Lafarge Africa
Lafarge Africa's facilities.

Following an improved performance in Q1 2019, Lafarge Africa Plc sustained growth in earnings in its recently released H1 2019 results as the company posted a Pre-tax Profit of N9.3bn, a remarkable improvement from the Pre-tax loss of N6.3bn reported in H1 2018.

The Pre-tax Profit in H1 2019 was an outcome of its efforts to deleverage its balance sheet which led to a 41% y/y decline in Finance Cost to N14.1bn in H1 2019 compared to N23.7bn in H1 2018 amidst cost reduction measures implemented by management to drive operational performance. Consequently, EBITDA grew 70%y/y to N38.2bn in H1 2019 while EBITDA margin strengthened to 23.8% from 13.8% in H1 2018.

Although Revenue declined marginally 1.2% y/y to N160.3bn in H1 2019, the decline in Cost of Sales (-10.8% y/y to N104.9bn), Selling and Marketing expenses  (-11.3% y/y to N2.5bn) and Administrative expenses (-24.6% y/y to N14.7bn)  bolstered the strong growth in EBITDA.

[READ: Lafarge admits to why it’s been reshuffling management in Nigeria]

Management noted that the decline in Group Revenue was due to a flattish growth in its Nigeria operations amidst sustained weakness in its South Africa Operations (Net sales declined 2.1% q/q in Q2 2019 despite price increase). Management further highlighted that there was a reduction in prices in Nigeria in Q2 following an increase in Q1 2019 which supported volume growth in Nigeria- up 3.3% in Q2 2019 when compared to Q1 2019.

According to Management, sales volume was, however, affected by delays in the new cabinet nomination post-February general elections- we believe management decision to reduce prices in Q2 was on the back of weak demand occasioned by a stall in construction activities across the country.

Lafarge Africa Plc continued to deleverage its balance sheet (its highly geared position has been the major drag on its earnings in recent years) as the debt to equity ratio of the firm improved to 1.0x in H1 2019 from 1.98x as of FY 2018. This supported the moderation in Finance Cost to N14.1bn in H1 2019 (H1 2018; N23.7bn). The Net debt of the firm stood at N206.6bn in H1 2019 compared to N255.8bn in H1 2018, on the back of repayments made on Loans and Borrowings and Proceeds from rights issues which increased the company’s cash position.

According to Management, the proceeds of the Rights Issue and cash from the divestment of the South African (SA) operations expected in Q3 2019 will significantly deleverage Lafarge Africa Plc by c. N239bn. This is expected to strengthen the Company’s balance sheet while significantly reducing financing costs.

We reiterate our view that the cost-containment measures adopted by the firm, deleveraging of its balance sheet coupled with the disposal of the SA operations should place the firm on a growth trajectory that should translate into better earnings growth and value accretion to shareholders.  

Deal book 300 x 250
Deal book 300 x 250

We have a target price of N16.0 for Lafarge Africa with a HOLD recommendation.  Our estimates are under review.  

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CSL STOCKBROKERS LIMITED (“CSLS”) is regulated by the Securities and Exchange Commission, Nigeria. CSLS is a member of the Nigerian Stock Exchange.

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