Lafarge Africa Plc in its recently released FY 2020 financial result, reported an 8% YoY revenue growth from N212.99bn in FY 2019 to N230.57bn in FY 2020, driven by volume (+6%) and price (+3%) growth.
In our view, we believe that the low-yield environment that characterized the Nigerian financial markets resulted in a redirection of capital into alternative assets – of which the real estate was a beneficiary. Therefore, the increased levels of activities in that space possibly raised the demand for cement in 2020.
A combination of cost efficiency and optimization resulted in margin expansion, as Lafarge’s operating margins advanced by 400 basis points from 16% in FY 2019 to 20% in FY 2020. By implication, operating profit grew by 31% YoY from N34.91bn in FY 2019 to N45.67bn in FY 2020.
The sustained deleveraging efforts by the Company continued to yield positive results, which reflected in the 52% YoY decline in finance cost from N20.18bn in FY 2019 to N9.71bn in FY 2020. As of FY 2020, the Company’s total borrowings stood at N49.73bn, representing a 23% YoY decline from N64.21bn in FY 2019.
Finance income also declined by 63% YoY from N3.15bn in FY 2019 to N1.18bn in FY 2020. On a net basis, net finance cost lowered by 50% YoY from N17.02bn in FY 2019 to N8.53bn in FY 2020. Hence, the Company’s profit before tax grew significantly by 110% YoY from N17.89bn in FY 2019 to N37.57bn in FY 2020. Profit after tax grew by 99% YoY from N15.52bn in FY 2019 to N30.84bn in FY 2020, which effectively implies an increase in earnings per share from N0.96 in FY 2019 to N1.91 in FY 2020.
The Company maintained the N1.00 dividend it declared in FY 2019. Strong Cash Flow Generation Operating cash flow before working capital changes grew by 19% YoY from N65.77bn in FY 2019 to N77.95bn in FY 2020. However, operating cash flow, after working capital, lowered by 21% YoY from N81.30bn in FY 2019 to N63.74bn in FY 2020, majorly due to a N15bn prepayment for gas supply used in the production process.
Free cash flow declined by 6% YoY by N57.45bn from FY 2019 to N54.28bn in FY 2020. The slower decline in FCF, relative to operating cash flow, was due to a 58% YoY decline in capital expenditure in FY 2020.
We relate the Capex decline to the movement restrictions induced by the coronavirus pandemic. Free cash flow to equity (FCFE) improved from a N52.91bn negative amount to a N33.32bn positive amount.
We expect to see a sustained revenue growth in FY 2021, on the back of volume growth. We note the significant nominal GDP growth in the cement sector over the last five years (35% CAGR), and we believe that the upside potentials for additional growth are present. Some of the industry fundamentals that could drive growth, in our view, include the persistent infrastructural deficit, rising trend in urbanisation, and population growth. Cement Manufacturing GDP Trend.
In the near to medium term, we expect to see continued increase in the Group’s products demand based on the industry fundamentals. We estimate a 9% YoY revenue growth in FY 2021, and a 23% YoY profit growth. The bottomline expansion is hinged on a sustained deleveraging by the Group, thereby resulting in an estimated reduction in finance cost in FY 2021.
In FY 2020, two of the Group’s major competitors announced a capacity expansion, to take advantage of the growing cement industry. In line with the trend, we expect to see a possible future expansion by the Group, to stay competitive and protect its market share. The expected capacity expansion could be a core value driver in the medium to long term.
Using a blend of Discounted Cash Flow (DCF), Dividend Discounted Model (DDM), Residual Income Model (RIM), and Enterprise Value/EBITDA methodology; we estimate a N26.73 fair value for the stock. Our fair value estimate effectively implies an 11.37x justified P/E. At the forward P/E of 8.93x, the stock trades at a 27% discount to our fair value.
We forecast a N1.40 dividend for FY 2021, which translates to a 7% dividend yield. Based on the combined expected 34% total return, we maintain our BUY recommendation.