Lafarge Africa Attracts Buy Ratings After Major Debt Payoff
Lafarge Africa Plc has continued to attract buy ratings from equity analysts representing various investors’ interests after a major debt payoff that keeps the cement company’s balance sheet strong.
In the first half of 2021, the company deleveraged its balance sheet by lowering its debt book. Consequently, its net finance costs dropped, thus supporting its bottom line.
The cement company records an impressive performance in nine-month in 2021 financial scorecard as revenue grew by 21.86% to N219.20 billion from N179.88 billion recorded in nine-month to September 2020.
Reacting to questions about the Lafarge earnings outlook, PAC Capital analyst Oluwole Adeyeye told MarketForces Africa that Lafarge has been doing well after the sale of LSAH (Lafarge South Africa Holdings).
Adeyeye also hinted that the cement company has been able to reduce finance costs significantly as they now have fewer loans to service.
Lafarge Africa plans an interim dividend of N1.00 per 50 Kobo ordinary share, payable from the pioneer profits will be paid to shareholders whose names appear in the Register of Members as at the close of business on 10th November 2021.
But the share price declined in spite of this, from N26.90 to N28.85 on Wednesday, leaving the company’s market capitalisation at N416.386 billion on 16.107 billion shares outstanding.
Historical share price in 2021 shows that WAPCO was N22.95 in January, from where it peaked at N30 in the same month. The company’s share price has largely closed lower month on month until October 2021 when it peaked at N27 to a share.
Analysts are expecting better earnings, with higher expectations for dividend pay in 20201 as the demand outlook remains positive.
The average industry’s margin is noted to be high, according to some analysts, though very capital intensive to play for key players that have seen increased production and operating costs.
In Nigeria, the cement oligarchs are having fun with uncontested upward price adjustments due to the concentration of the market.
But rising costs provide a veritable alibi for such upward adjustment, MarketForces Africa gathered from a number of equity analysts’ discussions.
With three key players in the cement industry, prices have been steep, an adjustment anchored on a double-digit inflationary position in the country. The price level is worsened by dollar scarcity, analysts said.
In the second quarter of 2021, Nigerian Lawmakers criticised the dominance of three large firms in Nigeria’s cement industry amid price rises, saying such a level of dominance impedes construction that is critical to economic recovery, calling for looser licensing rules to attract new entrants.
Nigeria has a total cement production capacity of 47.8 million tonnes and annual demand for around 20.7 million tonnes, but cement prices are some 240% above the global average, they said, a serious dampener on Africa’s largest economy.
A tonne sells for about $150 in Nigeria. In a motion adopted in the upper house Senate, lawmakers had called for a relaxation of licensing restrictions to create the competition needed to drive down prices.
Industry-wide earnings growth has been impressive, according to financial statements submitted by the three listed cement companies to the Nigerian local bourse.
In its equity note, PAC Capital sees the company’s 12-month trailing earnings per share (EPS) uptrend to N2.67 as impressive, rising from N1.44 in the corresponding period of last year.
Collaborating the position, analysts at Cordros Capital also hinted about their expectation for an upward revision to consensus 2021 estimate EPS given the impressive run rate as of 9M-2021.
Pan Africa Capital analyst attributed the increase in the revenue to growth in demand for cement and increase in prices in Nigeria during the period.
Following its sterling earnings performance, PAC Capital valuation puts the target price of the stock at N29.02, representing an increase of 13.81%, from the reference market price of N25.50.
“We have a target price of N34.87 with a buy recommendation on the stock’, analysts at CSL Stockbrokers Limited said in its equity note.
The stockbrokers’ company said Lafarge deleveraging efforts were further reflected in the 25.7% year on year decline in net finance cost to N5.1 billion in 9-month 2021 from N6.8 billion in 9M 2020.
Since the liquidation of its major debt in June 2021, the leverage position remains low.
According to its financial statement, Lafarge WAPCO Cement segment contributed 97.50% (N213.72 billion) to the overall revenue while the aggregate and concrete segment contributed 1.74% (N5.48 billion) to the overall revenue of the company.
However, it was spotted that the cost of sales rose by 25.66% to N155.24 billion in 9-month 2021 from N123.54 billion in 9-month 2020.
