Lafarge Africa recently released its 9M’20 results, reporting a 37% y/y jump in the bottom line to ₦28.2 billion, albeit c.₦6.5 billion shy of our ₦34.7 billion estimate. While topline continued to rebound from the pandemic-driven slump in the second quarter, the earnings miss was spurred by higher-than-expected costs, a side effect of rapid FX depreciation and scarcity in the Nigerian market.
The cement maker reported a 31% y/y growth in Q3’20 topline to ₦59.3 billion, exactly in line with our ₦59.2 billion expectation. Notably, this was driven by a 29% y/y jump in cement sales to 1.3 million MT in Q3’20. Looking at the progression of sales across the three months in Q2, we had expected a 5% q/q growth in cement sales in Nigeria to 1.4 million MT, supported by rebounding economic and construction activity.
We see the sales figures as confirmation of our volume expectations. Combined with the H1’20 numbers, Lafarge reported a 10% y/y growth in volumes to 4.1 million MT and 10% y/y growth in Revenue to ₦179.9 billion (Vetiva: ₦179.7 billion) in the 9M period. While the backdrop for stronger economic activity in Q4 remains, especially heading into the festive season, we take a mildly conservative stance to sales in the quarter amid instances of social unrest across the country and an unconnected but subsequent spate of insecurity.
Consequently, we forecast a mild 5% q/q growth in cement sales to 1.4 million MT in Q4, taking FY sales 11% higher y/y to 5.5 million MT in Nigeria. Overall, we forecast a 5% q/q growth in Q4’20 topline to ₦62.4 billion and a 14% y/y growth in FY’20 topline to ₦242.3 billion.
Inflationary pressures, FX depreciation drives margin drop while Revenue expanded 31% y/y, Operating profit (EBITDA) grew by a much milder 8% y/y to ₦16.0 billion in Q3’20, 35% below our expectation. Notably, the slower growth was dragged by Cost of sales, which grew at a faster pace of 37% y/y in Q3, taking Gross profit for the period 17% higher y/y to ₦13.8 billion.
According to management, the surge in Cost of Sales is attributed to the FX devaluation as well as maintenance costs across some plants. We are largely satisfied with this explanation as we believe that critical production cash cost components such as Kiln fuels (Gas) and Strategic Raw materials (e.g. Gypsum) are USD denominated, exposing Lafarge Africa’s cost profiles to currency fluctuations.
While management asserts that there remains significant investment in Alternative Fuels (AF) utilization, levels are still low enough to limit the impact on Energy costs. That said, in spite of inflationary pressures, Lafarge Africa has managed to relatively contain OPEX, with OPEX-to-sales ratio moderating by 20bps y/y in Q3’20. Overall, 9M’20 EBITDA came in 11% higher y/y at ₦63.1 billion (Vetiva: ₦71.8 billion), translating to an EBITDA margin of 35%. Finally, Lafarge continued to reap the benefits of the deleveraging in Q3’19, with Net finance costs falling 56% y/y to ₦6.8 billion in 9M’20 (Vetiva: ₦6.5 billion), taking PBT 70% higher y/y to ₦34.3 billion.
