Lafarge Africa Plc reported a relatively strong Q2’20 performance. Although revenue declined by 5% year-on-year in Q2’20 to N56.85bn from N59.87bn in Q2’19, net income surged by 60% YoY from N9.54bn in Q2’19 to N15.26bn in Q2’20.
The decline in revenue was due to lower volume sold in Q2’20 as a result of the coronavirus pandemic which grounded economic activities.
Meanwhile, cost of sales declined by 14% YoY from N38.00bn in Q2’19 to N32.76bn in Q2’20. The decline in cost of sales was driven by the Company’s cost optimisation strategies. The management emphasised an overhaul and restructuring of costs were done during the period.
We also believe that the investments in fixed assets made by the Company in previous years are beginning to yield a positive result for the Company. Consequent to the 14% YoY decline in cost of sales, gross profit grew by 10% YoY from N21.87bn in Q2’19 to N24.08bn in Q2’20.
A significant decline in operating expenses resulted in a 30% YoY increase in operating profit from N16.33bn in Q2’19 to N21.17bn in Q2’20. Specifically, operating expenses reduced by 41% YoY from N6.85bn in Q2’19 to N4.01bn in Q2’20.
The lower operating expenses incurred during the period was driven by a 46% decline in administrative expenses, particularly office and general expenses. In our view, we think that the lockdown directive and ‘work-from-home’ policy resulted in cost-saving for the Group. Also, selling and marketing expenses declined by 12% YoY.
The positive impact of the successful deleveraging efforts of the Company continued to reflect in earnings, as finance cost declined by 69% YoY from N6.21bn in Q2’19 to N1.95bn in Q2’20.
We note that finance cost also declined by 69% YoY in Q1’20. As a result of the lower finance cost incurred in Q1’20, profit before tax spiked by 78% YoY from N10.87bn in Q2’19 to N19.38bn in Q2’20. However, the bottom-line growth was moderated, due to a higher effective tax rate (21% in Q2’20 vs 12% in Q2’19). Profit after tax grew by 60% YoY from N9.54bn in Q2’19 to N15.26bn in Q2’20.
We revise our earnings expectations for FY’20E, owing to the positive surprise in Q2’20. We, however, note that the higher-than-expected Q2’20 results released by the Company were majorly due to lower-than-expected operating expenses.
Based on our assessment, the significant decline in operating expenses is linked to the ‘work-from-home’ policy induced by the COVID-19 pandemic. In the short term, we expect the Company to keep incurring lower operating expenses.
However, as the economy gradually recovers, and in the mid-term, we maintain that operating expenses will be at normalised levels. Therefore, we upgrade our EPS forecast from N1.87 to N2.27, reflecting our expectation of higher profit on the back of continued cost optimisation.
In addition, we revised our cost of equity used to discount our projected free cash flows and dividend. We made the downward revision of our cost of equity estimate to reflect a lower risk-free rate from 11% in our last earnings report to 8% as of the writing of this report.
Overall, we arrived at a fair value of N12.78. Based on our fair value estimate, the expected total return (price return and dividend yield) on the stock is 20%. Hence, we upgrade our recommendation to BUY.