Equity Research: Lafarge Africa Plc

Transcription

1 Equity Research: Creating a Regional Company Wednesday, June 17, 2015 Table 1: BUY Current Price N99.00 Fair Value N The turnover in FY 2014 declined marginally by 0.11% to N205.84bn. 1.0 FY 2014 Performance Analysis: The full year result of Lafarge Africa for the period ended December 31, 2014 shows that its Turnover (T/O) declined marginally by 0.11% to N205.84bn, compared with N206.07bn recorded in the corresponding period of The overall product sales from the Nigeria operations increased by 8% to N130.9bn in 2014 compared with a decline of 2% to N74.9bn recorded from the South Africa operations. From the Nigeria operations, WAPCO grew by 9%; Ready-Mix by 256% while Ashaka dropped by 3%. The cost of sales declined by 1.00% to N137.36bn from N138.75bn recorded in 2013 mainly driven by cost savings initiatives, improved industrial performance and innovation. The company recorded an improved growth in gross profit by 1.73% to N68.48bn. The distribution and administrative expenses as a percentage of turnover increased from 10.57% in 2013 to 11.06% in The operating income for the year decreased by 3.00% to N44.18bn compared with N45.54bn recorded for the corresponding period of 2013, while the finance charges reduced from N2.75bn to N542mn, representing a decrease of 80.28% from the previous year as the company repays a significant portion of its debts. The company s 2014 Profit Before Tax (PBT) stood at N41.2bn. However, the PBT at comparable scope (i.e. excluding Lafarge South Africa Holdings N21.7bn Pan African Cement disposal gain and WAPCO N4.1bn, Ashaka N0.5bn prior year pioneer tax credits in 2013) is put at N43.6bn an increase of 2% from N42.6bn in Tax provision increased by 97.62% from N3.31bn in 2013 to N6.54bn in 2014, which led to a Profit After Tax (PAT) of N34.66bn from N60.95bn (including an exceptional item of N21bn from the sale of investment assets) recorded in Notably, PAT at comparable scope stood at N34.4bn from N34.1bn in 2013 representing 1% increase. Table 2: Full Year Result Highlights (N'bn) FY 2014 FY 2013 Change Turnover (0.11%) GP % EBIT (3.00%) PBT (35.89%) PAT (43.14%) PAT* % *At comparable scope excluding LSAH 21.7bn disposal gain and Wapco 4.1bn, Ashaka 0.5bn proper year tax credits in

2 Table 3: Four Quarter Result Highlights (N'bn) Q Q Q Q Q Q Turnover PBT PAT The company s profit margins recorded decline in FY 2014 compared with FY The PBT margin decreased to 20.01% in 2014 from 31.18% as at PAT margin currently stands at 16.84%, down from 29.58% in the corresponding period of Notably, the company s profit margins recorded when the Exceptional Item of N21bn is The company s profit margins declined FY excluded show that the PBT margin decreased marginally from 20.77% in 2013 to 20.01% in 2014 and the PAT margin decreased from 19.16% in 2013 to 16.84%. Table 4: Profitability Margins (%) FY 2014 FY 2013 FY 2013 (without Exceptional Item) GP* Margin EBIT Margin PBT Margin PAT Margin *GP Gross Profit Q4 Revenue Trend N'bn Q Q Q Q Revenue

3 The total assets were financed by a mix of equities and liabilities in the ratio of 62.65% and 37.35% respectively. A cursory look at the balance sheet position as at FY 2014 compared with the position as at FY 2013 shows a marginal decrease in the company s fixed assets. The total fixed assets decreased by 1.94% to N209.15bn from N213.28bn in FY 2013; stock increased by 12.50% to N24.26bn in 2014 from N21.57bn in FY The cash and bank balances recorded a decrease by 58.61% from N33.9bn in FY 2013 to N14.03bn in FY Trade debtors and other receivables increased in FY 2014 by 36.72% to N17.46bn from N12.77bn in the FY 2013, while trade creditors and other payables increased by 13.59% to N51.31bn from N45.17bn as at FY Working capital stood at a negative of N2.95bn from a positive of N3.85bn in FY 2013, while net assets for the period increased by 11.61% to stand at N191.64bn from N171.71bn in the FY The total assets of the company which stood at N305.88bn as at FY 2014 were financed by a mix of equities and liabilities in the ratio of 62.65% and 37.35% respectively. Our analysis of the liabilities shows that the short-term liabilities stood at N59.21bn, accounting for 51.83% of the total liabilities, while the long-term liabilities which constituted mainly of deferred tax liabilities stood at N34.17bn, accounting for 48.17% of the total liabilities % Financing Mix 62.65% Lafarge Africa Vs NSE ASI Rebased (Jun'14 - Jun'15) Equities Liabilities Lafarge Africa NSE ASI Rebased 3

