Update: LAFARGE published 9M-18 results this week, with higher-thanexpected after tax loss in Q3-18. We have increased our loss after tax estimate for 2018E to NGN9.12 billion (from NGN4 billion) to adjust for the miss in Q3, and as we look for lower net profit in Q4 than previously expected. We believe the group will deliver its first profit in two years in 2019E, wherein we expect finance charges will be some way lower compared to 2018E. But that aside, the short-term outlook for both Nigeria and the South Africa cement markets is conservative from the viewpoint of economic activities. And while the ongoing restructuring/turnaround activities across the group appear to be yielding little results, the associated costs remain elevated, with continued negative pass-through to margins and profitability.
Volume growth in 2019; eyes on turnaround programme and Ghana: Economic activities do not appear likely to improve significantly in Nigeria and South Africa (SA) in 2019, from 2018. And we believe it was for this reason that LAFARGE’s management was cautionary about its cement demand growth expected in both markets during the recent conference call. Management, however, noted that the ongoing turnaround programmes will provide the group with some room to improve on volume and close the gaps – which has existed in recent years – with the markets. Volume is also expected to gain support from Ghana – where management said the result from test exports from Nigeria was positive – with a target 80% utilization
rate from the 670kmts grinding station billed to commence production next month.
Price, restructuring costs, and margins: Management guided to a price erosion trend that started in Nigeria in Q3 (-c.6% y/y). Management expects the price to stabilize in the market from the seasonally strong dry season (between Q4-18 and April 2019) but noted that price movement will be positively correlated with the state of the economy. Management said it increased price in SA by 14% q/q in Q3, with a stable outlook.
SAP and restructuring costs accruing from Nigeria (+38% in 9M-18) are expected to start reducing as SAP go live from January 2019. In SA where there are still some grounds to cover, the costs will probably remain elevated. Overall, we expect cost reduction from the entire restructuring/turnaround activities to be more impactful on margins from 2020E.
Rights issue (RI), debt restructuring, FX risk: From the timeline provided by management, we expect to see the impact of the approved RI on both earnings and balance sheet from 2019E. Both the substitution of expensive short-term debts with equity and the restructuring of USD loans (from USD308 million to USD293 million, maturity extended to 7.5 years, and with a 2-year moratorium on both interest and principal effective September 2018) should moderate finance cost. That said, we believe the outstanding USD debt is underlined by FX risk in a possibly volatile 2019 environment.
Strong price upside, but with a caution: On our DCF-derived TP of NGN27.05/s, LAFARGE’s stock offers 29% potential upside – and expected the total return of 36% after incorporating 2018E dividend yield of 7%. However, we maintain HOLD rating. The group has consistently disappointed with its ability to grow revenue and maintain a stable margin, amidst a highly leveraged balance sheet (with high FX risk).