and
others. On our estimates, a 15% depreciation (Figures 79 and 80) of the Nigerian naira, from our
base case in 2018e (2019e), could lead to an 8% (7%) decline in our EPS estimates, compared with
our base case.

Figure 79: 2018e EPS (NGN, y axis) sensitivity to NGN deval. Figure 80: 2018e EPS (NGN, y axis) sensitivity to NGN deval.
10% 10%
5% 5%
0%
0%
-5%
-5%
-10%
-10%
-15%
-20% -15%
-15% -10% -5% 0% 5% 10% 15% 20% 25% -15% -10% -5% 0% 5% 10% 15% 20% 25%
Source: RMBNS Source: RMBNS
Geo-political risks
Dangote Cement is exposed to both geopolitical and regulatory risks from its operations across ten
different Africa markets.
Early in 2017, geo-political risks crystallised in both Ethiopia and Tanzania, impacting operations. In
Ethiopia, unrest in the region of Dangote Cement's plants affected operations. The second
incidence, which took place in Ethiopia, was the likely ceding of some of its operations to the locals
in its operating area. This could have led to the shutting down of Ethiopian operations for a few
weeks, according to management.
In Tanzania, delayed access to gas and prolonged negotiations with the host government have led
to a missed target of installing gas turbines. This, in turn, has resulted in continuous loss-making at
the plant. We understand from management that this has now been resolved.
Key assumptions
Margin assumptions
On our estimates, we forecast Nigeria's EBITDA margin to moderate to c60% over 2018e-2023e
(Figures 81 and 82), mainly on naira weakness and a flat cement price (naira terms) over the same
period. For 2018e, we forecast Nigeria’s EBITDA margin compression of 345bp to c61% to reflect
our view of naira weakness.
For the Pan-Africa operation, we forecast EBITDA margin to improve to c22% in 2018e, from c18%
in 2017e (Figure 48). The improvements we forecast from the Pan-Africa operations is driven by our
expectation of Tanzania being EBITDA-positive in 2018e, post the resolution of energy challenges.
Furthermore, we anticipate that Congo will come out of start-up losses and be profitable in 2018e,
while Sierra Leone’s profitability will improve.

Figure 81: EBITDA margin profile Figure 82: EBITDA profile, Nigeria operation
66% 30% 70.0% 28.0
64% 27.5
25% 65.0%
62% 27.0
60% 20% 26.5

60.0%
58% 26.0
15%
56% 55.0% 25.5
2017e
2018e
2019e
2020e
2021e
2022e
2023e
54% 10%
2014 2016 2018e 2020e 2022e
-EBITDA margin EBITDA / t (NGN), RHS
EBITDA margin - Nigeria EBITDA margin - Pan-Africa
We forecast both Congo and Tanzania to return an EBITDA margin of 10% in 2018e, both from an
EBITDA loss position in 2017e (Figure 83).
Figure 83: EBITDA margin assumptions, Pan-Africa
40%
30%
20%
10%
0%
2018e 2019e 2020e 2021e 2022e 2023e
South Africa Senegal Zambia
Tanzania Congo Ethiopia
Cameroon Ghana Sierre Leone
Rest of Africa
Source: Dangote Cement, RMB Nigeria Stockbrokers’ estimates and analysis
Growth capex and capacity growth assumptions

We anticipate that Dangote Cement will add 5.5mt p.a. of integrated capacity and 3mt of grinding
plant capacity over 2018e-2023e. We estimate this to mean USD1bn growth capex over the same
period (Figures 84 and 85).
Nigeria – 6mt p.a. integrated capacity over 2023e: We forecast the Nigerian operation will need
to increase capacity by 3mt p.a. in 2022e (Figure 86), in Edo, based on our volume forecast. We
assume a two-year project completion cycle, implying growth capex spend to start in 2020e, which
is when we forecast Nigeria operation to be at a utilisation rate of c60%. We also forecast growth
capex for another 3mt p.a. cement plant in Nigeria. We assume construction will commence in
2022e, with a three-year project-completion cycle; we assume three years, as we find it a more
prudent use of resources and do not see an immediate urgency.

Figure 84: Growth capex profile assumptions, USD m Figure 85: Growth capex profile assumptions, USD m by segment
1,200 300
1,000 250
Nigeria Rest of Africa
800 200
600 150
400 100
200 50
- -
2018e 2019e 2020e 2021e 2022e 2023e Total 2018e 2019e 2020e 2021e 2022e 2023e
capex
Pan-Africa – 2.5mt integrated capacity, 3mt grinding plants addition anticipated over
2023e: Given the impressive ramp-up in Ethiopia, with a utilisation rate of 88% in 2017e, we
forecast additional capacity of 2.5mt p.a. in 2020e (Figure 87) with a 2 year project completion
cycle.
Our discussion with management reveals a capex budget of USD300m in 2018e, with
US$200m in setting up 1.5mt p.a. grinding plants in both Ghana and Cote D'lvore in 2018e.
Figure 86: Capacity additions, Nigeria Figure 87: Capacity additions, Pan-Africa
35.0 25.0 68%
30.0
20.0 66%
25.0
15.0 64%
20.0
15.0 10.0 62%
10.0 5.0 60%
5.0
- 58%
- 2017e 2018e 2019e 2020e 2021e
2018e 2022E new 2022e Current capacity Ghana
capacity
Cotde d'Ivore Ethiopia
Over our forecast horizon, we forecast group installed capacity to increase to 55.6mt p.a.by 2023e,
from 45.6mt in 2017e (Figure 88), with Pan-Africa’s share increasing to 42% by 2023e from 36% in
2017e Figure 89).

Figure 88: Group installed capacity (mt) Figure 89: Share of group installed capacity
60.0 100%
50.0
75%
40.0
30.0 50%
20.0
10.0 25%
-
0%
2021e
2017e
2018e
2019e
2020e
2022e
2023e
2015A
2016A
2023e
2017e
2018e
2019e
2020e
2021e
2022e
2016A
2015A
Nigeria Pan-Africa
Nigeria Pan-Africa
Figure 90: Share of installed capacity within Pan-Africa operations

2016A 2017e 2018e 2019e 2020e 2021e 2022e 2023e
South Africa 18% 17% 17% 15% 12% 12% 12% 12%
Senegal 9% 9% 9% 8% 13% 13% 13% 13%
Zambia 9% 9% 9% 8% 6% 6% 6% 6%
Tanzania 19% 18% 18% 16% 13% 13% 13% 13%
Republic of Congo 9% 9% 9% 8% 6% 6% 6% 6%
Ethiopia 16% 15% 15% 13% 21% 21% 21% 21%
Cameroon 9% 9% 9% 8% 6% 6% 6% 6%
Ghana 9% 9% 9% 16% 13% 13% 13% 13%
Cote D'Ivoire 0% 0% 0% 8% 6% 6% 6% 6%
Sierre Leone 0% 3% 3% 3% 2% 2% 2% 2%
100% 100% 100% 100% 100% 100% 100% 100%
Source: RMB Nigeria Stockbrokers’ estimates and analysis
Valuation Methodology
We initiate coverage on Dangote Cement with an Overweight (OW) rating and a 2018e-based
target price of N271 based on our five-year discounted cash flow (DCF) methodology (Figure 91).
The main assumptions of our DCF include:
 Geared beta of 1.24 (Bloomberg).

 Risk free rate of 14.0%, in line with expected yields on a ten-year Nigerian government
paper.
 Equity risk premium of 6.5%.
 Long-term nominal growth rate of 12%, reflective of our expectations of i) long-term
inflation rate of 9% and ii) a 3% long-term GDP growth rate.
 Cost of equity of 22.1% and WACC of 20.0%.

