LAFARGE WAPCO CEMENT PLC

Transcription

1 Vetiva Research 5 April 2011 FY 10 Earnings Release Bright Outlook Despite Unimpressive Scorecard In spite of Lafarge WAPCO s disappointing FY 10 earnings, our revised target price of N49.55 still supports a Buy rating on the company s shares. Relative to today s closing price of N38.50, our target price translates into a potential return of 28.7%. YTD, Lafarge WAPCO share price has declined by 5%, despite reaching a high of N We are still upbeat We retain a long term positive outlook on Lafarge WAPCO, despite the unsatisfactory net earnings in FY 10 results. Our optimism is predicated on four key reasons; 1. The strong top-line growth and higher efficiency that the second Ewekoro (Lakatabu) Plant would add to the company s operation when it comes on stream later this year. 2. We are convinced that the company s management would work more tenaciously to deliver good numbers given the current debt overhang (about C225 million secured for the construction of the new plant) on the company. 3. The backing and commitment of the parent Lafarge SA remains strong, given its huge investments in the expansion of the company. 4. The opportunities presented by the deficit of physical infrastructure in Nigeria simply show that the growth potential of the cement sector cannot be overemphasized, despite increasing competition. We believe Lafarge WAPCO, given its strong brand name is poised to maximize this growth potential. despite a challenging Q4 10: Having reiterated our positive long term outlook, we note the company s disappointing performance, essentially in Q4 10 bottom-line. Though we had, at first thought, believed the poor performance may have been due to an exceptional item charge, management s insight reveals otherwise. According to Lafarge WAPCO s management, the company had slight operational challenges at the Ewekoro Plant in Q4 10. Consequently the Ewekoro Kiln was shut down for about 41 days, quite longer that the usual days for routine maintenance. Notwithstanding the shut-down of the Ewekoro kiln, turnover came in as expected as the company milled stored old clinker stock to produce cement. The plunge in the PBT line is therefore a result of the higher costs of production given that some portion of the older clinker stock were imported in the previous year. Since the actual process of milling clinker to cement consumes the highest electric power in cement production, the company incurred much higher power costs, given the higher humidity of the clinker stock as a result of moisture absorption over months of storage. The resultant impact of the higher costs of production therefore resulted to a net loss of N381 million in Q4 10 (October to December) Earnings Off to a good start: From our last visit to Lafarge WAPCO, there are indications of a good start to 2011 performance. According to management, the company opened the year with a strong upsurge in cement demand, as against the industry-wide wane witnessed in the sector in Q3 10 and some periods of Q4 10. Whilst alluding to management s position, given the confirmation of similar upsurge in demand by other industry players, we note that higher fuel prices (LPFO and diesel) which persisted for most part of Q1 11 would pose some threat. However, we maintain our view (as detailed in our sector update of 17 th March High Energy Price, Margins Pressured?) that Lafarge WAPCO would likely be the least vulnerable. Analyst Tosin Oluwakiyesi t.oluwakiyesi@vetiva.com Stock Data Symbol: NSE: Bloomberg: Reuters: WAPCO WAPCO.NL WAPCO.LG Current Price (N): Trailing EPS (N): 1.16 Trailing P/E (x): 33.2 Shares Outstanding (mn): 3,002 Market Cap (Nbn): Market Cap ($ Mn): Year High (NGN): Year Low (NGN): Share Price Performance 30 Days (%): Days (%): weeks (%): 8.5 Ownership Structure: Lafarge S.A (%): 60.0 Odua Group (%): 10.0 Others (%): week share price performance (Rebased) Target Price Range N45.17 N52.98 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 WAPCO NSE ASI BM Index Vetiva Capital Management Limited Plot 266B Kofo Abayomi Street Victoria Island Lagos, Nigeria Tel: Fax: research@vetiva.com 1

2 Performance highlights Income Statement (N millions) Dec-10 Dec-09 % Change Turnover 43,841 45,589 (3.8) Profit Before Taxation 8,464 9,237 (8.4) Taxation 3,583 4,181 (14.3) Profit After Taxation 4,881 5,055 (3.4) Balance Sheet (N'millions) Fixed Assets 100,751 69, Stock 9,728 12,517 (22.3) Trade Debtors Cash and Bank Balances 5,248 3, Other Debit Balances 2,122 1, Trade Creditors 2,113 2,521 (16.2) Short Term Borrowings 1,411 NIL Other Credit Balances 66,663 40, Working Capital (40,401) 6,747 (698.8) Equity 48,291 43, Lafarge WAPCO s quarterly performance -Turnover (N Mn), PBT (N Mn) and PBT Margin (%) - in 2010 and Q1 11 Forecast 14, % 10, % 6, % 2, % -2,000 Q1'10 Q2'10 Q3'10 Q4'10 Q1'11F Turnover PBT PBT Margin -10.0% Source: Company Filings, Vetiva Research 2

