Lafarge Africa: Q1 21 – High sensitivity to FX issues, but good cash position
- We update our model following Lafarge Africa's Q1 21 result, but our TP (NGN32) and Buy recommendation remain unchanged
- The major model adjustments include upward revision in our revenue per tonne and cost per tonne estimates
- Key management call takeaways: Lafarge to add 2Mt operational capacity and tax credit in the works
We update our model following the release of Lafarge Africa's Q1 21 result. The major adjustments include the upward revision in our revenue per tonne and cost per tonne estimates. This left a net zero impact on our model, as our target price was left unchanged at NGN32. We reiterate our Buy recommendation on the stock with an expected total return of 58%, which includes a dividend yield of 5% (assuming NGN1 dividend/share) based on current pricing of NGN20.85.
Our adjusted FY 21 EPS forecast for the year was slightly higher at NGN2.07/s (previously NGN2.06). This reflected:
The increase in revenue per tonne for the year to NGN49,000 from NGN46,000 after prices rose faster than we estimated by 11% yoy in Q1 21; and
Increased FY 21 cash cost per tonne to NGN29,000 from NGN27,000. Cost per tonne rose 12% yoy in Q1 21 following naira depreciation amid scarce FX. 40% of Lafarge's costs have FX exposure and this leaves Lafarge susceptible to FX risks.
Among the cement players triad (Dangote, BUA and Lafarge), Lafarge has the cheapest multiples with P/E and EV/EBITDA of 10x and 4x compared to the group average of 20x and 11x. It is worth stating that Dangote’s superior ROE justifies the premium (it also trades cheap compared to MEA peers' median of 20x and 13x and Lafarge's 5-year average of 15x and 10x, respectively).
The upside risks to our estimates include:
The addition of operational capacities – 2Mt over the next 2 years, with 400Kt of that coming from Ashaka debottlenecking. We highlighted this in our recent sector note. We are yet to incorporate in our model.
Two-year tax credit extension on the Mfamosing line 2 after the 3-year tax credit expired in 2020.
Further increase in ex-factory cement prices, which management states is unlikely.
The key downside risks include:
Naira devaluation amid FX illiquidity.
Losing market share as the competition capture market growth with increasing plant capacities.
Key management call takeaways
The key takeaways from the call with management yesterday include:
A more detailed expansion plan: In our recent sector note, we said that we would not be surprised if Lafarge had expansion plans kept under wraps. At the meeting yesterday, management confirmed that there were plans to add 2Mt in operational capacity over the next two years. 400Kt of that will come from the Ashaka debottlenecking which has been in the works for quite some time now and is expected to be completed within the next year in two phases. Management also said that there were considerations to revamp the moribund Shagamu plant.
Tax Credit: Lafarge has applied for a 2-year extension on tax credit, which expired in 2020. If successful, this would be applied to the company’s profits in 2021. This could lead to a lower effective tax rate than our FY 21 estimate of 25%.
Q1 21 highlights
Topline growth: Lafarge's revenue grew by 12% in the quarter to NGN71bn. This was largely driven by the 11% yoy increase in prices to NGN49,500/tonne while volume was up only 1% to 1.4Mt. The 11% jump in revenue per ton, similar to other players, was faster than our 5% growth projection. This informed the upward revision to our estimates.
Increased costs and low margins: Costs increased by 14% yoy, which led to gross margin erosion by 100bps to 27%. This stemmed from 13% yoy increase in costs per tonne following increased maintenance costs, naira depreciation (given 40% FX exposure) and higher electricity tariffs that drove power costs higher in Ashaka. The devaluation of the naira neutered the energy cost savings we had expected from the renegotiated dollar gas contracts on the Mfamosing lines.
Higher Taxes: The effective tax rate (ETR) in the quarter increased to 28% from 14% in Q1 20. This was due to the expired tax credit, which was used up in December 2020. Lafarge has applied for a 2-year extension on the tax credit. If approved this could lower FY 21 ETR from our 25% estimate.
Cash continues to impress, but unlikely to lead to increased cash payouts: Lafarge’s cash growth has continued to impress since selling off the unprofitable South Africa business in 2019. Cash grew 44% from FY 20 to NGN75bn. Compared to Q1 20, the FCF in the quarter prints 14x higher at NGN26bn owing to strong growth in cash from operations. However, as we stated in our previous note and reiterated at the management meeting yesterday, Lafarge is more likely to channel the cash towards capex (rather than borrow) than towards dividend cash payouts in 2021. In our view, this is a more appropriate route to avoid the shadows of the past where high finance costs wrecked the company’s earnings. Thus, we assume unchanged dividend of NGN1 in FY 21.
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This report is independent investment research as contemplated by COBS 12.2 of the FCA Handbook and is a research recommendation under COBS 12.4 of the FCA Handbook. Where it is not technically a res...