Lafarge recently published its inaugural report following sale of Lafarge South Africa Holdings (LSAH) in Q3. Comparing the margins of the 9M 2019 (Lafarge Nigeria) and that of 9M 2018 (the previously combined entity), we observed a remarkable improvement in Gross and Operating Margins, suggesting that the sale of LSAH will be value accretive to shareholders.
Lafarge Nigeria Gross Margin of 46.2% in 9M 2019 was far ahead of 31.3% in 9M 2018 for the combined entity. Similarly, Lafarge Nigeria EBITDA margin of 36.6% was above 15.5% for the combined entity.
The sale of LSAH also supported the marked reduction in Finance Cost (down 53% y/y to N16.6 billion in 9M 2019 vs N34.9 billion for the combined entity in 9M 2018), reflective of the decline in gross debt (down 75% YTD to N65.3 billion) following the settlement of Inter-Company loan owed to Caricement BV (Purchaser of LSAH).
Consequently, the leverage position of the firm improved (Debt/equity ratio moderated to 0.19x in 9M 2019 compared to 1.0x in H1 2019 and 1.98x in FY 2018). We believe the improved leverage position of the firm and stronger margins bodes well for future earnings growth.
We have updated our model, in line with the latest results. The overall impact is an upward review in our price target to N24.4/s from N16.0/s previously. We upgrade the stock from Hold to Buy, considering the steep decline in stock price (down c.70% over the last two years) and the 74% upside potential implied by our target price from the latest closing price of N14.0/s.
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Although Lafarge Nigeria Revenue of N163.1 billion is significantly below that of the combined entity (N234.3 billion), we note that the Gross Profit of Lafarge Nigeria (N75.4bn) was ahead of that of the combined entity (N73.4 billion), suggesting better cost efficiencies in the Nigerian business.
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