3 Strained Liquidity? The negative working capital of N40.4 billion reported in the FY 10 results (see table in previous page), would have ordinarily signalled a possible liquidity strain. However, we clarified from Lafarge WAPCO s management that the negative balance in working capital is a result of reclassification of its medium term loan to short-term in Q4 10 for financial reporting reasons. Hence, we saw a spike in current liabilities balance which resulted in negative working capital. Despite the lower-than-expected FY 10 earnings, we remain comfortable about Lafarge WAPCO s cashflow and liquidity, given the expectation of significant rise in revenues (and cashflow) since the new Lakatabu plant would have been in operation at least 2 months before the commencement of repayment of its medium term debt (C225 million) scheduled to commence in Q4 11. Revisions to our forecasts: While we expect strong growth in FY 11 numbers (turnover: 53%; PBT: 77%), Q1 11, contrary to the historical pattern would account for a lesser portion of FY 11 earnings. The boost expected in FY 11 earnings would stem from increased production output by H1 11. Hence for Q1 11, we project a turnover of N12.85 billion, which would translate into an increase of 18.8% from Q4 10 and a pre-tax profit of N1.95 billion. Valuation and Rating Our valuation is based on the Discounted Cash-flow Method, with forecasts spanning through a 5 year period (2011 to 2015). Our model captures the expected rise in revenue when Lafarge WAPCO s new plant (Lakatabu), billed to start production by the second half of 2011, comes on board. As a result of the recent conversion of the existing Ewekoro and Shagamu plants to a dual-firing kiln type, investment in 90MW power plant that will support the new 2.2 million tonnes line and the general positive outlook on gas pricing for manufacturers, we believe cost of production would gradually trend downwards. We estimate production costs (as percentage of sales) would decline gradually to c.50% (from c.67% in FY 09 results) over the five year forecast period. We believe, however, that Lafarge WAPCO would incur more distribution and marketing expenses over the forecast period, given the expected increase in competitive pressure when Dangote s Ibese plant, also expected to be completed in 2011, starts production. Using a discount rate (WACC) of 12.27% (see table below for WACC assumptions) on projected free cash-flows to derive our fair value, we arrive at a target price of N49.55 by rolling our estimate of the company s fair value one year forward at its WACC. Relative to target price range, we project a potential return of 28.7% based on Lafarge WAPCO s close price of N38.50 and therefore maintain a Buy rating on the stock. 3

4 WACC Assumptions After tax cost of debt 6.6% Tax rate 32.0% Risk free rate 12.5% Beta 0.8 Equity risk premium 5.0% Target Debt/Total Capital 42.9% Shareholders Equity/Total Capital 57.1% WACC 12.3% Forward 2011 Valuation Metrics: Local Peers Company P/E (x) EV/EBITDA (x) Div Yield (%) ROAE (%) EBIT Margin (%) Ashaka Lafarge WAPCO CCNN Dangcem Valuation Metrics: Emerging Market Peers Company Pret. Portland Anhui (Mkt Mn EBITDA Margin EBIT Margin ROE (%) EV/EBITDA P/E (x) Div. yield (%) USD) Country 2011F 2012F 2011F 2012F 2011F 2012F 2011F 2012F 2011F 2012F 2011F 2012E S/Africa 2, % 34% 27% 27% Hong Kong 21, % 33% 27% 28% Ambuja India 5, % 24% 19% 19% Bamburi Kenya % 29% 24% 22% ACC Limited India 4, % 20% 13% 14% Gulf UAE % 23% n/a n/a n/a n/a Sib Russia % 30% 18% 20% n/a 0.9 Siam Holcim Phillipines MISR Sinai Lafarge WAPCO Thailand 12, % 17% 11% 12% Philli pines 24, % 23% 13% 15% Egypt n/a 50% 44% 41% 32% n/a n/a n/a n/a n/a n/a n/a n/a Egypt % 44% 41% 35% Nigeria % 30% 22% 24% Ashaka Nigeria % 42% 31% 38% CCNN Nigeria % 16% 13% 12% Dangcem Nigeria 12,700 63% 66% 59% 62%

5 Lafarge WAPCO Financials: Actual and Forecasts (N million and USD Million) INCOME STATEMENT (N'Mill) F 2012 F Turnover 38,665 43,274 45,590 43,841 66,975 90,972 Cost of Sales (21,945) (25,026) (30,513) - (36,836) (50,035) Gross Profit 16,720 18,247 15,077-30,139 40,937 Distr. & Admni Expenses (4,843) (4,542) (5,224) - (10,046) (13,646) Core Operating Profit 11,877 13,705 9,853-20,093 27,292 EBITDA 11,877 13,705 9,853-20,093 27,292 Depreciation & Amortization (1,378) (1,580) (1,576) - (5,177) (5,366) EBIT/Operating Profit 10,499 12,125 8,277-14,916 21,925 Interest Payable & Charges (831) (228) - - (1,256) (864) Profit Before Taxation 11,665 12,769 8,956 8,464 13,660 21,062 Taxation (1,358) (1,781) (4,182) (3,583) (4,371) (6,740) Profit After Taxation 11,179 11,252 5,056 4,881 9,289 14,322 BALANCE SHEET (N'Mill) F 2012 F Non-Current Assets Fixed Assets 33,356 43,121 69, , , ,105 Long Term Investments Current Assets Inventories 8,572 10,083 12,517 9,728 15,111 20,526 Trader Debtors Bank and cash balances 4,220 5,974 3,628 5,248 5,099 9,850 Other Receivables and Current Assets 4,388 2,364 1,092-2,679 3,639 Total Current Assets 17,180 18,587 17,422-23,162 34,384 TOTAL ASSETS 50,596 61,769 87, , ,550 Current Liabilities Trade Creditors & Accruals 7,732 8,353 8,573 2,113 16,487 22,394 Other Creditors 1,461 1,422 1,056-2,095 2,845 Short Term Loan 4,713 7,113-1,411 14,969 35,196 Taxation 1,842 1,212 1, Total Current Liabilities 15,748 18,099 10,674-33,551 60,436 Non-current Liabilities Long-Term Loans ,793-24,793 24,793 Provision for Gratuity 1,748 1,758 2,801-13,134 22,745 Deferred Taxation 294 1,455 5,183-2,136 1,602 Total Non-Current Liabilities 2,042 3,213 32,778-40,063 49,140 TOTAL LIABILITIES 17,790 21,312 43,452-73, ,576 Net Assets 32,806 40,456 43,711 48,291 51,380 59,974 Source: Annual Report, Vetiva Research 5

