Equity Analysis /
Nigeria

Lafarge Africa: H1 19: Margin expansion supports bottom-line growth; reiterate Buy

    Ayodeji Dawodu
    Ayodeji Dawodu

    Equity Research Analyst, Industrials

    Tellimer Research
    23 July 2019
    Published by

    Lafarge Africa reported PAT of NGN9.0bn in H1 19, versus a loss of NGN3.9bn in H1 18. The group’s performance is currently ahead of our FY 19 forecast of PAT at NGN11.9bn, excluding the pending sale of Lafarge South Africa Holdings (LSAH). Lafarge Africa’s performance was largely driven by: 1) the improvement in EBITDA margin to 23.8% from 17.1% in H1 18 and, 2) the 41% yoy decline in finance cost on the back of the recently completed NGN90bn rights issue, which contributed to the 25% decline in total debt at end-H1 19, compared with end-18. 

    Reiterate Buy with a TP of NGN25 (ETR of 95%). Our view is based on: 1) potential improvement in profitability following the sale of LSAH; 2) reduction in the group’s balance sheet leverage after the repayment of all shareholder loans (US$293mn) with the proceeds of the divestment; and 3) likelihood of further efficiency gains from the group’s energy and business integration initiatives in Nigeria. However, we highlight that the competitive environment and weak GDP growth in Nigeria could be a strain on margin expansion and volume growth over the medium term. Lafarge Africa currently trades at 5.3x FY 20f EV/EBITDA multiples versus a five-year historical average of 9.1x.

    Divestment should support margins and bottom-line performance in the near term. The expansion in EBITDA margin in H1 19 was supported by the 8.5% yoy decrease in gas and power expenses, as well as the 12.3% yoy decline in administrative expenses (excluding depreciation and technical service fees). We see further improvement in the group’s EBITDA margin from the sale of LSAH, which reported a negative EBITDA of NGN1.3bn in Q2 19, according to management. Also, with the group repaying all its shareholder loans from the proceeds of the LSAH sale, we expect loans and borrowings to decline by 77% yoy to NGN68bn by end-2019. The reduction in debt should drive a 63% yoy decline in finance costs.

    Revenue growth to remain sluggish. Group revenues fell by 1.2% yoy in H1 19, although cement volumes were up by 3.2% yoy. The decline in the group’s revenues was partly due to the poor performance of LSAH with revenues down by 6.5% yoy in H1 19 despite price increases in Q2 19. In Nigeria, revenues were relatively flat as management pointed to downward pressures on prices, which we believe could be due to competition for market share.