Figure 91: DCF valuation of Dangote Cement, NGN bn except stated
2016A 2017e 2018e 2019e 2020e 2021e 2022e 2023e
EBIT 182 306 356 402 468 525 599 675
Less: taxation 6 (35) (50) (57) (67) (77) (88) (101)
Tax adjusted EBIT 188 271 306 345 402 449 510 574
Depreciation & amortisation 75 81 74 81 73 82 84 88
Change in w orking capital 36 (85) (1) 21 16 10 9 7
Other non cash adjustments - - - - - - - -
Less: capex (119) (114) (106) (64) (115) (81) (84) (88)
Free cash flow 180 154 273 384 376 460 519 581
WACC 20.1%
Discounted cash flow 180 154 273 319 261 266 250 232
Long term grow th rate 12.0%
Terminal value 8,022 8,022 8,022 8,022 8,022 8,022
Discounted terminal value 3,210 3,855 4,630 5,561 6,679 8,022
PV of 2023E CF 4,810 5,449 6,084 6,856 7,682 8,603
Net debt + minority 198 37 (86) (261) (626) (1,010)
Fair Mkt. Cap. 4,612 5,413 6,170 7,118 8,308 9,613
Fair value (NGN) 271 318 362 418 488 564
Source: Bloomberg, Company data, RMBNS
Figure 92: WACC and terminal growth sensitivity

WACC
271 17.0% 18.0% 19.0% 20.1% 21.0% 22.0% 23.0%
6.0% 239 218 201 185 174 163 153
7.0% 255 232 212 194 182 169 159
8.0% 275 248 225 204 190 177 165
Terminal growth
9.0% 301 267 241 217 201 185 172

10.0% 333 292 259 231 213 195 180
11.0% 376 323 283 249 227 207 190
12.0% 437 365 313 271 245 221 201
13.0% 528 424 354 300 267 238 214
14.0% 680 511 411 337 295 259 231
15.0% 983 658 495 390 333 287 252
Relative valuation
Our fair-value EV/EBITDA multiple is 11.2x
On our estimates, Dangote Cement’s 2018e EV/EBITDA of 11.1x, is in-line with the valuation of
Asian (11.1x) and Middle Eastern (11.2x) peers (Figure 93). To put this into perspective, our 2018e
fair value of 11.4x compares with regional peers.

Figure 93: Regional EV/EBITDA multiple (26.01.2018)
Asia Middle East DCF valuation

2018e EV/EBITDA (x) 11.1 11.2
2018e EBITDA - Nig (NGN, bn) 376 376
2018e EBITDA - Pan-Africa (NGN, bn) 67 67
2018e EBITDA 430 430 430
EV (NGN, bn) 4,760 4,797 4,810

Net debt (NGN, bn) (198) (198) (198)
Fair equity mkt value (NGN, bn) 4,562 4,599 4,612
No of shares outstanding (bn) 17 17 17
EV based TP (NGN) 268 270 271
Implied fair EV/EBITDA (x) 11.1 11.2 11.2
Source: Bloomberg, RMBNS’ estimates and analysis
Figure 94: EV/EBITDA valuation scenarios
EV/EBITDA (x)
270 8.0 9.0 10.0 11.0 11.2 12.0 13.0 14.0
-20% 325 141 160 179 198 202 217 236 255
-15% 345 150 170 191 211 215 231 251 272
EBITDA changes
-10% 365 160 181 203 224 228 245 267 288
-5% 406 179 203 226 250 255 274 298 322
0% 430 190 215 241 266 271 291 316 342
5% 426 188 213 238 263 268 288 313 338
10% 446 198 224 250 276 282 303 329 355
15% 467 207 235 262 290 295 317 344 372
20% 487 217 245 274 303 308 331 360 388

Lafarge Africa: Initiate with an UW, N49 TP
Lafarge Africa WAPCO NL All eyes on the South Africa operation: Our underweight rating reflects our view on
Stock Rating Underw eight Lafarge Africa’s South African business as well as the company’s negative ‘excess return’
Target price 49.0 profile amongst others. We estimate a negative “excess return” of -8% (ROIC less
Share price, close (N) 52.0 WACC) for Lafarge Africa, implying that growth adds no value. Furthermore, the
52 w eek range (N) 33-63 performance of Lafarge Africa’s South African operation has been disappointing, with
Market cap. (N, bn) 451 EBITDA margin declining from a high of 22% in 2012 to 5% in 2016 and -5% as at 9M 2017.
Market cap. (USD, bn) 1.3 We however model a recovery of the South African operation’s EBITDA margin to 5% in in
Enterprise value (N, bn) 659 2018e, contributing 150 bp margin improvement to the 350 bp we forecast for the group in
Enterprise value (USD, bn) 1.8 2018e. In our view, for there to be meaningful re-rating of the stock, i) we expect the SA
Avg. value traded (USD, m) 0.2 operation margins to re-rate substantially or ii) management should consider divesting from
Free float (%) 37 the low margin, low growth potential operation in SA.
Furthermore, our UW rating reflects our view on limited catalysts supportive of share-price
Gbenga Sholotan appreciation, potential operational plant downtime from ageing plants and continued
Equity Analyst unfavorable market dynamics in South Africa – as well as limited guidance on capex plans
Gbenga.Sholotan@rmbstockbrokers.com.ng going forward, which increases cash flow forecast and valuation risks.
+234 1 463 7101
On a positive note, Lafarge Africa is currently restructuring its capital base through the
N132bn equity rights issue. This could lead to an improved net debt/equity ratio of 0.7x by
2018e (2017e: 1.2x), resulting from pay down of the US$343m quasi-equity. We forecast
that that group cement volumes could come in at 6% higher year-on-year in 2018e,
(Nigeria: c+8%, South Africa: +3%) with five-year EBITDA and earnings CAGR of 11% y/y
Stock price performance vs Nigeria
All Share Index (NASI) rebased
and c18% y/y over 2018e-23e. We also like that the earnings profile could be robust over
100
our forecast horizon: we estimate EBITDA and PAT CAGR of 11% y/y and c18% y/y over
75 2018e-23e. The South Africa operation, however, remains a key risk to our estimates going
forward.
50
Volume growth – a rising tide lifts all boats: We expect to see recovery in Lafarge
25 Africa’s group cement volume, growing +6% y/y in 2018e to 6.4mt, supported by economic
Jan-15 Jan-16 Jan-17 Jan-18
recovery in Nigeria (+c8%% y/y, 2017e:-17%) and South Africa (+3% y/y, 2017e:-23%). We
Lafarge Africa NASI (rebased)
estimate Nigeria’s 2018e cement volumes at 4.8mt in 2018e (46% utilisation) and SA’s at
Stock price performance relative to NASI
1M 3M 6M 12M YTD 1.6mt (45% utilisation). Over 2018e-23e, our group volumes imply a CAGR of 10%.
Absolute 20% 6% -10% 36% 16%
Relative to NASI 6% -14% -29% -31% 2% Catalyst – Improvements in South Africa EBITDA could be positive for the share
Source: Bloomberg, NSE, RMBNS price: On our estimates, a sustainable EBITDA margin re-rating to 15% over 2018e-
2023e, could add N130bn (N15/share) to our valuation. Similarly, a 25% EBITDA margin
from SA in 2018e, alone, could add N26bn to our equity value estimate, implying accretion
of N3/share (Figure 98 and 99). As such, fixing the operational challenges at the
Lichtenburg plant, in SA, and an improved performance could be positive of stock price re-
rating. Risks: These include risk to cement volumes from operational shutdowns as a
result of ageing plants and earnings underperformance from the SA operation. This is in
addition to sector risks.
Key estim ates 2014A 2015A 2016A 2017e 2018e 2019e
Revenue, Nbn 260.8 267.2 219.7 289.3 313.8 347.8
EBITDA, Nbn 69.5 67.8 29.1 57.8 73.7 82.3
Net income, Nbn 33.8 27.1 16.9 24.7 27.7 36.7
EPS , current (N) -29.02 6.50 3.33 4.43 3.19 4.23
DPS, N 3.60 3.00 - 2.88 2.07 2.75
P/E (x) 13.4 15.8 26.7 18.3 16.3 12.3
EV/EBITDA (x) 9.5 9.7 22.7 11.4 8.9 8.0
Net debt/EBITDA (x) 1.4 1.9 3.7 5.7 2.8 2.4
FCF yield 7.2% -0.4% -6.8% -10.8% 6.7% 11.9%
Div. yield 6.9% 5.8% 0.0% 5.5% 4.0% 5.3%

Investment summary
We initiate coverage on Lafarge Africa (WAPCO NL), Nigeria’s second-largest cement producer
with a market share of 25%. We rate the stock Underweight (UW) with a target price of N49. Our
target price and per-share estimates have assumed full subscription from the December 2017
equity-rights issue and incorporated additional shares of 3.1bn units.
Lafarge Africa has operations in two African countries – Nigeria and South Africa – with an
installed cement capacity of 14.1mt (Nigeria: 10.5mt p.a.).
Our underweight rating reflects our view on the following:
1. Limited share price catalysts supportive of the stock’s re-rating from current levels,
except for the South African operation, which is prone to high risk.
2. On our estimate, we see negative excess return of -8% (ROIC less WACC) for Lafarge
Africa in 2018e, and do not see this being positive over the next 12 -18 months. This
compares with an excess return of +3% we forecast for Dangote Cement. We would
actually like to see an improvement in Lafarge Africa’s ROIC to at least match its WACC
for the stock to re-rate. We argue the South African operation’s performance would have
to improve significantly to attain for ROIC to match WACC. Another option we see for
ROIC to match WACC would be divestment from a non-performing asset, the SA
operation; we do not see an immediate option for management, considering that the SA
business was only consolidated with the Nigerian operation in 2015. Hence our
underweight rating.
To put the non-performing categorisation of the SA business into perspective, we

estimate a 2018e EBITDA margin of 31% for the Nigeria operation and 23.5% for the
group, dragged lower by the 5% we forecast for the South Africa operation. On our
2018e estimate, the SA business will generate just 9% of group EBITDA, despite a sales
contribution of 30% (Figure 95). As such, the SA business is earnings-dilutive.
Figure 95: Contribution to group EBITDA
100%
80%
60%
40%
20%
0%
2016A 2017e 2018e 2019e 2020e 2021e 2022e 2023e
-20%
WAPCO UNICEM
Ashaka Atlast & Ready mix, Nig
Lafarge South Africa
3. No 2018e and beyond capex guidance from management. This, in our view increases
our cash flow forecast risk and valuation risks.
4. Potential operational downtime from ageing plants and continued unfavourable market
dynamics in South Africa.

