Lafarge Africa Plc is embarking on aggressive business and capital restructuring that should deliver great value to its shareholders in the short-to-medium term. The company is selling its loss-making South African subsidiary to its parent company, LafargeHolcim Group. It plans to use the proceeds of this divestment to pay down its foreign loans and its accumulated interest. It also concluded a Rights Issue in March 2019 to reduce its loan and subsequently the interest expenses. FSDH Research believes these initiatives will change the focus of the business going forward and enable the company to deliver a strong Financial performance for its shareholders.
Our analysis of Lafarge Africa Plc in Q1 2019 shows that the financial performance of the Nigerian operations, as a standalone business, was substantially different and better than the performance of the whole company when combined with that of the South African business operations. The Nigerian operations recorded Earnings Before Interest Depreciation and Amortisation (EBITDA) of N20.31bn, the combined (Nigerian and South African) business recorded N18.69bn. The operating profit for the Nigerian operations stood at N11.49bn while that of the combined business stood at N8.43bn. The Profit Before Tax (PBT) and Prot After Tax (PAT) of the Nigerian operations stood at N4.56bn and N6.30bn respectively; that of the combined entity stood at N123mn and N3.15bn respectively. The company recorded tax credit income during the period, therefore the PAT was higher than the PBT.
Our analysis shows that the company is better off with the Nigerian operations as a standalone business entity going forward. The company expects to receive US$317million from the proposed sale of its South African subsidiary; this will be used to completely pay off the shareholder loan of US$293million and the accumulated interest as at 31 July 2019. Subsequently, Lafarge expects the annual interest expenses for the Nigerian business to drop substantially by about N10bn, while cash-flow and profitability should grow significantly. This reorganisation should help the company aggressively pursue measures to expand local operations and deliver better growth than historical growth levels. This should, in turn, increase dividend payments to its shareholders.
Lafarge Africa faces stiff competition in Nigeria from a strong competitor, Dangote Cement Plc, which is a market leader in the industry. However, Lafarge has years of experience in the business of cement manufacturing and can tap from the technical expertise of its parent company, LafargeHolcim, who is the world leader in cement manufacturing and marketing. The prot margin of Dangote Cement is higher than that of Lafarge. Dangote derives this advantage through the use of modern technology, economies of scale, and plant advantage with respect to availability of raw materials. Therefore as a price-setter, Dangote may be able to reduce price which will lower the profitability of Lafarge in the Nigerian market. This is the major risk that Lafarge faces in Nigeria. However, Lafarge
competes well in some regional markets in the country. The poor transport network in the country gives players certain advantages in regions where production plants are located. FSDH Research notes that as the Nigerian economy continues to grow the demand for cement will grow and players in the industry will get a better share of this growth.
Valuation – Our forecast and valuation are based on the assumptions that the company will execute the business and capital restructuring successfully in 2019. Therefore, turnover and interest expenses will drop in 2019 compared with 2018 while prots will increase. We employed a relative valuation method using Enterprise Value (EV) to EBITDA multiple.
Applying the EV/EBITDA multiple of 8.58x on EBITDA for the forecast period, we arrived at
N29.33 per share as the fair value. Our target price for one year investment period is N20.53.