The increase in the cost of sales could be attributed to inflationary pressure and higher cement volumes, which resulted in a 28.01% increase in the production and distribution variable costs during the period, according to Pan African capital analyst.
This translated to a cost-to-sales ratio of 70.82% in 9M’21, meaning that a moderate pressure ensued amidst steep inflation in its key market, Nigeria, when compared with 68.68% recorded in 9M’2020.
In addition, the selling, marketing and administrative expenses grew by 4.96% to N16.80 billion in 9M’2021 from N16.00 billion in the comparable period in 20202.
Despite the increase in total operating expenses, the cement company’s operating profit rose by 17.09% to N48.14 billion in 9M’2021 from N41.11 billion in 9M’2020.
Lafarge Africa net finance costs fell significantly by 25.74% to N5.06 billion in 9M’2021 from N6.82 billion in 9M’2020, mainly as a result of a reduction in loans and borrowings which resulted in a 39.98% fall in interest on borrowings, according to analysts.
Consequently, the company’s profit before tax grew by 28.02% to N43.90 billion in 9M’21 from N34.29 billion in 9M’20. The company made a lower provision of N3.51 billion for tax in 9M’21 (vs. N6.10 billion in 9M’20).
As a result, the profit after tax improved significantly by 43.26% to N40.40 billion in 9M’21 as against N28.20 billion in 9-month 2020.
With the impressive figures released by the company and expectation of improved cement demand in coming quarters, Pan-Africa Capital analysts upgraded the target price per share to N29.02, albeit moderate from N28.47 and maintain a BUY recommendation.
The balance sheet remains solid as Lafarge Africa rewards the shareholders with an interim dividend of N1:00 per share, some analysts are expecting payout incremental as the cement company raised earnings performance.
In the third quarter of 2021, analysts said in the review that Lafarge Africa maintain a strong financial position as total assets improved marginally by 0.33% to N512.37 billion as against N510.69 billion in the third quarter of 2020.
This was attributed to the growth recorded in the current assets of the company during the period. Detail from the financial statement showed that Lafarge current asset improved by 4.60% to N115.08 billion Q3’2021 from N110.02 billion in Q3’20, mainly as a result of a 29.95% increase in inventories and 64.39% growth in other financial assets.
Total liabilities however fell by 16.43% to N128.44 billion in Q3’2021 from N153.69 billion in Q3’2020, driven by a significant decline in total loans & borrowings.
During the period, PAC analyst Adeyeye said the short-term and long-term loans & borrowing declined by 58.49% and 54.87% to N19.15 billion, from N46.14 billion in the corresponding period in 2020 and N3.29 billion from N7.29 billion respectively.
Consequently, the net assets of the cement company improved by 7.54% to N383.93 billion in the third quarter of 2021 from N357.00 billion reported in the corresponding period of the previous year, and this resulted in a net asset per share of N23.83 compare with N22.16 in the comparable period.
With the robust balance sheet and impressive operating performance during the period, the company rewarded its shareholders with an interim dividend of N1.00 per share, equaling the total dividend per share paid for 2020, according to PAC Capital.
“We expect Lafarge to pay an additional dividend (final) in the full year of 2021 as we anticipate growth in demand for cement in the fourth quarter of 2021”, PAC Capital analyst said.
Analysts at Cordros Capital said they expect Lafarge to sustain the momentum in earnings in the last quarter of the year given a positive outlook on sustained private and public sector demand for cement amidst gains from its deleveraged balance sheet.
Lawmakers challenged cement price hikes since 2016 given the dominance of Dangote Cement DANGCEM, which has a 60.6% market share. However, PAC Capital analyst Adeyeye told MarketForces Africa that the entry barrier into the cement industry in Nigeria is very strong.
For instance, Dangote Cement is currently enjoying economies of scale, reflected in its cost-to-sales ratio which is about 40%. However, the cost-to-sales ratio of Lafarge is currently 69%.
“Any new cement company coming into the industry should be ready to experience this. Cost-to-sales ratio has a huge role to play in the net profit of any company”, Adeyeye said.
On the 19th of November 2021, dividends will be paid electronically to shareholders whose names appear in the Register of Members as of 10th November, 2021, and who have completed the e-dividend registration and mandated the Registrar to pay their dividends directly into their Bank accounts.
Read Also: Lafarge Africa’s Huge Cash, Low Debt to Influence Dividend Payout
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