South Africa could be EBITDA-positive in 2018e, but margin outlook is still a
concern in our view.
We have an improved margin outlook for the South African operation, following our discussion
with management.
While there was no guidance from management, on margin outlook, we have assumed an
EBITDA margin of 5% (Figure 96) for the South African operations, this in line with Q2 17 margins
vs. 2016’s 4.4%. We are looking for 2017e EBITDA of – N3.6bn for the South Africa operation.
Within the Nigerian operations, we forecast EBITDA margin to remain resilient y/y, with the most
margin improvement over our forecast horizon coming from Mfamosing (Figures 96 and 97).
We expect Nigeria cement to remain the most profitable operation over the period, with cement
EBITDA margin at 32% in 2018e (Figure 97), compared with 5% for South Africa and 9% for the
other Nigeria business.
Figure 96: EBITDA margin – Nigeria plants and South Africa Figure 97: EBITDA margin outlook
40.0% 40%
30.0% 30%
20.0% 20%
10.0% 10%
0.0% 0%
2016A 2017e 2018e 2019e 2020e 2021e 2022e 2023e
2021e
2016A
2017e
2018e
2019e
2020e
2022e
2023e
-10.0% -10%
WAPCO Mfamosing
Nigeria, Cement Nigeria, Others
Ashaka Lafarge South Africa
South Africa
South Africa’s EBITDA contribution to the group is at 9%, despite higher sales at 30%. As such, the
SA business is earnings-dilutive.
Share-price catalysts
 All about South Africa’s earnings
In our view, the major catalyst we see supportive of a re-rating is a sustained improvement in
EBITDA margin of the South African operation.
The South African (SA) operation has been a drag on group earnings. SA’s EBITDA margin has
been disappointing, declining rapidly from a high of 22% in 2012, to 4% in 2016 and a loss position
as at 9M 2017. We forecast 5% EBITDA margin for 2018e and view a stronger-than-expected
performance as a catalyst.
On our 2018e estimates, a 25% EBITDA margin from SA could add N26bn to our equity value
estimate, implying accretion of N3/share (Figure 98).

Figure 98: SA’s EBITDA margin and valuation upside (NGN, bn)
40.0
Accretion to valuation (NGN, bn)

30.0
20.0
10.0
-
-10% -7% -5% 5% 10% 15% 25% 30%
-10.0
-20.0
-30.0 SA EBITDA margin scenarios
Source: RMBNS
The impact of a sustainable EBITDA margin re-rating, over 2018e-2023e, is higher based on our
analysis. A 15% EBITDA margin for SA over our forecast horizon could add N130bn (N15/share) to
our equity value estimate (Figure 99).
Figure 99: SA’s EBITDA margin and valuation upside (NGN, bn)
40.0
Accretion to valuation (NGN, bn)
30.0
20.0
10.0
-
-10% -7% -5% 5% 10% 15% 25% 30%
-10.0
-20.0
-30.0 SA EBITDA margin scenarios
Source: RMBNS
Alternative fuel is a positive, but upside limited

In our view, we see limited upside to Lafarge Africa’s earnings, in the near to medium term, from
alternative fuel (AF).
Our view is informed by the following:
 According to our estimates, Nigeria’s cement plants are currently operating with an
alternative fuel ratio of c30% (Figure 100).
 Secondly, we find management’s timeline of achieving 40%50% in the “long term”, as

disclosed during a Q317 conference call, without committing to specific timelines, as
unclear.

Figure 100: Alternative fuel utilisation, Lafarge Africa Nigeria
Installed capacity Production based

Installed
capacity % share of Weighted Volum es % share of Weighted Current
Plants (m tpa) capacity AF ratio (m tpa) vols AF ratio AF ratio
Ew ekoro 1 1.1 10% 4% 0.6 12% 5% 40%
Ew ekoro 2 2.5 24% 11% 1.1 24% 11% 46%
Sagamu 0.9 9% 2% 0.5 10% 3% 25%
Ashaka 1.0 10% 8% 0.6 12% 9% 80%
UNICEM 5.0 48% 0% 2.1 43% 0% 0%
10.5 100% 25% 4.8 27%
In our view, attaining appreciable alternative fuel usage at the 5mt p.a UNICEM plant could be
supportive of an earnings re-rating. However, we are doubtful of the availability of an alternative fuel
source to achieve this in the near term.
 Thirdly, while we are encouraged as regards the potential earnings impact of improved
alternative fuel usage, we have no guidance on alternative fuel sourcing and capex costs.
This limits our ability to incorporate potential accretion to earnings.
We forecast five-year EBITDA CAGR at 11%

We forecast Lafarge Africa’s 2017e and 2018e EBITDA at N57.8bn (+99%) and N74bn respectively
(+27%) (Figure 101). Our 2017e EBITDA growth is flattered by a weak 2016. Beyond 2018e, we
forecast EBITDA growth to average 11% y/y.
On a group basis, we forecast 170bp EBITDA margin expansion in 2018e to 23.5% (Figure 102),
mainly from EBITDA margin recovery from the South African operation.
Our estimates imply an EBITDA growth of 11% y/y for Nigeria in 2018e to cN70bn, with South Africa
returning a positive EBITDA of N4.6bn in 2018e.
Figure 101: EBITDA contribution per segment in NGN, m Figure 102: EBITDA growth and margin – Group
120,000
100% 30%
80,000
60%
20%
40,000 20%
2016A
2018e
2017e
2019e
2020e
2021e
2022e
2023e
- -20%
10%
2021e
2022e
2023e
2014A
2015A
2016A
2017e
2018e
2019e
2020e
-60%
-40,000
WAPCO UNICEM -100% 0%
Ashaka Atlast & Ready mix
EBITDA growth Group EBITDA margin, RHS
Lafarge South Africa

We model 12% y/y earnings growth in 2018e
In 2017e, we forecast PAT to come in 33% higher y/y, flattered by a weak 2016 that was affected by
operational challenges and currency translation losses. Our 2018e earnings growth of 12% year-on-
year is helped by the improvements we forecast to gross and EBIT margins.
Beyond 2018e, we forecast earnings growth to average 20% y/y, helped by the c30% y/y growth we
see in 2019e. Our 2019e earnings growth of 30% year-on-year is helped by the improvements we
forecast for gross (+60bp) and EBIT (+105bp) margins, in addition to a decline in net financing costs
of 15% y/y.
Figure 103: EPS growth profile
60%
40%
20%
0%
2015 2016 2017e 2018e 2019e 2020e 2021e 2022e 2023e
-20%
-40%
-60%
We are aggressive on margins, relative to consensus

Relative to consensus, we are aggressive on the outlook of Lafarge Africa’s EBITDA margin - our
EBITDA margin forecast is 110 bp higher than consensus over 2018e/19e . We are however less
optimistic on FCF going forward relative to consensus.
Figure 104: RMB’s estimates vs. Bloomberg market consensus, in NGN million except stated.
2017e 2018e 2019e
Bloomberg RMB vs Bloomberg RMB vs Bloomberg RMB vs
Cons. RMB ests. Cons. Cons. RMB ests. Cons. Cons. RMB ests. Cons.
Revenue 304 289 -5% 345 314 -9% 384 348 -9%
Gross margin 28.4% 32.8% 444bps 31.3% 32.4% 106bps 30.4% 33.0% 263bps
EBIT 37 55 49% 59 59 -1% 59 69 17%
EBITDA 63 58 -8% 80 74 -8% 84 82 -2%
EBITDA margin 20.6% 20.0% -61bps 23.1% 23.5% 40bps 21.8% 23.7% 181bps
PBT 14 27 90% 40 40 -2% 45 52 17%
FCF 76.0 (46.4) -161% 65.4 33.1 -49% 70.0 56.5 -19%

