Lafarge Africa Plc (‘Lafarge’ or ‘the Company’) declared a 31% year-on-year revenue (YoY) growth in Q3’2020. Operating profit grew by 7% YoY. Profit before tax rose by 18% YoY while profit after tax rose by 3% YoY. On a cumulative basis, revenue in 9M’2020 grew by 10% YoY to N178.88bn from N163.06bn in 9M’2019. Gross profit also grew by 11% YoY from N50.37bn in 9M’2019 to N56.12bn in 9M’2020. Operating profit increased by 16% YoY from N35.54bn in 9M’2019 to N41.11bn in 9M’2020. Profit before tax grew by 70% YoY, while profit after tax grew by 37% YoY from N20.57bn in 9M’2019 to N28.19bn in 9M’2020.
Higher Prices and Volume Spur Q3’2020 topline growth
We attribute the 31% YoY revenue growth in Q3’2020 to higher prices during the period. We believe that the exchange rate devaluation, which affected the cost of major industry players, resulted in an industry trend of a price increase. From our research, we observed price increases in some competitors’ products. Given that Lafarge is a price taker in the industry, we posit that a price increase possibly took place to protect margins.
Exchange Rate Devaluation Drive Higher Costs
Owing to the exchange rate devaluation, cost of sales increased by 38% YoY from N33.03bn in Q3’2019 to N45.53bn in Q3’2020. The Group incurred higher variable costs (+61% YoY from N16.41bn in Q3’2019 to N26.45bn in Q3’2020) and higher fixed costs (+23% YoY from N10.17bn in Q3’2019 to N12.46bn in Q3’2020). On variable costs, cost pressures emanated from distribution cost and energy cost, and we maintain that the exchange rate devaluation impacted on energy costs. On fixed costs, the significant cost increase incurred during the period was production cost, which rose by 66% YoY from N5.59bn in Q3’2019 to N9.31bn in Q3’2020.
Consequent to the higher costs incurred during the period, gross margin declined by 400 basis points from 27% in Q3’2019 to 23% in Q3’2020. Meanwhile, gross profit increased by 14% YoY from N12.14bn in Q3’2019 to N13.80bn in Q3’2020.
High Operating Expenses as the Economy Reopens
Operating expense increased by 10% YoY from N5.26bn in Q3’2019 to N5.79bn in Q3’2020, driven by higher administrative expenses (+32% YoY from N3.45bn to N4.54bn). On the other hand, selling and marketing expense declined by 30% YoY from N1.81bn to N1.26bn. We note that the Group recorded a 41% YoY operating expense decline in Q2’2020, attributed to the lockdown directive and ‘stay-at-home’ directive which implied lower office and general expenses.
We expected a higher level of operating expense if the lockdown relaxed. On a quarter-on-quarter basis, operating expenses rose by 45%. Therefore, we relate the higher operating expenses in Q3’2020 to the economic reopening. Nonetheless, operating profit grew by 7% YoY from N7.75bn in Q3’2019 to N8.30bn in Q3’2020.
Earnings Accretion Propelled by Balance Sheet Deleveraging Efforts
The Group’s total borrowings declined by 16% on a YoY basis, from N65.27bn as of 9M’2019 to N54.95bn as of 9M’2020. We note that the restructuring exercise done by the Group in its previous financial year, wherein equity capital was injected to deleverage the balance sheet and extinguish its foreign currency loans. In Q3’2020, the exercise paid off, as finance cost lowered by 4% YoY from N3.25bn in Q3’2019 to N3.11bn in Q3’2020. Finance income increased by 82% YoY, from N188.98mn in Q3’2019 to N344.39mn in Q3’2020. The higher finance income was as a result of a higher cash balance in Q3’2020.
Therefore, profit before tax grew by 18% YoY from N4.69bn in Q3’2019 to N5.53bn in Q3’2020. Profit after tax grew by just 3% YoY from N4.73bn in Q3’2019 to N4.87bn in Q3’2020, due to an effective tax charge in Q3’2020 relative to a tax credit in Q3’2019.
We have a positive short-term, medium-term, and long-term outlook for Lafarge Africa Plc. We note the significant revenue increase in Q3’2020 despite the quarter being a historically weak quarter for the Group. The restructuring exercise by the Group has positioned it for higher growth and profitability, in our view. We also believe that the previous investments made by the Group in previous years are beginning to materialise in the form of cost efficiency and optimisation.
As of 9M’2020, the Group’s cash balance stood at N63.34bn (9M’2019: N9.05bn). The significant increase in cash position as of 9M’2020 resulted from higher cash flow generation from operations, and a lesser outflow from financing activities. We note that the Group previously spent a significant amount of cash generated on the financing of its debts. However, owing to the reduction in debt levels, the pressure on cash flows were relaxed in 9M’2020. We expect to see improved cash levels going forward, on the back of more robust operations and improved industry fundamentals.
Our earnings projections are still on track, as we expect to see a FY’2020 EPS of N2.18. We also expect the Group to declare a N1.50 dividend. We revise our cash flow projections upwards to reflect an improved outlook of business fundamentals and earnings. Consequently, our fair value estimate is revised upwards to N19.21. At the current market price of N18.00, the stock offers a 15% total return (price return and dividend yield). Therefore, we maintain our BUY recommendation.