6 INCOME STATEMENT (USD Mill) F 2012 F Turnover Cost of Sales (187) (201) (207) - (237.7) (322.8) Gross Profit Distr. & Admni Expenses (41) (36) (35) - (64.8) (88.0) Core Operating Profit EBITDA Depreciation & Amortization (12) (13) (11) - (33.4) (34.6) EBIT/Operating Profit Interest Payable & Charges (7) (2) - - (8.1) (5.6) Profit Before Taxation Taxation (12) (14) (28) (23) (28.2) (43.5) Profit After Taxation BALANCE SHEET (USD'Mill) F 2012 F Non-Current Assets Fixed Assets Long Term Investments Current Assets Inventories Debtors Bank and cash balances Other Receivables and Current Assets Total Current Assets TOTAL ASSETS ,093.9 Current Liabilities Creditors & Accruals Other Creditors Short Term Loan Taxation Total Current Liabilities Non-current Liabilities Long-Term Loans Provision for Gratuity Deferred Taxation Total Non-Current Liabilities TOTAL LIABILITIES Net Assets Source: Annual Reports, Vetiva Research, FDHL Analytics 6

7 Key financial ratios: Actual and Forecasts E 2011 F 2012 F Growth Turnover growth (%) -2.5% 11.9% 5.4% -3.8% 52.8% 35.8% Growth in EBITDA 84.8% 115.4% 71.9% % 135.8% Growth in PBT 98.4% 109.5% 70.1% -8.4% 193.0% 154.2% Growth in PAT 4.7% 0.7% -55.1% -3.4% 165.8% 54.2% Profitability Return on Average Equity (%) 38.7% 49.8% 35.8% 7.8% 19.1% 25.7% Return on Average Assets (%) 22.6% 20.0% 6.8% - 7.6% 9.7% EBITDA Margin 30.7% 31.7% 21.6% % 30.0% EBIT Margin 27.2% 28.0% 18.2% % 24.1% Pre-tax Margin 30.2% 29.5% 19.6% 19.3% 20.4% 23.2% Net Profit Margin 28.9% 26.0% 11.1% 11.1% 13.9% 15.7% Liquidity Ratios (x) Quick ratio Cash ratio Current ratio Days in inventory Days in payables Days in receivables Activity Ratios (x) Sales to cash Sales to inventory Sales to total assets Sales to total fixed assets Production Data Capacity(million tonnes) Production (million tonnes) Average Utilization (%) Revenue/tonne (N'000) Per Share Data Earnings/share Dividend/share Net Asset/share Sales/Share Valuation Multiples P/E (x) P/B (x) Dividend Yield (%) 3.2% 1.6% 0.3% 0.7% 1.3% 5.1% EV/EBITDA (x) Source: Company Financials, Vetiva Research 7

8 INVESTMENT RECOMMENDATIONS Vetiva uses a 5-tier ratings system for stocks under coverage: Buy, Accumulate, Neutral, Reduce and Sell. Buy % expected absolute price performance Accumulate % to % expected absolute price performance Neutral +5.00/+9.99% range expected absolute price performance Reduce -5.00% to +4.99% expected absolute price performance Sell < -5.00% expected absolute price performance Definition of Ratings Buy rating refers to stocks that are highly undervalued but with strong fundamentals and where potential return in excess of or equal to 25.00% is expected to be realized between the current price and analysts target price. Accumulate rating refers to stocks that are undervalued but with good fundamentals and where potential return of between 10.00% and 24.99% is expected to be realized between the current price and analysts target price. Neutral rating refers to stocks that are correctly valued with little upside or downside where potential return of between and+9.99% is expected to be realized between current price and analysts target price. Reduce rating refers to stocks that are overvalued but with good or weakening fundamentals and where potential return of between -5% and % is expected to be realized between current price and analysts target price. Sell rating refers to stocks that are highly overvalued but with weak fundamentals and where potential return in excess less than -5% is expected to be realized between current price and analysts target price. 8

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