4 1.1 Q1 Performance Analysis: As at Q1 2015, the PBT Margin decreased over the Q1 2014, and the Financial Year ended December (FY), 2014 figure. The PBT margin decreased to 15.48% in Q from 26.09% as at Q1 2014, and from 20.01% as at the end of FY Also, the PAT margin currently stands at 15.04%, down from 22.31% in the corresponding period of 2014, and also down from 16.84% as at FY The result also indicates that the percentage of T/O, PBT, and PAT in the Q to the Audited T/O, PBT and PAT for the period ended December 2014 are: 27.67%, 21.40% and 24.72%, respectively. Given the run rate, the company should be able to meet its previous year s performance and surpass it based on the strength of the strategic focus of the company. Table 5: Profitability Margins (%) Q Q Q Q GP* Margin EBIT Margin PBT Margin PAT Margin *GP Gross Profit Q1 Revenue Trend N'bn Q Q Q Q Revenue Table 6: Financial Performance (N bn) Q Q Change (%) T/O EBIT (14.62) PBT (31.57) PAT (22.23) 4

5 2.0 Drivers of Performance: The company s performance was hinged on the following: Impressive sales of cement and ready-mix as it grew by 4% and 172% respectively. High utilization rate in Q4 with all the Lafarge plants running above 90%. Ashakacem recorded a significant increase in coal substitution to 71% in 2014 from 35% in Cost savings initiatives, improved industrial performance and innovation Cost per ton decreased by 2.2% in Q4 and by 1.4% for FY Savings on raw materials cost (Quarry cost) across plants. Benefits of power consolidation in Sagamu through Shoreline. Increased efficiencies from the Wartsilla (gas fired power plant) plant in Ewekoro. Stable gas supply as usage was high in Q4. Strategic truck partnership with logistics companies for easy cement transportation. About 300 trucks were fully operational in Q High utilization rate in Q4 with all the Lafarge plants running above 90%. Growing footprints by introducing innovative solutions to frontline customers on the ready-mix products. Security situation at the Ashaka factory in Q4 negatively affect both volume and sale. Ashakacem recorded a significant increase in coal substitution to 71% in 2014 from 35% in In Lafarge South Africa Holdings - challenging environment with new cement entrant and lower overall growth Ready Mix and Aggregates are gaining momentum. Cement volumes 21% below 2013 in Q4 and -10% FY Ready-Mix 8% above 2013 in Q4, but -2% FY Aggregates 17% above Q and 14% FY

6 2.1 Strategic Focus: The joint development agreement with Wartsilla (gasfired power plant) and IFC to boost power generation capacity to 310MW signed in Q is expected to enhance its efficiency. The company recently signed the Share Purchase Agreement with Flour Mills Nigeria (FMN) to increase its stake in UNICEM. The first tranche of UNICEM acquisition was completed in February 2015: Lafarge Africa now owns 42.5% of UNICEM up from 35%. The second tranche to be completed between July 2015 and February Looking ahead, the joint development agreement with Wartsilla (gas-fired power plant) and IFC to boost power generation capacity to 310MW signed in Q is expected to enhance its efficiency. Also, the separate SPV power company/entity set up in Q in anticipation of Power Sales in 2015 is expected to improve its efficiency. Given that Nigeria offers great potential for construction due to the rapid population and urbanisation growth of 2.8% and 4.88%, the Technical Partnership signed with Shelter Afrique to facilitate access to affordable housing, should generate strong demand for cement. It is anticipated that construction activities should pick up in second half of the year as demand for office spaces and residential properties continues to rise. In addition, an MOU with the Ministry of Works and Housing for concrete road and affordable housing was signed in Q Further investments in alternative fuels across Sagamu and Ewekoro II are underway. Further investments in alternative fuels across Sagamu and Ewekoro II are underway. Cement expansion drive in progress, the debottlenecking plans ongoing in all plants, expansion plans are well on track and additional expansion plans are being appraised. Also, the transition into Lafarge Africa to be completed, Ashaka Mandatory Tender Offer (MTO) well on track and the second tranche of FMN share transfer to be completed within the next 12 months. In South Africa, the cement market is expected to pick up in 2015 compared with 2014, and it is expected to grow between 2% to 5%. In addition, stronger industrial performance and cost improvement actions are expected to drive margins. The South African Rand (ZAR) strengthened by 6% compared with the Naira by end of Q to the end of Q and had strengthened by 15% end of Feb 2015 compared with the beginning of This translates to an exchange rate gain for Lafarge Africa in Naira terms. 6