Key assumptions
 The rights issue will be fully subscribed, raising the N131bn as required, leading to shares
outstanding of N8.7bn units (Figure 105).
 Our shares outstanding have captured the additional 3.1bn new shares from the equity
rights issue.
 Proceeds from the rights issue will be applied to the quasi equity of N123bn (USD343m),
with the balance of N6.8bn applied to working-capital needs (Figure 105).
Figure 105: Summary of Lafarge Africa’s rights issue Figure 106: Use of rights issue proceeds
5%
Details Num bers
Pre-rights shares in issue, bn 5.6
Rights ratio - 5 new shares for every 9 held 0.6
New shares from rights issue, bn 3.1
Post rights shares in issue bn 8.7
Rights issue price (N) 42.5
Gross proceeds, N bn 131.7
Net proceeds, , N bn 130.3
Offer costs, , N bn 1.4
Offer costs as a % of gross proceeds 1.0% 95%
Quasi equity Applied to working capital
 We assume the South Africa operation’s margin will recover to 5% in 2018e, from a loss
position in 2017e (-4%), remaining at 5% over our forecast horizon (Figure 107). As at
9M17, the SA operation had reported negative EBITDA of -N4.5bn and a post-tax loss of
N5.9bn on operational challenges at the SA plant.
Figure 107: Lafarge Africa’s South Africa operation, EBITDA margin
25%
20%
15%
10%
5%
0%
2017e
2014e
2018e
2019e
2020e
2021e
2022e
2023e
2012
2013
2015
2016
-5%
-10%
Sales: 11% CAGR over 2018e-23e

Lafarge Africa’s Nigerian operation remains the biggest contributor to revenue, contributing 70% to
group sales in 2016 (Figure 108). We expect Nigeria’s contribution to sales to improve further – to a
74% peak – over our forecast horizon, as we see limited growth from the South African operation
relative to Nigeria.

On a growth basis, we forecast sales growth of c12%% y/y to N314bn (Figure 109) in 2018e, with an
11% CAGR over 2018e-2023e.
Figure 108: Segmental sales share Figure 109: Group sales and sales growth
100% 50%
500,000
50%
300,000
0%
0% 100,000
2015A
2018e
2016A
2017e
2019e
2020e
2021e
2022e
2023e
2015A
2016A
2017e
2018e
2019e
2020e
2021e
2022e
2023e
-50% -100,000 -50%
SA others
Nigeria, ReadyMix, Aggregates and Atlas SA others
SA readymix and concretes Nigeria, ReadyMix, Aggregates and Atlas
-100% Intercompany eliminations SA readymix and concretes
Sales (Cement) - SA Intercompany eliminations
Sales (Cement) - Nigeria Sales (Cement) - SA
Sales (Cement) - Nigeria
For Lafarge Africa’s Nigeria operation, we forecast sales growth of 32% y/y in 2017e (Figure
110), helped to a large degree by a 58% y/y price increase in 2017e, as volumes were subdued at -
19% y/y. We have a 10% y/y sales growth expectation for Nigeria in 2018e, supported by a
combination of higher price (c4%) and volumes (c8%). Beyond 2018e, we forecast sales growth to
average 11% y/y.
For the South Africa operation, we forecast 33% sales growth in 2017e, moderating to 4% y/y in
2018e. (Figure 111). 2017e sales growth is driven primarily by price and currency translation, as
volumes are down across product lines (cement:-23% y/y, aggregates: -6% y/y, ready mix: -6% y/y).
We estimate sales growth to moderate to 7% y/y in 2021e, before flattening out over 2023e.
Figure 110: Sales (NGN, m) and growth, Nigeria Figure 111: Sales (NGN, m) and growth, South-Africa
400,000 40% 140,000 40%

120,000 30%
300,000 20%
100,000
20%
80,000
200,000 0% 10%
60,000
0%
100,000 -20% 40,000
20,000 -10%
0 -40% - -20%
2022e
2017e
2018e
2019e
2020e
2021e
2023e
2016A
2018e
2023e
2016A
2017e
2019e
2020e
2021e
2022e
Nigeria , NGN m Y/y, RHS South Africa Y/y


Volumes growth to rebound 6% y/y in 2018e
We forecast group volumes to decline by 19% y/y in 2017e (Figure 112) for Lafarge Africa, driven
primarily by weak volumes across all product lines – notably, a 17% and 23% contraction in cement
volumes in Nigeria and South Africa respectively.
We see group volumes at +6% y/y (Figure 113), helped by the demand recovery we see in Nigeria
(+8%% y/y) and South Africa (+3% y/y). We estimate Nigeria’s volumes at 4.8mt in 2018e.
Figure 112: Group volume growth Figure 113: Volume growth by product line and region
15% 30% 5%
10% 20%
5% 10% -5%
0% 0%
2016A 2017e 2018e 2019e 2020e 2021e 2022e 2023e
2016A
2018e
2022e
2017e
2019e
2020e
2021e
2023e
-5%
-10% -15%
-10%
-20%
-15% Nigeria, Cement
-30% South Africa, Cement -25%
-20% Readymix, SA
Aggregates, SA
-25% Ready Mix, Nigeria, RHS
We expect Nigeria to remain the core driver of cement volumes for Lafarge Africa, accounting for
75% of volumes in 2018e (Figure 114). We forecast this to improve to c80% by 2023e, as we regard
Nigeria a high-growth market relative to South Africa.
Given the advantage of newer plants and access to gas, we forecast volumes at UNICEM (Figure
114) to be meaningful, at 32% of the group’s volumes in 2018e from 21% in 2014, as Lafarge
attempts to optimise margins.
Figure 114: Share of cement volumes sold Figure 115: Group production volumes (tonnes)
12.0
100%
10.0
80%
8.0
60%
6.0
40% 4.0
20% 2.0
0% -
2016A 2017e 2018e 2019e 2020e 2021e 2022e 2023e 2016A 2017e 2018e 2019e 2020e 2021e 2022e 2023e
WAPCO UNICEM Ashaka Lafarge South Africa WAPCO UNICEM Ashaka Lafarge South Africa


We estimate Nigeria’s 2018e volumes at 4.8mt (Figure 116) – up c8% y/y, with cement volumes in
South Africa expected to be up 3% in 2018e to 1.6mt (Figure 117). Over our forecast period, we
expect volume CAGR of 13% and 5% for Nigeria and South Africa respectively.
Figure 116: Nigeria production and y/y growth Figure 117: South Africa production and y/y growth
9.0 20% 2.5 20%
2.0 10%
10%
6.0
1.5 0%
0%
1.0 -10%
3.0
-10%
0.5 -20%
- -20% - -30%
2016A
2017e
2018e
2019e
2020e
2021e
2022e
2023e
2016A
2017e
2021e
2018e
2019e
2020e
2022e
2023e
Nigeria cement vols (mt) Y/y SA, vols (mt) Y/y
Figure 118: Group utilisation rate Figure 119: Segmental utilisation rate
70%
80%
65%
70%
60%
55% 60%
50%
50%
45%
40%
40%
2016A
2020e
2022e
2017e
2018e
2019e
2021e
2023e
2016A
2018e
2023e
2017e
2019e
2020e
2021e
2022e
Nigeria, Utilisation SA, utilisation

Sensitivity analysis
Price and volumes to EPS
On our estimates, Lafarge Africa’s earnings are much more sensitive to price changes than
volumes. Our sensitivity shows that a +/-5% change in cement rice from current levels could lead to
a +/-28% change in our 2018e EPS (Figures 120). According to our analysis, we find that a +/-15%
change in our 2018e cement volume forecast for Nigeria could lead to a +/- (34%, 29% and 29%)
decline in our EPS estimates for 2018e, 2019e and 2020e in that order (Figures 121).

Figure 120: Earnings sensitivity to Nigeria’s cement prices Figure 121: Earnings sensitivity to Nigeria’s cement volumes
150% 50%
100%
25%
50%
0% 0%
-20% -15% -10% -5% 0% 5% 10% 15% 20% -20% -15% -10% -5% 0% 5% 10% 15% 20%
-50%
-25%
-100%
-150% -50%
2018e 2019e 2020e 2018e 2019e 2020e
Risk to our estimates

Growth capex estimates: As at our last meeting with management in December 2017,
management is yet to provide near or medium-term capex guidance. As such, we make certain
assumptions based on our view of the sector.
Over our forecast horizon, we forecast growth capex of USD150m for a 1mt p.a. cement capacity in
Ashaka and maintenance capex of one euro per tonne.
Operational shutdowns, ageing plants in Nigeria: This is a key risk to our estimates, as there
have been repeated incidences of operational outage at some of Lafarge Africa’s cement plants in
South West Nigeria recently. We believe this is due primarily to the age of the plants. While our
volume forecast for Lafarge Africa’s Nigeria operations is based on our cement-GDP multiplier
model, operational challenges from Lafarge Africa’s ageing plants in South West Nigeria could lead
to volume underperformance.
South Africa operations: One key risk we see to our estimates from the South Africa operations is
earnings and industrial performance. For earnings, we have attempted to model this by assuming a
5% EBITDA margin over our forecast horizon. We have also assumed a 45% utilisation rate for the
cement operation in 2018e to reflect our view on volumes.

