Lafarge Africa Plc (WAPCO) – Capital Raise Mitigates FX Risk But Dilutes Valuation

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Lafarge Africa announced that it has successfully concluded its ₦131.65 billion Rights Issue with a 100% subscription rate. We recall that the funds from the Rights Issue had been earmarked for debt conversion as well as working capital and expansion capital funding. Whilst we expect this transaction to be value accretive over the long run, we anticipate some earnings dilution in the near term and forecast a post-rights FY’18 EPS of ₦2.86, albeit we see the resulting reduction in FX exposure as one of the positives from the move. We also cut our post rights target price to ₦63.15 (Previous: ₦70.58) and maintain a BUY rating.

Increase in shares triggers EPS dilution but lowers FX risk

Given the 100% subscription, we have increased WAPCO’s outstanding shares on our model by 56% to 8,673 million units. The issue proceeds will
be used to liquidate the dollar-denominated quasi-equity instrument of c.₦93 billion, support working capital (c.₦19 billion) and fund expansion projects (c.₦19 billion). Meanwhile, given that interest payment (6% annual dividend) on the instrument was treated as a direct charge to Equity (rather than to Income statement), we do not expect any savings in its interest expense (post-liquidation). Consequently, we expect significant EPS dilution and thus revise our FY’18 EPS lower to ₦2.86 (Previous: ₦4.85), and postFY’18 EPS by an average c.40% over our forecast period. Notwithstanding, WAPCO would no longer be required to pay out the 6% dividend previously accruing on the equity instrument, freeing up additional earnings for distribution to shareholders and investors. The restructuring also frees up WAPCO’s financials from the volatility that may arise on the instrument’s carrying value due to movement in the exchange rate.

Post-rights TP revised to ₦63.15, BUY rating maintained

Post-rights, WAPCO’s foreign currency loan exposure is reduced from $595 million to c.$308 million – made up of two shareholder loans of $88.4 million and $220 million. Both loans are hedged at separate 1-Year Non-Deliverable Future contracts which have now effectively expired – contract on $88.4 million expired December 2017, contract on $220 million expires March 2018. As such, currency depreciation remains a risk to WAPCO’s earnings going forward, although tempered by a more optimistic outlook on the naira.

In valuing WAPCO post-rights, we back out the ₦93 billion quasi-instrument from WAPCO’s minority interest following the conversion to ordinary shares. Notwithstanding the resulting increase in weight of equity (more expensive than debt) in the new capital mix, our Weighted Average Cost of Capital (WACC) post-rights is revised lower to 14.7% (Previous: 15.3%) on the back of a lower risk-free rate assumption. After updating our model, we cut our target price to ₦63.15 (₦70.58) but maintain a BUY rating on the stock.

 

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