7 The company expects to benefit from positive economies of scale and achieve substantial synergies in its operations, as well as introduce new products in the Nigerian market, which it expects will drive growth over the next few years. Lafarge Africa designs and produces building materials to meet customer requirements for housing, transport, healthcare, education and essential infrastructure for economic and social growth. The company owns plants in various parts of the country including: Gombe State, Rivers State, Cross-River State and Ogun State. The company expects to benefit from positive economies of scale and achieve substantial synergies in its operations, as well as introduce new products in the Nigerian market, which it expects will drive growth over the next few years. 3.0 Business: Lafarge Africa designs and produces building materials to meet customers requirements for housing, transport, healthcare, education and essential infrastructure for economic and social growth. The company s principal activities are the manufacturing and marketing of cement products. Its brands includes: Elephant Cement; Supaset Cement; Powermax Cement, Ready Mix Cement and Sulphate Resisting Cement. The company owns plants in various parts of the country including: Gombe State, Rivers State, Cross-River State and Ogun State. The strength of the company is backed by a global brand name and strong international presence, coupled with its expansion plans and new improved facilities. The company also engages in the provision of technical assistance to customers when required., formerly known as Lafarge Cement Wapco Nigeria Plc, is a combination of all Lafarge s Nigerian operations (AshakaCem Plc, UNICEM, Atlas Cement Company Limited) and Lafarge South African Holdings Limited assets in order to create a stronger platform for growth in Sub-Saharan Africa, with value creating opportunities. The transaction was concluded in September On 7 November 2014, Nigerian Cement Holdings B.V. (NCH), a 50% affiliate of, entered into an agreement with Flour Mills of Nigeria, defining a roadmap to purchase Flour Mills of Nigeria s 30% investment in UNICEM (the 3rd largest cement manufacturer in Nigeria). The first phase of the acquisition (15%) was completed recently. In accordance with Section 131(1)(a) of the Investments and Securities Act, 2007, Lafarge Africa is required to make a Tender Offer to all other shareholders of AshakaCem Plc. Consequently, the Board of Lafarge Africa granted approval for a Tender Offer to be made to all Qualifying Shareholders of AshakaCem Plc. 7

8 The Mandatory Tender Offer was successful and is in the final stages of regulatory approval. AshakaCem Plc is a cement manufacturing company focused on providing creative, qualitative solutions to meet the needs of stakeholders. Ashakacem: AshakaCem Plc is a cement manufacturing company focused on providing creative, qualitative solutions to meet the needs of stakeholders. AshakaCem Plc was incorporated in August 1974 and commenced production in 1979 as a cement manufacturing and marketing company under the name Ashaka Cement Company Limited. The Company was initiated by the Nigerian Industrial Development Bank Limited in collaboration with Blue Circle Industries Plc UK (now LAFARGE SA), the Nigerian Bank for Commerce and Industry, Northern Nigeria Investment Limited and the Government of the then North Eastern State (now Adamawa, Bauchi, Borno, Gombe, Taraba and Yobe States). Atlas: Atlas Cement Company Limited was incorporated on September 24, 1999 to carry out the business of importation of bulk cement, bagging, selling, distribution and dealing in cement products. Atlas Cement is 100% owned subsidiary of Lafarge SA of France, the world leader in the building materials industry. The company's terminal was commissioned for operation in 2001 in Rivers State within the Federal Ocean Terminal Onne. The plant is operated on a floating vessel called "ATLAS ENTERPRISE". Atlas Cement Company Limited was incorporated on September 24, 1999 to carry out the business of importation of bulk cement, bagging, selling, distribution and dealing in cement products. Today, Atlas Cement Company Limited is a fully fledged Business Unit and is one of the companies under the umbrella of Lafarge Africa. In line with Government policy of backward integration, the company is gradually changing her business concept, moving away from being a conventional supplier of Ordinary Portland Cement to offering Cement solutions to the Oil and Gas sector of the economy. The Atlas brand is established as a regional preferred brand in South Eastern Nigeria. 8