Valuation
Methodology
We value Lafarge Africa at N49 per share based on our five-year discounted cash flow (DCF)
methodology (Figure 122).
The main assumptions of our DCF include:
 Geared beta of 0.9 (Bloomberg)

 Risk-free rate of 14.0%, in line with expected yields on a 10-year Nigerian government
paper.
 Equity risk premium of 7.5%, a 100bp add-on to reflect higher risk associated with
modelling relative to Dangote Cement.
 Long-term nominal growth rate of 12%, reflective of our expectations of i) long-term
inflation rate of 9% and ii) a 3% long-term GDP growth rate.
 Cost of equity of 20.8% and WACC of 17.5%.
Figure 122: DCF valuation of Lafarge Africa, NGN bn except stated
DCF Valuation 2016A 2017e 2018e 2019e 2020e 2021e 2022e 2023e
EBIT 10 55 59 69 78 86 89 96
Less: taxation 40 -2 -12 -16 -17 -22 -24 -26
Tax adjusted EBIT 50 53 47 53 61 63 65 70
D&A 16 3 15 14 9 11 18 26
Change in w orking capital 3 -67 -5 21 14 -24 -20 -31
Less: capex -41 -34 -18 -25 -33 -14 -15 -17
Unleveraged free cash flow 28 -45 39 62 51 36 48 48
WACC 17.5%
Discounted cash flow 28 (45) 39 53 37 22 25 21
Long term grow th rate 12%
Terminal value 966 966 966 966 966 966
Discounted terminal value 431 506 595 699 699 966
PV of 2023e CF 628 641 682 759 746 988
Net debt + minority 2018e 208 195 186 196 193 194
Fair Mkt. Cap. 420 447 496 563 552 794
Per share value (NGN) 49 51 57 64 63 91
Source: Company data, Industry checks, RMBNS
Figure 123: WACC and terminal growth sensitivity
WACC
49 15% 16% 17% 17.5% 18% 19% 20% 21% 22% 23% 24%
6% 33 28 24 22 20 18 15 13 11 10 8
7% 37 31 26 24 23 19 17 14 12 10 9
Terminal growth rate
8% 43 35 30 27 25 21 18 16 13 11 10
9% 50 41 34 31 28 24 20 17 15 13 11
10% 61 48 39 35 32 27 23 19 16 14 12
11% 76 58 46 41 37 31 26 22 18 15 13
12% 103 73 56 49 44 36 29 24 20 17 15
13% 155 99 71 61 54 42 34 28 23 19 16
14% 313 150 95 79 68 51 40 33 27 22 18
15% #DIV/0! 302 144 113 91 65 49 39 31 25 21

Appendix 1: Market structure
Supply and consumption: Transitioned from importer to exporter
Over the last 20 years to 2016, the Nigeria cement sector has gradually transitioned from an import-
dependent market to exporting cement to neighbouring African countries (Figure 124). This
transitioning was helped by supportive government policies, such as pioneer tax incentives, as well
as a progressive phase out of cement imports through protectionism. Consequently, Nigeria’s
importation of cement has declined from 63% of consumption to being an exporter of cement in
2017.
Figure 124: Nigeria cement consumption pattern, supply in % of imports and domestic production
100%
80%
60%
40%
20%
0%
2017e
2018e
2003
2014
1996
1997
1998
1999
2000
2001
2002
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2015
2016
Import Domestic production
During the same period, in absolute terms, Nigeria’s cement consumption increased from c4mt
(1996) to 23mt in 2016, an impressive CAGR of c10% supported by increased demand for housing
as well as infrastructure.
We expect a -16% contraction in Nigeria’s cement demand in 2017e which in our view represents a
clear sign of market correction following growth of +10% y/y growth in 2016, while the economy
contracted -1.6% in real terms. This led to Nigeria’s cement-GDP multiplier decoupling in 2016
(Figure 127).
Beyond 2017e, we forecast Nigeria’s cement consumption growth to return to the path of recovery,
growing an average of 11% year-on-year over 2018e-2021e.

Figure 125: Nigeria cement consumption (mt) pattern
30.0 Manufactured imported Y/y growth (RHS)

25%
20%
25.0
15%
20.0 10%
5%
15.0
0%
10.0 -5%
-10%
5.0
-15%
- -20%
2011
2016
2019e
2007
2008
2009
2010
2012
2013
2014
2015
2017e
2018e
2020e
Nigerian cement sector is currently over supplied having an installed capacity of c47mt and
producing only about 20mt. We forecast the sector to operate at a utilisation rate of 44% in 2018e,
improving to 51% by 2020e.
One positive we see from the excess capacity in Nigeria, is the ability to export cement to
neighbouring countries. Dangote Cement currently exports cement to Ghana where it has a 1.5mt
bagging plant, and clinker to its grinding plant in Cameroun.
Figure 126: Nigeria cement sector utilisation
60%
55%
50%
45%
40%
2014A
2015A
2016A
2020e
2017e
2018e
2019e
2021e

Appendix 2: RMBNS Cement-GDP multiplier
Our cement consumption forecast for Nigeria is based on our in-house derived cement-GDP
multiplier. We forecast Nigeria’s near term sustainable cement-GDP multiplier at 3.4x over 2018e-
2020e (Figure 127).
The adjustments we have made reflects the countercyclical swings in cement volumes and GDP
growth, in 2016e and 2017e, which we attribute to lag effects. In 2016e, cement consumption in
Nigeria was unusually strong at c10% y/y compared with a GDP contraction of -1.5% y/y. We
suspect the decoupling in growth between GDP and cement consumption growth was driven by the
following
 Front loading of cement demand in anticipation of potential price increases. We view this
as plausible given prices have increased c65% y/y in 2017e
 the need for capital preservation by investors in an economy which was undergoing
recession
Over the last seven years to 2017, Nigeria’s cement consumption growth has decoupled from GDP
growth twice - first in 2013 and more recently 2016. In both cases, the decoupling was preceded by
a year of strong cement volume growth – in 2013, the multiplier was high at 2.9x.
Figure 127: Cement GDP multiplier

15
-5 Dangcem GDP multiplier (x)

-15
GDP growth (%)
Lafarge Africa GDP multiplier (x)
-25
2010
2011
2012
2013
2014
2015
2016
2017e
2018e
2019e
2020e
Source: RMBNS and analysis

Appendix 3: Market share and competition
Nigeria’s cement sector is structured as a competitive oligopolistic market, with three key players –
Dangote Cement (OW), Lafarge Africa (UW) and the BUA Group (Not covered) Dangote Cement is
the largest player by capacity and production, accounting for about 60% of installed capacity and
67% of cement consumed in Nigeria (Figure 128 and 129).
Figure 128: Installed cement capacity share Figure 129: Cement production share
62% 62% 60% 59% 64% 63% 62% 67% 67% 67% 68%
69% 70% 67% 67% 70% 68%
76%
22% 22% 25% 26% 29%

24% 24% 28% 30% 23% 23% 24% 23% 23%
24%
29% 28% 21%
2013A 2014A 2015A 2016A 2017e 2018e 2019e 2020e 2021e 2013A 2014A 2015A 2016A 2017e 2018e 2019e 2020e 2021e
BUA Group Lafarge Africa Dangote Cement

BUA Group Lafarge Africa Dangote Cement
Source: Company data, RMB Nigeria Stockbrokers analysis Source Company data , RMB Nigeria Stockbrokers analysis
Combined, Nigeria has an installed capacity of 44mt (2017e) having added 16mt over 2013e-2017e.
We expect installed capacity to increase to 47mt in 2018e when the BUA Group completes its 3mt
p.a.mt p.a. OBU II cement plant in Okpella, Edo State.
Nigeria’s installed cement capacity has grown from 28mt in 2011 to 44mt in 2016 helped by
favourable government policies, which has led to import-substitution. We estimate installed capacity
to increase to 47mt in 2018e when we expect the BUA group to complete its 3mt OBU II plant in
Okpella in Edo State.
Figure 130: Nigeria cement capacity profile
60.0 +5.79%
50.0
40.0
30.0
20.0
10.0
-
2011A 2012A 2013A 2014A 2015A 2016A 2017e 2018e 2019e 2020e 2021e 2022e

