Analysts at ARM have issued a sell rating for Lafarge Plc. They explain why in the ensuing article below;


  • We expect Lafarge Africa Plc (Lafarge) to demonstrate improvement in fundamentals, mainly from higher volumes, energy savings and lower finance cost. Basically, with FX issues effectively addressed in the near term, we expect gains from higher volumes (a fallout of improving domestic cement consumption in Nigeria) and energy savings should have more telling impact on earnings in 2018. On volumes, we estimate a Nigeria cement consumption of ~4.7MT (+5% YoY).
  • On energy, we look for a stable energy source over 2018 with gas and coal gaining more prominence in Nigeria and ongoing turnaround plan in South Africa. Consequently, we have adopted a conservative cost to sales ratio of 77% which translates to 6ppts expansion in gross profit margin to 23%. Overall, we project EPS and DPS of N0.65 and N1.15 respectively for 2018.
  • However, this is eclipsed by its excessive valuation, in our view. We downgrade the stock to a SELL (previously: NEUTRAL) as we revise our FVE lower to N34.71 (prior: N48.45). Lafarge trades at 2018 EV/EBITDA and P/E of 9.7x and 53.3x compare to Bloomberg EMEA peers of 9.2x and 16x respectively.
  • Base effect from current one-offs to magnify 2018 earnings. Going forward, we expect ex-factory gate prices to remain at current elevated levels with a marginal upward adjustment over the year to average N44,328/ton as the company continue to access the impact of the price increases on margin and in line with that of industry leader – Dangcem. On the volume end, we believe Lafarge would struggle to gain market share during the year, which is already reflective in the 5% decline in volume in Q1 18. However, given our outlook of increased consumption over 2018, we look for a 4.9% YoY growth in Nigeria output to ~4.7mt.
  • Accordingly, we expect Nigerian revenue to print at N217 billion (vs. N205 billion in 2017). Elsewhere, we look to see a more substantial recovery in South Africa in 2018, with the attendant impact informing our cement volume and revenue forecast of 1.9MT (+8% YoY) and N101 billion (+6.9% YoY). At the group level therefore, we see scope for sales in excess of N318 billion in 2018E.
  • Elsewhere, we expect the improvement in energy flexibility to persist over 2018 with fuel and power cost contribution to cost of sales expected to decline (FY 18: 16.4% YoY 18.1% in FY 17) to N40.2 billion. However, the pressure point for cost of sales remains rising cost of raw material & consumables, production, maintenance and distribution activities. Also, with the ongoing turnaround plan in South Africa, we do not rule out the possibility of another impairment charge on redundant equipment.
  • Accordingly, we have adopted a conservative cost to sales ratio of 77% (83% in FY 17) which translates to a slight moderation in cost of sales to N244 billion and a 7% YoY decline in cost per tonne to N36,000. Thus, we expect a 44% YoY increase in gross profit to N73 billion (gross margin: +6pps YoY to 23%). Furthermore, we review our FY 18 OPEX to N42 billion in tune with current realities to leave our implied FY 18E EBIT at N34.1 billion (vs. N7.9 billion in FY 17) barring any negative surprise in form one-off administrative charges from the ongoing turnaround in South Africa.
  • On borrowings and finance cost, management recently received shareholders’ approval for N100 billion capital raise with focus on refinancing existing FCY borrowings and general business spend. However, given management access to cheaper FCY borrowings (currently estimated at $442 million as at FY 17), we do not expect any significant decline in its FCY obligations especially with management focus on revamping the South African operation. As such, while 68% of total debt stock (N250 billion as at Q1 18) are due for maturity during the year, we believe management will rollover a large chunk of it with an extension of its maturity profile to fund its capex plan and working capital needs.
  • For context, management guided to a capex plan of N19.2 billion for the Ashaka coal power plant, South West alternative fuel project, Mfamosing crusher and Ashaka debottlenecking. On balance, we expect the company’s net debt position to print at N241 billion by year-end. On impact, we do not expect any sizeable loss on its FCY positions with the relative stability of the naira and thus, hold out for 26%YoY decline in finance cost over 2018, which pushed our overall net finance cost for the year to N28 billion (vs. N42 billion in FY 17).

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Written by ARM Research

 

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