9 Lafarge in South Africa manufactures and markets cement, ready mix concrete aggregates and gypsum products. United Cement Company of Nigeria Limited (UNICEM): UNICEM operates a green field, fully integrated cement plant at Mfamosing, near Calabar, Cross River State. Flour Mills of Nigeria, together with its partners (Lafarge and Holcim) invested in the cement factory. The investment is in recognition of the tremendous growth potential of the Nigerian economy, the impending major infrastructure projects, the existence of a vibrant housing sector and the fact that the market will remain largely under-supplied in the medium term due to growing demand. Lafarge in South Africa Lafarge South Africa, one of the major cement companies in South Africa, manufactures and markets cement, ready mix concrete, aggregate (sand and gravel) and gypsum products. The company is based in Woodmead, South Africa. Lafarge South Africa (Pty) Ltd, operates as a subsidiary of Financiere Lafarge SA. 9

10 Table 7: Directors Shareholding as at December 31, 2014 Director Position Holdings Chief Olusegun Osunkeye OFR, OON Chairman 101,184 Mr. Joseph Hudson Director 38,424 Mr. Alfred Amobi Director 5,750 Mr. Guillaume Roux MD/CEO Nil Mr. Jean-Christoph Barbant Vice Chairman/Executive 25,093 Chief (Dr) Joseph Sanusi Director 8,964 Mr. Mobolaji Balogun Director 2,103,302 Mrs. Oludewa Edodo-Thorpe Director 46,037 Dr. Adebayo Jimoh Director 53,000 Mr. Jean-Carlos Angulo Director Nil Ms. Sylvie Rochier Director Nil Mr. Adebode Adefioye Director Nil Mr. Anders Kristiansson Executive Director Nil Mrs. Peju Adebajo MD WAPCO Operations Nil Dr. Shamsuddeen Usman,CON Director 44,289 Alhaji Umaru Kwairanga Director 289,227 10

11 Table 8: Company Summary Ticker Sector Sub-sector Date of Incorporation Date of Listing Financial Year End Number of Fully Paid Share Current Capitalization(NGN) NSE Capitalization (NGN) % of NSE Capitalisation 52 Week high NGN 52 Week low NGN YTD Return (%) 52 Weeks Average Volume Traded Trailing EPS NGN Trailing P/E Ratio (X) WAPCO Industrial Goods Building and Construction Materials February 26, 1959 February 16, 1979 December 4,404,175, ,453,840, ,476,706,956, % ,341, Table 9: Shareholding Structure as at December 31, 2014 Shareholders No. of Shares Held % of Shareholding Lafarge S.A. 3,203,584, Stanbic Nominees Nigeria Ltd 320,280, Others 880,310, Total 4,404,175,

12 The company s most common brands are Atlas Cement, Elephant Cement and Ashaka Cement. 4.0 Product Analysis Lafarge Africa has a wide range of product lines ranging from extra strength brands to quick drying products such as; Atlas Cement, Elephant Cement, Supaset Cement, Power Max Cement and Ashaka Cement. The company s most common brands are Atlas Cement, Elephant Cement and Ashaka Cement. The group also owns its own Ready Mix concrete business, which has brought some product differentiation to the building materials sub-sector. 4.1 Ready Mix Cement This arm of the business increased production levels over the previous year and witnessed a significant revenue growth of about roughly 250% between H and H1 2014, as a result of increased demand and production capacity. The company not only provides tangible goods and products, but also engages in a number of services by providing technical advice and consultation to customers. Elephant Cement has been used in the construction of various landmark structures in Nigeria. 4.2 Elephant Cement Elephant Cement, being the oldest cement brand in Nigeria, is of a high standard, durable and has proven to be reliable in most building constructions intended for general use. It has been used in the construction of various key landmarks including the Third Mainland Bridge and the National Assembly Complex Abuja. 4.3 Supaset Cement Supaset Cement is another product created by the company and specifically targets block makers with qualities including early setting and quick strengthening. 4.4 Powermax Cement Powermax was created for particularly large construction projects, which require more durable and versatile cement types. 12