Appendix 4: Pricing
Nigeria’s cement market will continue to command a premium cement price,
in USD, relative to other EM markets in our view
Based on the data we sampled in Figure 131, we find that Nigeria’s low per capita cement
consumption is supportive of higher cement prices relative to peers in our view. As such, we believe
the Nigerian market will continue to command a premium cement price, in USD, relative to other EM
markets.
Our analysis shows that countries with higher per-capita consumption, e.g. Turkey, Egypt and
Thailand have relatively lower cement prices compared to countries with low per capita
consumption. In our view, this implies Turkey, Egypt and Thailand have accelerated fixed
investments.
Nigeria has one of the highest cement prices (USD135/t) amongst emerging market peers. This is
inspite of the market having excess capacity. We also understand the excess capacity is a market
strategy adopted by Dangote Cement to create a high entry barrier to potential new entrants and
investments.
Figure 131: Per capita consumption and cement prices

800 180
Per capita consumption (Kg) - LHS Cement prices (US$/t) - RHS
700 160
600 140
120
500
100
400
80
300
60
200 40
100 20
0 0
Egypt
Angola
India
Thailand
Pakistan
Sudan
Brazil
Kenya
Mexico
South
Ethiopia
Philippines
Nigeria
Turkey
Africa
Source: Dangote Cement, RMB Nigeria Stockbrokers analysis
Cement price in Nigeria and the kinked demand curve theory

To better understand cement pricing in Nigeria, as well as how it impacts market share and
competition, we present the fundamentals of a competitive oligopolistic market as defined by the
kinked demand curve theory (Figure 132)
When a firm in the cement market, increases price above P1, as shown in Figure 132, the demand
is relatively elastic. Consequently, due to little or no product differentiation, if other competing firms
decide not to increase prices, the firm increasing prices will lose some market share.
On the other hand, reducing price below P1, in a bid to undercut the market will likely lead to a gain
in market share assuming the other competitive firms do adjust prices accordingly. However, when
other firms adopt the same strategy there is no change in market share.

Figure 132: Kinked demand curve
Source: Warwick business school
Based on our discussions with management of Dangote Cement, we understand the pricing
rationale to be in favour of protecting ‘dollar’ margins for its Nigerian business. As such, a
devaluation of the NGN could trigger further price increases.
From a pricing perspective, Nigeria’s cement market tends towards a monopolistic nature in our
opinion. This is because Nigeria’s cement price is set by the market’s cost and profitability leader –
Dangote Cement, leaving no ‘room’ for sustained price wars by rival firms.

Appendix 5: Cost structure
Share of total – Distribution costs stands out for Lafarge Africa
Both Lafarge Africa and Dangote Cement have different cost structure due mainly to the way their
distribution platform is organised. However, Dangote Cement remains the most profit after we
attempt to reclassify the costs to appear similar.
Dangote Cement distribute its cement products through its own trucks – which is carried as an asset
on its balance sheet. Lafarge Africa, on the other hand, distributes its products mainly through third-
party agreements with truck owners – in most cases an exclusive contract - making payments to
these truck owners based on distance covered. As such, distribution costs features predominantly in
Lafarge Africa’s costs structure (COGS) at 42% of COGS (FY16), while not represented in Dangote
Cement’s COGS.
Figure 133: Lafarge Africa’s cost structure – As reported (FY16)

Production
fixed costs,
15%
Others, 4%
Distribution
costs, 42%
D&A, 9%
Maintenance
fixed costs,
8%
Material
Consumed, Fuel & power,
9% 14%
Source: Lafarge Africa, RMBNS
Dangote Cement on the other hand reports its distribution costs as ‘haulage expenses’ in the selling
and distribution line of its income statement. Haulage expenses include cost of running the trucks –
diesel etc.
Once we adjust for distribution costs, Lafarge Africa’s costs structure looks similar to that of Dangote
Cement (Figure 134 and 135), albeit with Dangote cement remaining more profitable on a per tonne
basis.
Once we adjust for distribution expenses, Lafarge Africa’s COGS/t moderates to NGN14,000/t (from
NGN23,700/t) which is comparable Dangote Cement’s NGN15,700/t.
The exception we see here is maintenance costs which is 14% compared with the 8% for Dangote
Cement. We reckon the difference in the age of the cement plants is responsible for the higher
maintenance costs of Lafarge Africa as older plants require more frequent maintenance.

Figure 134: Dangote Cement’s cost structure Figure 135: Lafarge Africa’s cost structure, adjusted for
distribution costs
Other Plant
Production Fuel &
Production maintenanc
fixed costs, power, 24%
expenses, e, 8%
26%
2% Material
Depreciatio
Consumed,
n& 34%
amortizatio
n, 16%
Salaries
Others, 7%
and related Material
staff costs, Consumed,
7% Fuel & 15%
Power
Consumed,
33% Maintenanc
D&A, 15% e fixed
costs, 14%
Source: Dangote Cement, RMB Nigeria Stockbrokers Source: Lafarge Africa, RMB Nigeria Stockbrokers

Appendix 6: Dangote Cement
Appendix 6a: Financial statement
Figure 136: Income statement and key ratios
Incom e statem ent, N m illion 2014A 2015A 2016A 2017e 2018e 2019e
Revenue 391,639 491,725 615,103 802,372 913,796 1,015,526
Gross profit 248,581 289,917 291,287 454,049 500,183 554,596
EBIT 187,102 207,822 182,493 306,395 355,805 402,409
EBITDA 223,302 262,448 257,200 387,551 429,898 483,505
Net interest (2,413) (19,528) (42,719) (11,490) (17,344) (19,725)
PBT 184,689 188,294 180,929 291,193 331,998 382,684
Tax (25,187) (6,971) 5,695 (34,943) (49,800) (57,403)
Effective tax rate 14% 4% -3% 12% 15% 15%
PAT 159,501 181,323 186,624 256,250 282,198 325,281
Per share data 2014A 2015A 2016A 2017e 2018e 2019e
Shares outstanding (m) 17,041 17,041 17,041 17,041 17,041 17,041
Earnings per share (EPS), N 9.36 10.86 10.95 15.04 16.56 19.09
Earnings per share (EPS), post minorities, N 9.42 10.86 11.34 14.63 16.97 19.50
Dividend per share (DPS), N 5.65 8.00 8.50 10.97 11.88 13.65
Grow th data 2014A 2015A 2016A 2017e 2018e 2019e
Revenue 1% 26% 25% 30% 14% 11%
Gross profit -3% 17% 0% 56% 10% 11%
EBIT -4% 11% -12% 68% 16% 13%
EBITDA -3% 18% -2% 51% 11% 12%
PBT -3% 2% -4% 61% 14% 15%
PAT -21% 14% 3% 37% 10% 15%
EPS -21% 16% 1% 37% 10% 15%
EPS, post Minorities -99% 15% 4% 29% 16% 15%
DPS -19% 41% 6% 29% 8% 15%
Key ratios 2014A 2015A 2016A 2017e 2018e 2019e
Gross margin 63% 59% 47% 57% 55% 55%
EBITDA margin 57% 53% 42% 48% 47% 48%
Operating margin 48% 42% 30% 38% 39% 40%
Pretax margin 47% 38% 29% 36% 36% 38%
Net margin 41% 37% 30% 32% 31% 32%
ROE 27% 29% 24% 26% 28% 28%
ROAE 28% 30% 27% 29% 29% 30%
RoAA 18% 18% 15% 15% 17% 18%
Debt/Equity (x) 0.4 0.4 0.5 0.5 0.3 0.2
Debt/EBITDA (x) 0.9 0.9 1.2 1.0 0.8 0.5
ROIC (NOPAT based) 24% 24% 18% 24% 26% 28%
Current ratio (x) 72% 70% 66% 70% 93% 129%
Acid ratio (x) 54% 48% 47% 53% 73% 107%
Net Debt / Equity 29% 35% 33% 30% 19% 3%
Net interest cover (x) 77.5 10.6 4.3 26.7 20.5 20.4
Net debt/EBITDA 99% 82% 100% 69% 46% 8%
DuPont Model - 5 stage m odel
EBIT/Sales - EBIT margin 48% 42% 30% 38% 39% 40%
PAT/PBT - Tax burden 87% 98% 107% 86% 87% 87%
PBT/EBIT - Interest burden 0.99 0.91 0.99 0.95 0.93 0.95
Profit M argin 41% 38% 31% 31% 32% 33%
Sales/Assets - Asset turnover 40% 44% 40% 47% 53% 56%
Asset/Equity - equity muliplier (x) 1.7 1.7 1.9 1.8 1.6 1.5
ROE 27% 29% 24% 26% 28% 28%
Dividend payout ratio 60% 74% 75% 75% 70% 70%
Source: Company data, RMBNS Research estimates and analysis

