The deal that helped Lafarge stock gain 18% in less than a week.

Embattled Cement Industry giant, Lafarge Africa (Nigerian listed) was among the top best stocks for the week ended June 23, 2019, gaining an impressive 18.46%.  Lafarge Africa has been down by over 20% YTD and over 70% in the last year.

What happened? During the week, the company informed the stock market that it had reached an agreement to spin off its loss-making South African entity. The deal is expected to wipe off the company’s foreign currency debt which is incidentally owed to its parent company Lafarge Holcim. The news played favourably with investors, helping the company’s shares to rally by 18.4%.

The deal, in a nutshell, will see Lafarge Africa agree to sell its South African Subsidiary to Caricement (a subsidiary of Lafarge Holcim) for a purchase consideration $316.2 million. However, the amount will be used to pay off existing loans of about $293 million plus accrued interest.

• Shareholders of Lafarge will not be expecting any major cash windfall from this transaction as the purchase consideration will be used to set off Lafarge Africa’s foreign currency debt.
• However, clearing the debt helps strengthen Lafarge’s balance sheet which has over the years been marred by dwindling sales and increasing losses from its South African entity.
• Lafarge Africa can then use part of its unencumbered cash flows to finance news investments especially building modern and cost-efficient cement plants that can compete with BUA and Dangote Cement.
• The deal appears positive for Lafarge Africa Shareholders as they will not have to write off their investment in the South African entity which they opine will cost them about N70 billion in impaired losses.

What next: Lafarge has reported falling profits for the last 5 years posting losses in both 2017 and 2018 respectively. For example, while the Nigerian entity posted a profit of N38.6 billion in 2018 (2017: N30.1 billion) compared to South Africa losses of  N13.7 billion 2018 (2017: N22.2 billion). It reported profits in the first quarter of 2019 on the back of lower net interest cost.

With the South African entity out of the way, Lafarge Africa can focus on growing its Nigerian entity and competing in a market dominated by Dangote Cement and fragmented along regional lines.

Shareholders will expect to see a steady rise in the share price of Lafarge which at Friday’s closing price of N11.5 is still far from its 5 year high of N107.

This transaction also underscores how critical the Nigerian market is when compared to its sub-Saharan counterparts. Despite the prevailing harsh economic conditions and slowing GTB, most sectors are still able to post strong operating profit margins.