13 4.5 Sulphate Resisting Cement Equity Research Report The company also produces Sulphate Resisting Cement which reduces damage to concrete, mortar and grout exposed to sulphate attack and can also be used for marine concrete. It is highly durable, sets quickly and has low alkali content. Dangote Cement is the main competitor in the Nigerian market. Despite the variation in its product base, Dangote Cement its main competitor has a greater market share than all Lafarge products combined. Its economies of scale combined with its new plants with latest equipments in cement manufacturing enable Dangote cement to produce at cheaper costs and gives it a higher profit margin. 13

14 5.0: SWOT Analysis: 5.1 Strengths: Has operations and presence in numerous African countries. Experienced and competent management team. Wide variety of products meeting specialised needs. Strong international presence and highly capitalised parent firm. High liquidity ratio. Strong EBITDA margins from the Nigerian operations. Generates own power in certain plants. Increased efficiency from the gas fired plant. Merged with strong South African producer. 5.2 Weaknesses: High cost of LPFO fuel (leading to high cost of sales) in some plants. Older cement plants producing cement less efficiently. Low dividend payout ratio. Revenue for cement was down following cement pricing in SA. 5.3 Opportunities: Large market size Abundance of raw materials (limestone) in Nigeria. Attractive cement prices. Rapid urbanisation and housing deficit. Ban on bulk cement importation. High barrier to entry (initial investment). 5.4 Threats: Indigenous competitor Northern security challenge 14

15 6.0 Forecast: Our Forecast Drivers We considered the following factors in arriving at our 5-year forecasts: Positive Drivers: Current expansion drive The competitive position of the company in the industry The company s merger with its Sub-Saharan counterpart Increase in power generation capacity Stable macroeconomic indicators Equity Research Report Huge infrastructure and housing deficit in Nigeria which requires cement Attractive cement prices Large market size in Africa Negative Drivers: The current shortages of gas in the industry We estimate a dividend per share of N3.80 for the FY Taking the foregoing factors into consideration we estimate Turnover of N216.14bn, N259.36bn, N324.21bn, N395.53bn and N481.76bn for the periods ending December 2015, 2016, 2017, 2018 and 2019 respectively. We estimate EBIT of N42.15bn, N65.80bn, N84.53bn, N105.09bn and N129.91bn, and EBITDA of N52.27bn, N76.13bn, N95.17bn, N116.11bn and N141.42bn for the same period using EBIT margins of 19.50%, 25.37%, 26.07%, 26.57% and 26.97% respectively. Our PBT forecasts for the periods are: N41.40bn, N65.56bn, N84.12bn, N105.06bn and N129.74bn. Adjusting for tax, our PAT forecasts are N34.83bn, N55.16bn, N70.77bn, N88.39bn and N109.15bn. PAT Margin for the period are 16.11%, 21.27%, 21.83%, 22.35% and 22.66%. Our forecast final dividend for the FY 2015 is N3.80 per share. 15