Figure 137: Balance sheet, Cash flow statement and valuation metrics
Balance sheet, N m illion 2014A 2015A 2016A 2017e 2018e 2019e

Current assets 137,104 165,980 303,164 419,564 413,249 484,208
Cash 20,593 40,792 115,693 159,272 145,900 213,199
Property, plant and equipments 747,794 917,212 1,155,711 1,194,589 1,219,470 1,209,288
Total non-current assets 847,617 944,963 1,224,744 1,281,771 1,317,117 1,318,898
Total assets 984,721 1,110,943 1,527,908 1,701,334 1,730,366 1,803,107
Current liabilities 232,949 200,698 512,247 520,812 444,717 375,648
Short term debt 110,640 47,275 220,300 273,065 191,145 97,010
Long term debt 131,942 208,329 152,475 152,475 152,475 152,475
Total liabilities 392,834 466,223 730,563 757,693 681,598 612,529
Shareholders' equity 591,886 644,720 797,345 943,641 1,048,768 1,190,578
Total liabilities and equities 984,721 1,110,943 1,527,908 1,701,334 1,730,366 1,803,107
Invested capital 834,468 900,324 1,170,120 1,369,181 1,392,388 1,440,062
Net debt / (cash) 221,988 214,812 257,082 266,268 197,719 36,286
Cash flow , N m illion 2014A 2015A 2016A 2017e 2018e 2019e

EBIT 187,102 207,822 182,493 306,395 355,805 402,409
Depreciation and amortisation 36,266 54,626 74,750 81,156 74,093 81,096
Change in w orking capital (26,043) 26,356 35,857 (84,979) (1,232) 21,406
Cash flow from operations 215,348 299,517 278,594 267,629 378,866 447,508
Capex (217,192) (157,092) (118,841) (113,585) (106,037) (63,910)
Free cash flow 23,303 143,826 161,670 190,461 296,720 393,811
Cash flow from investing (192,045) (155,691) (116,924) (77,167) (82,146) (53,697)
Cash flow from financing (80,384) (117,521) (93,905) (140,591) (310,092) (326,512)
Net (decrease) / increase in cash (57,081) 26,305 67,765 49,871 (13,372) 67,299
Valuation 2014A 2015A 2016A 2017e 2018e 2019e

P/E (x) 27.6 24.0 22.9 17.8 15.3 13.3
EV/EBITDA (x) 20.7 17.6 18.0 11.9 10.8 9.6
EV/IC (x) 5.5 5.1 4.0 3.4 3.3 3.2
EV/Sales (x) 11.8 9.4 7.5 5.8 5.1 4.6
EV/output, USD/t 927 684 551 577 524 481
EV/installed capacity, USD/t 447 295 285 282 282 265
Free cash flow yield 0.5% 3.2% 3.6% 4.3% 6.7% 8.9%
Dividend yield 2.2% 3.1% 3.3% 4.2% 4.6% 5.2%

Appendix 6b: Production costs profile
We estimate Dangote Cement’s COGS/t of N15.8k.t in 2017e (Figure 136), increasing 8% to N17k/t in 2018e mainly on naira
weakness we see from Nigeria.
Figure 138: Production costs profile
Production, '000 tonnes Q1 15 Q2 15 Q3 15 Q4 15 FY15 Q1 16 Q2 16 Q3 16* Q4 16 12M 16 Q1 17 Q2 17 Q3 17 9M 17 2017e 2018e

Nigeria 3,103 3,211 3,042 3,934 13,290 4,513 4,253 3,147 3,215 15,128 3,770 3,085 2,775 9,630 12,728 13,638
Pan-Africa 699 1,121 1,880 1,868 5,568 1,922 2,282 2,232 2,189 8,639 2,255 2,399 2,225 6,879 9,544 10,884
West & Central Africa 227 570 703 637 2,137 1,246 1,316
South & East Africa 472 551 1,177 1,272 3,472 691 965 2,232 2,189 8,639 2,342 2,406 2,274 7,022
Inter company sales (41) (41) (15) 1 (87) (7) (49) (143) (191) (245)
Volume (kt) 3,802 4,332 4,922 5,761 18,817 6,420 6,536 5,379 5,404 23,767 5,938 5,477 4,951 16,366 22,081 24,277
COGS/tonne (NGN) 10,521 10,272 11,012 10,954 10,725 9,689 11,778 17,196 17,049 13,625 14,786 16,386 16,624 15,878 15,775 17,037
Nigeria 82% 74% 62% 68% 71% 70% 65% 59% 59% 64% 63% 56% 56% 59% 58% 56%
Pan-Africa 18% 26% 38% 32% 30% 30% 35% 41% 41% 36% 38% 44% 45% 42% 43% 45%
Inter company sales 0% 0% 0% -1% 0% 0% 0% 0% 0% 0% -1% 0% -1% -1% -1% -1%
100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%
COGS - Nigeria, NGN, bn (30,569) (29,190) (30,102) (40,557) (130,418) (39,435) (46,125) (48,182) (44,387) (178,129) (43,096) (40,411) (38,273) (121,780) (161,415) (200,463)
COGS - Pan-Africa, NGN, bn (9,428) (15,314) (24,092) (22,557) (71,390) (22,769) (30,858) (44,315) (47,745) (145,687) (44,706) (49,336) (44,032) (138,074) (186,908) (213,150)
(39,997) (44,504) (54,194) (63,113) (201,808) (62,204) (76,983) (92,497) (92,132) (323,816) (87,802) (89,747) (82,305) (259,854) (348,323) (413,613)
COGS per tonne - Nigeria, NGN 9,852 9,091 9,895 10,309 9,813 8,738 10,845 15,310 13,806 11,775 11,431 13,099 13,792 12,646 12,682 14,699
COGS per tonne -Pan-Africa, NGN 13,488 13,661 12,815 11,816 12,728 11,755 13,528 19,854 21,811 16,864 19,089 20,505 19,363 19,663 19,584 19,584
Weighted average, NGN, bn 10,520 10,273 11,011 10,956 10,725 9,689 11,778 17,196 17,049 13,625 14,786 16,386 16,624 15,878 15,775 17,037

Appendix 7: Lafarge Africa
Appendix 7a: Financial statement
Figure 139: Income statement and key ratios
Incom e statem ent, N m illion 2014A 2015A 2016A 2017e 2018e 2019e
Revenue 260,810 267,234 219,714 289,329 313,840 347,765
Gross profit 83,028 82,645 40,662 94,961 101,686 114,681
EBIT 53,966 51,760 9,927 55,006 58,534 68,509
EBITDA 69,500 67,800 29,061 57,794 73,677 82,255
Net interest -7,932 -9,028 -11,829 -21,871 -18,996 -16,112
PBT 40,358 29,389 -22,819 27,147 39,538 52,397
Tax -6,538 -2,277 39,717 -2,443 -11,862 -15,719
Effective tax rate 16% 8% 174% 9% 30% 30%
PAT 33,820 27,113 16,899 24,703 27,677 36,678
Per share data 2014A 2015A 2016A 2017e 2018e 2019e
Shares outstanding (m) 4,404 4,404 5,576 5,576 8,674 8,674
Earnings per share (EPS), N -29.0 6.5 3.3 4.4 3.2 4.2
Earnings per share (EPS), post minorities, N -29.0 6.5 3.3 4.4 3.2 4.2
Dividend per share (DPS), N 3.6 3.0 - 2.9 2.1 2.7
Grow th data 2014A 2015A 2016A 2017e 2018e 2019e
Revenue 26.6% 2.5% -17.8% 31.7% 8.5% 10.8%
Gross profit 23.3% -0.5% -50.8% 133.5% 7.1% 12.8%
EBIT 18.5% -4.1% -80.8% 454.1% 6.4% 17.0%
EBITDA 24.8% -2.4% -57.1% 98.9% 27.5% 11.6%
Net interest 188.6% 13.8% 31.0% 84.9% -13.1% -15.2%
PBT -37.2% -27.2% -177.6% -219.0% 45.6% 32.5%
PAT -44.5% -19.8% -37.7% 46.2% 12.0% 32.5%
EPS -379.5% -122.4% -48.8% 33.1% -28.0% 32.5%
EPS, post Minorities -379.5% -122.4% -48.8% 33.1% -28.0% 32.5%
DPS n/a -16.7% -100.0% #DIV/0! -28.0% 32.5%
Key ratios 2014A 2015A 2016A 2017e 2018e 2019e
Gross margin 32% 31% 19% 33% 32% 33%
EBITDA margin 27% 25% 13% 20% 23% 24%
Operating margin 21% 19% 5% 19% 19% 20%
pretax margin 15% 11% -10% 9% 13% 15%
Net margin -49% 7% 8% 9% 9% 11%
ROE -127% 17% 7% 9% 9% 11%
ROAE -36% 4% 4% 4% 4% 5%
RoAA -36% 4% 4% 4% 4% 5%
Debt/Equity (x) 1.2 1.3 0.5 1.3 0.8 0.8
Debt/EBITDA (x) 1.7 2.2 3.1 4.6 3.5 3.2
ROIC (NOPAT based) 24% 19% 3% 10% 10% 12%
Current ratio (x) 1.0 0.8 0.6 0.7 0.8 0.8
Acid ratio (x) 0.5 0.5 0.3 0.3 0.4 0.4
Net Debt / Equity (x) 1.0 1.1 0.4 1.2 0.7 0.6
Debt to total capital (x) 0.5 0.6 0.3 0.5 0.4 0.4
Net debt/EBITDA (x) 1.4 1.9 3.7 5.7 2.8 2.4
DuPont Model - 5 stage m odel
EBIT/Sales - EBIT margin 21% 19% 5% 19% 19% 20%
PAT/PBT - Tax burden -317% 66% -81% 91% 70% 70%
PBT/EBIT - Interest burden 0.75 0.57 -2.30 0.49 0.68 0.76
Profit M argin -49% 7% 8% 9% 9% 11%
Sales/Assets - Asset turnover 63% 59% 44% 43% 45% 49%
Asset/Equity - equity muliplier (x) 4.1 3.9 2.0 2.3 2.2 2.2
ROE -127% 17% 7% 9% 9% 11%
Dividend payout ratio 47% 68% 0% 65% 65% 65%

