Lafarge Africa Plc (WAPCO) released its FY-2020 results last week, showing a 98.8% y/y rise in PAT to N30.8bn. Lafarge’s revenue (up 8.3% y/y to N230.6bn) grew faster than its cost of sales (up 4.0% to N163.3bn) during the period.
This, coupled with improved operating cost management (9.4% of revenue vs 9.9% in FY-2019) and a marked decline in finance costs (-51.9% y/y), resulted in a whopping 110.0% y/y increase in PBT to N34.3bn. Notably, the drop in finance costs, due to balance sheet restructuring, was again at the heart of the improvement in profitability. We review WAPCO’s latest financials, and our valuation estimates below.
Topline Performance Bolstered By Sector-Wide Demand Recovery
Following a 5.1% y/y slump in revenue in Q2-2020, which threatened the sales outlook, the easing of lockdown measures, which largely took effect in Q3 2020, supported a turnaround in WAPCO’s full-year revenue (up 8.3 % y/y to N230.6bn vs N239.8bn est.), as Cement sales (98.1% of total revenue) rose by 9.1% y/y while revenue from Aggregates and Concrete Products (1.2% of total revenue) declined by -25.5%.
WAPCO managed to keep its input costs in check, as Cost of Sales climbed moderately, in comparison to Revenue (Cost of Sales up 4.0% y/y to N163.3bn). As such Cost margin dropped 289bps y/y to 70.8% in FY-2020. Fuel and power costs (up 21.7% to N38.6bn) were mainly responsible for the increase in Cost of Sales, according to the cost breakdown.
However, the cost of materials and consumables remained stable, and lower production (down 2.6% to N23.8bn) and fixed distribution costs (down 59.3% to N1.8bn) helped alleviate cost pressures, as shown by the increase in Gross Margin (29.2% in FY-2020 vs 26.3% in FY-2019).
EBITDA was up 16.0% on the back of turnaround initiatives vis-à-vis WAPCO’s “Health, Cost and Cash” strategy to cut down on excessive operating expenses, which climbed by 2.5% y/y to N21.5bn.
Specifically, the company curtailed Selling and Marketing expenses (down -17.2% to 4.2bn), as advertising, campaign and innovation expenses fell dramatically. This offset increases in Directors costs (up 391.4% to N174.3m) and staffrelated expenses (up 15% to N6.2bn). This made for a decent operating performance as the company posted a 217bps increase in EBITDA margin to 32.7%.
Balance Sheet Improvements Drive Finance Costs Lower, Prop Up Net Income
WAPCO sustained its efforts in deleveraging its balance sheet as Total Debt declined by 22.5% y/y to N49.7bn. Notably, the company’s Debt to Total Capital ratio improved to 0.41x (from 0.44x in FY-19 and a 1.76x 5-year average). Consequently, Net finance cost tumbled 49.9% y/y, driven by a 51.9% drop in interest expense to N9.7bn, further aided by the low-interest rate environment. As a result, Pre-tax profit surged 110.0% y/y to N37.6bn while Post-tax profit grew 98.8% y/y to N30.8bn.
Additionally, effective working capital management, particularly in terms of inventories (inventory turnover of 5.1x vs 4.0x in FY-2019) and trade receivables (receivables turnover of 7.3x vs 5.4x in FY-2019), aided cash generation (Cash and cash equivalents grew 96.7% to N53.3bn).
Outlook: Stronger Outing Expected Despite Concerns
Looking ahead, we are cautiously optimistic about WAPCO. Although we expect continued revenue growth driven by broader demand trends and economic momentum, which should drive higher volumes.
The company’s operational difficulties (particularly in its Ewekoro and Mfamosing plants), which were mostly illustrated in its Q4-2020 performance (revenue rose by just 1.5% y/y), weigh slightly on our outlook. Specifically, we have forecasted a 9.0% y/y growth in Revenue as we expect a stronger outing in FY-2021 hinged on management guidance on the resolution of the operating challenges experienced in Q4-2020 which capped revenue growth. On the cost level, we expect the company’s cost optimization strategies to bear more fruit, and input costs to normalize later in the year, allowing for margin improvement. However, we express our concerns over the depressed marketing spend, considering competitors’ marketing strategies and the intensifying competition for market share. In all, we estimate a 16.9%y/y improvement in EPS to N2.2/share.
Adjusting our model estimates for the new assumptions, higher risk-free rate and country risk premium, we review our year-end target price downward to N27.7/share, from N32.5/ share. The stock’s current market price of N22.25/share reflects a 24.3% discount to our year-end Target Price. Also, the counter currently trades at a P/E of 11.6x, compared with domestic peers, DANGCEM (13.9x) and BUACEMENT (35.3x). Thus, we maintain our BUY rating on the ticker.