16 Table 10: Income Forecast for ( ) Profit and Loss =N='bn Dec-15 Dec-16 Dec-17 Dec-18 Dec-19 Turnover (Net Sales) Cost of Sales (138.34) (161.60) (202.00) (246.44) (300.17) Gross Profit Admin, Selling & Distribution Expenses (25.53) (30.63) (38.29) (46.72) (56.90) Depreciation (9.90) (10.12) (10.41 (10.78) (11.25) Other Operating Income EBIT EBITDA Net Finance Cost (0.75) (0.23) (0.41) (0.02) (0.17) PBT Taxation (6.57) (10.40) (13.35) (16.67) (20.59) PAT Table 11: Earnings Forecast for ( ) Dec-15 Dec-16 Dec-17 Dec-18 Dec-19 EBITDA Margin 24.18% 29.35% 29.35% 29.35% 29.35% EBIT Margin 19.50% 25.37% 26.07% 26.57% 26.97% PBT Margin 19.15% 25.28% 25.95% 26.56% 26.93% PAT Margin 16.11% 21.27% 21.83% 22.35% 22.66% EPS(N) DPS(N) Dividend Payout 49.64% 45.74% 45.74% 45.74% 45.74% Earnings Yield * 6.36% 10.07% 12.92% 16.13% 19.92% Dividend Yield * 3.16% 4.61% 5.91% 7.38% 9.11% P/E Ratio* Number of Shares ( bn) ROE 15.98% 23.06% 28.56% 34.05% 39.85% Collection Days Payment Days Inventory Turnover Asset Turnover Interest Cover *At Our Fair Value of N

17 Table 12 : Comparable Analysis (Nbn) Company Lafarge Africa Dangote Cement Turnover (Net Sales) Gross Profit EBIT PBT PAT GP Margin 33.27% 63.47% EBIT Margin 21.46% 47.77% PBT Margin 20.01% 47.16% PAT Margin 16.84% 40.73% ROE 17.94% 29.26% Net Assets Net Assets Per Share PE Ratio 14.01x 16.71x Earnings Yield Dangote Cement operates a bigger plant and its efficiency is better than that of Lafarge Africa. 17

18 7.0 Valuation The fair value for Lafarge Africa Plc is N In arriving at a fair value for the ordinary shares of the company, we used the Discounted Free Cash Flow (DCF) model. We applied a terminal growth rate of 6.44%, which is the average rate for the real GDP growth rate for the Nigerian economy in the last four years. We used a beta value of 0.62x based on the 5-year daily historical returns on the company share price and the Nigerian Stock Exchange All Share Index (NSE ASI). We used the yield of 13.87% on the approximately 5 year tenor-to-maturity of the 7% FGN Bond October 2019 as our risk free rate, and market premium of 11.15, which is the equity market premium used for Nigeria. Applying the foregoing parameters on the Capital Asset Pricing Model (CAPM), the cost of equity generates 20.74%. The company has long term debt, with the weighted after tax cost of the debt estimated at 2.92% using a tax rate of 32%. The Weighted Average Cost of Capital (WACC), which is our discount rate, was estimated at 20.38%. Using 4.55bn shares in issue the DCF model generated N per share, which is our fair value. The current market price of Lafarge Africa shares is N The highest and the lowest closing price in the last 52 weeks are N and N66.50 respectively. The 2015 forward earnings yield and dividend yield based on our fair value are: 6.36% and 3.16% respectively. The total return, a combination of the capital appreciation and the dividend, generates 25.34%. This is higher than the current yield on the FGN Bond of 13.83%. We therefore place a BUY on the shares of at the current price of N99.00 as of June 17, 2015 for capital appreciation. 18

19 For enquiries please contact us at our offices: Lagos Office: 5th-8th floors UAC House, 1/5 Odunlami Street, Lagos. Tel: Port Harcourt Office: Mainstreet Bank Building, (2nd floor, 5 Trans Amadi Road, Port Harcourt. Tel: Abuja Office: Abia House, Plot 979, 1st Avenue, Off Ahmadu Bello Way, Cadastral Zone AO, Central Business District, Abuja. Tel: Website: research@fsdhgroup.com Our Reports and Prices are also Available on Bloomberg {FSDH<GO>} Disclaimer Policy This publication is produced by Limited solely for the information of users who are expected to make their own investment decisions without undue reliance on any information or opinions contained herein. The opinions contained in the report should not be interpreted as an offer to sell, or a solicitation of any offer to buy any investment. Limited may invest substantially in securities of companies using information contained herein and may also perform or seek to perform investment services for companies mentioned herein. Whilst every care has been taken in preparing this document, no responsibility or liability is accepted by any member of FSDH Merchant Bank Limited for actions taken as a result of Information provided in this publication. 19