First Quarter Performance Overshadows Q2:2020 Slip
In the just-released H1:2020 financial scorecard, Lafarge Africa Plc. (WAPCO) recorded a topline growth of 2.25% (NGN120.54bn vs. NGN117.89bn in H1:2019) powered by higher cement sales (+3.47%), which offset the sharp drop (-40.22%) in revenue from aggregates and concrete.
The growth of Lafarge Africa also masked the weaker performance in Q2:2020 with sales volume for the quarter dropping by 3.72% (due to the economic lockdown and as realized prices remained flat). This mirrored the performance of its peers, with half-year performances boosted by the strong showings in the first quarter.
Lafarge Africa showed resilience during the quarter as construction activities were not completely halted and lockdown measures to contain the spread of COVID-19 were eased subsequently.
Hence, we revise our revenue projection from NGN190.70bn to NGN216.48bn. This represents a year on year growth of only 1.63% as expectations of lower public CAPEX remain as downside risks.
Cost Optimization Initiative Support Operating Margin
In our Q1:2020 report on the company, we had alluded to its cost optimization efforts as a tailwind despite concerns around the cost implications of the FX devaluation by the CBN.
H1:2020 results show that although energy costs (+19.41%) maintained its uptrend, the cost to sales ratio was lower at 65.40% (vs 66.53% in H1:2019) reflecting efforts at improved quarry management to bring down raw material costs and inventory management. Given the further FX adjustment by the CBN, we expect to see FX induced pressures on direct costs in subsequent quarters.
Similarly, operating expenses fell sharply by 27.91% in H1:2020 as the company reined in administrative costs (most notably on office and general expenses) under its Health, Cost and Cash initiative. Consequently, operating margin was higher at 27.22% in H1:2020 (vs 23.62% in H1:2019).
Lafarge Africa continues to enjoy benefits of lower debt obligations (a result of divesting from the highly leveraged subsidiary and redemption of its Series 1 bonds) as lower finance costs (-66.77%) ensured a 47.29% growth in profit after tax to NGN23.33bn (vs NGN15.84bn in H1:2019).
Thus, widening the net margin to 19.35% (vs. 13.44% in H1:2019). We maintain our expectation of exchange gains on the company’s USD denominated financial assets owing to the FX adjustment while bottom-line should be supported by the tax credit from its pioneer plants.
Balance Sheet Metrics Signals an “All-Clear”
Lafarge Africa’s deleveraged balance sheet continues to yield gains evidenced in decent return to shareholders. In H1:2020, annualized ROE stood at 34.81%- 1.44 percentage points higher than 33.37% in 2019FY. Similarly, we note an improvement in return on asset- 24.73% (Trailing) vs 23.15% in 2019FY.
Also, the company maintains decent liquidity standing with a current and cash ratio of
0.72x and 0.33x respectively (vs. DANGCEM: 0.55x & 0.13x and BUACEMENT: 0.70x & 0.37x).
Outlook and Recommendation
Given our reassessment of the company’s topline performance and cost drivers, we revise our EBITDA forecast from NGN61.33bn to NGN65.97bn and maintain a target EV/EBITDA of 4.51x.
We thereby arrived at a 2020FY price target of NGN17.53. At the current price of NGN11.75, the implied upside of 49.19% (relative to our 2020TP of NGN17.53) informed our BUY rating on the counter.