Figure 140: Balance sheet, Cash flow statement and valuation metrics
Balance sheet, N m illion 2014A 2015A 2016A 2017e 2018e 2019e

Current assets 72,214 73,877 98,344 187,678 206,328 204,970
Cash 20,330 16,493 19,265 43,788 52,252 65,778
Property, plant and equipments 331,257 364,397 390,489 408,048 422,982 433,313
Total non-current assets 343,732 379,136 404,147 479,760 494,694 505,025
Total assets 415,947 453,012 502,491 667,439 701,022 709,995
Current liabilities 75,720 89,388 175,987 261,226 259,409 265,522
Short term debt 4,882 5,571 59,483 198,343 191,525 191,525
Long term debt 116,002 142,943 68,047 69,021 69,021 69,021
Total liabilities 240,367 276,861 253,538 382,660 380,843 386,957
Shareholders' equity 100,375 117,348 248,953 284,779 320,179 323,038
Total liabilities and equities 340,742 394,209 502,491 667,439 701,022 709,995
Invested capital 221,259 265,862 376,483 552,142 580,724 583,584
Net debt / (cash) 100,553 132,020 108,265 223,576 208,293 194,767
Cash flow , N m illion 2014A 2015A 2016A 2017e 2018e 2019e

EBIT 53,966 51,760 9,927 55,006 58,534 68,509
Depreciation and amortisation 15,509 16,149 15,997 2,787 15,143 13,745
Change in w orking capital -3,691 2,277 3,489 -67,025 -5,184 20,997
Cash flow from operations 57,817 57,868 10,663 -15,368 48,052 78,953
Capex -25,485 -59,853 -41,364 -33,557 -17,721 -25,474
Free cash flow 32,331 -1,985 -30,701 -48,925 30,331 53,479
Cash flow from investing -55,230 -63,141 -37,479 -29,882 -15,532 -22,339
Cash flow from financing -28,254 1,652 6,178 92,768 -24,055 -43,088
Net (decrease) / increase in cash -25,668 -3,620 -20,638 47,518 8,464 13,526
Valuation 2014A 2015A 2016A 2017e 2018e 2019e

P/E (x) 13.4 15.8 26.7 18.3 16.3 12.3
EV/EBITDA (x) 9.5 9.7 22.7 11.4 8.9 8.0
EV/IC (x) 3.0 2.5 1.8 1.2 1.1 1.1
EV/Sales (x) 2.5 2.5 3.0 2.3 2.1 1.9
EV/output, USD/t 220 214 251 307 285 264
EV/installed capacity, USD/t 158 158 158 158 158 155
Free cash flow yield 7.2% -0.4% -6.8% -10.8% 6.7% 11.9%
Dividend yield 6.9% 5.8% 0.0% 5.5% 4.0% 5.3%

Appendix 7b: Shareholding structure
The Shareholding structure below is as at 2017 before the 3.1 billion equity rights issue in December
2017.
Figure 141: Shareholding by investor type Figure 142: Key shareholders

Associated
Retail Others Internation
investors Stanbic 20%
6%
al Cement
Domestic Nominees Ltd
institutional 4% 29%
16%
Odu'a
Internationa
l
Investment
institutional 3%
5%
AshakaCe
m
2% Lafarge CariCemen
Lafarge S.A Nigeria Ltd t B.V
73% 14% 28%
Source: Company data Source: Company data

Disclosure section
Important Disclosures
Company Disclosure
Dangote Cement D
Lafarge Africa
A. The analyst, a team member, a member of the analyst’s household or a team member’s household serves as an officer,
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*Disclosures correct from date 26 January, 2018
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RMB Nigeria Stockbrokers' distribution of stock ratings

Ratings distribution Overw eight (Buy) Equalw eight (Hold) Underw eight (Sell) Restricted
All ratings 1 - 1 -
Ratings w ith investment Banking relationships
Information correct as at 26-Jan-18
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RMB Nigeria Stockbrokers

29 January 2018 Equity Research | CEEMEA | Nigeria | Construction and Materials

Nigeria Cement: Turning the corner Gbenga Sholotan

Please see the last page for the disclaimer 1

Executive Summary ................................................................................................................................................................... 3

RMBNS research coverage ....................................................................................................................................................... 7

Key sector assumptions ........................................................................................................................................................... 15

Sector risks .............................................................................................................................................................................. 18

Sector Investment thesis .......................................................................................................................................................... 20

Dangote Cement: Initiate at OW, N271 TP .............................................................................................................................. 29

Lafarge Africa: Initiate with an UW, N49 TP ............................................................................................................................. 47

Appendix 1: Market structure ................................................................................................................................................... 59

Appendix 2: RMBNS Cement-GDP multiplier .......................................................................................................................... 61

Appendix 3: Market share and competition .............................................................................................................................. 62

Appendix 4: Pricing .................................................................................................................................................................. 63

Appendix 5: Cost structure ....................................................................................................................................................... 65

Appendix 6: Dangote Cement .................................................................................................................................................. 67

Appendix 6a: Financial statement ............................................................................................................................................ 67

Appendix 6b: Production costs profile ...................................................................................................................................... 69

Appendix 7: Lafarge Africa ....................................................................................................................................................... 70

Appendix 7a: Financial statement ............................................................................................................................................ 70

Appendix 7b: Shareholding structure ....................................................................................................................................... 72

RMB Nigeria Stockbrokers 29 January 2018 2

Figure 1: Nigeria’s cement consumption and GDP growth

Cement consumption, CAGR Average real GDP growth

Source: World Bank, RMB Africa Research, RMBNS analysis

Figure 2: Cement-GDP multiplier assumptions Figure 3: Cement consumption — Nigeria

15 30.0 Manufactured imported Y/y growth (RHS)

Source: Company data, RMBNS

RMB Nigeria Stockbrokers 29 January 2018 3

Figure 4: Nigeria’s capex and implementation

80% Capex to budget 1.4

Source: Budget Office, RMBNS

RMB Nigeria Stockbrokers 29 January 2018 4

Figure 5: Orange County Island aerial map

Source: Orange County Island

Figure 6: Periwinkle Estate aerial map

Source: Periwinkle Estate

RMB Nigeria Stockbrokers 29 January 2018 5

Figure 7: Potential cement demand (mt) for concrete roads

Source: Channel checks, RMBNS

RMB Nigeria Stockbrokers 29 January 2018 6

Source: World Bank, RMBNS Source: IFC, World Bank, RMBNS

RMBNS research coverage

We envisage Dangote Cement is moving towards market consolidation and efficiency

RMB Nigeria Stockbrokers 29 January 2018 7

Key catalysts we see include a higher-than-expected i) margin expectation, ii) improved

Lafarge Africa (UW, TP: N49)

Our UW rating further reflects our view of the following:

RMB Nigeria Stockbrokers 29 January 2018 8

RMB Nigeria Stockbrokers 29 January 2018 9

The main assumptions underlying our DCF valuation include:

We set our discount rate at 14%

Figure 10: Bond yield and Nigeria equity performance

RMB Nigeria Stockbrokers 29 January 2018 10

Figure 11: RMBNS sector valuation (26.01.2018)

PE (x) EPS grow th EV/EBITDA (x) EV/IC (x) ROIC

EBITDA EPS Sales ROIC -