Capital Bancorp Plc (Member of The Nigerian Stock Exchange) 114135 EQUITY RESEARCH REPORT LAFARGE AFRICA PLC (WAPCO) September 15, 2014 Recommendation HOLD Target Price 132.35 Current Price 120.00 Upside/(Downside) 10.29% Company Statistics Symbol WAPCO Date of Incorporation Feb.24 th,1959 Date of Listing Feb.16 th, 1979 Year End Sub-Sector December Building Mat. 52 weeks High/Low 136.73/87.50 Market Cap. ('000) 351,217,216.468 Outstanding Shares 3,001,600,004 Nominal Value (N) 0.50k Trailing EPS (kobo) 9.42 Trailing P/E 12.72 YTD Return (%) 7.43% BVPS (N) 30.97 ROA (%) 17.55 ROE (%) 30.40 PB Value (x) 3.78 Dividend (Yield) 2.75% HIGHLIGHTS Created in 1833, LAFARGE is the world leader in building materials, with topranking positions in its Cement, Aggregates and Concrete businesses. The Company is located in 62 countries and in 2013, Lafarge posted sales of 15.1 billion euros. The acquisition of West African Portland Cement Plc (WAPCO), AshakaCem Plc (Ashaka), Atlas Cement (P/Harcourt) and a substantial stake in UNICEM (Calabar) has made the Company to hold a leadership position in the Nigerian Cement Industry. Historical performance analysis shows that Lafarge has consistently registered a modest Year-on-Year top line growth averaging 21.33% on a 5- Year Compounded Annual Growth Rate (CAGR) and with bottom lines PBT and PAT growing at a CAGR of 31.61% and 53.77% in the last five years. We are of the opinion that the acquisition of UNICEM, ASHAKCEM and LAFARGE SA will have a positive effect on the group s earnings but the inclusion of ATLAS CEMENT may slow down the bottom line figures. We however, believe that there are very attractive assets in the mix. We identified exposure to regulatory impact on price and distribution of products especially in the volatile Northern Nigeria as key risk factors. We also note that the post-transaction holding shares of 4,404,175,988 (upon approval by SEC and NSE), could dilute shareholders earnings. Our fair price valuation could also be undermined by the Company s failure to deliver cost restructuring benefits, and organic net sales growth, as well as lack of investors inclination to value the stock in a manner consistent with our assumptions. Based on our analysis and valuation of the shares of WAPCO, we maintain a HOLD recommendation at a Fair Price of N132.35 Financial 2013 2012 2011 2010 2009 Highlights Turnover (N'000) 98,798,452 87,965,224 62,502,320 43,841,325 45,589,798 EBIT (N'000) 31,564,519 26,657,429 12,007,877 8,464,365 8,955,716 Net Income 28,267,185 14,711,676 8,509,347 4,881,363 5,055,398 (N'000) EPS (Kobo) 942 490 283 163 168 DPS (Kobo) 330 120 75 25 10 MPS (N) 119.80 58.53 43.25 40.70 30.00 BVPS (N) 30.97 22.77 18.67 16.09 14.56 Contact: research@capitalbancorpng.com +234(1)4622371-5 CBP Equity Research Page 1
Lafarge in Nigeria has 8.5 metric tonnes (mmt) production capacity, comprising 4.5 MMT in Lafarge WAPCO (Ogun State), 1 MMT in Ashaka (Gombe State), 2.5 MMT in Unicem (Cross River State), and 0.5 MMT in Atlas (Rivers State) BACKGROUND INFORMATION Lafarge Cement WAPCO Nigeria Plc, a foremost building solutions provider in Nigeria is a subsidiary of Lafarge SA, the world s largest cement manufacturer and leader in building materials with presence in 62 countries. In 2013, Lafarge posted sales of 15.1 billion euros. The Company is driving excellence in Nigeria s building industry by placing innovation at the heart of its priorities, and striving to build better cities through sustainable construction and architectural creativity. The acquisition of West African Portland Cement Plc (WAPCO), AshakaCem Plc (Ashaka), Atlas Cement (P/Harcourt) and a substantial stake in UNICEM (Calabar) has made the Company to hold a leadership position in the Nigerian Cement Industry with investment in Companies that have a total capacity of about 8.5 million tonnes per annum. On June 4, 2014, LAFARGE group announced the merger of its Nigeria and South Africa s businesses to create a new name, LAFARGE AFRICA PLC. The combined new entity will have a market capitalization of around $3billion and make it the 5 th largest listed company of the floor of the Nigerian Stock Exchange. Brands Elephant Cement More than five decade-old formidable brand of impeccable standard and quality; Elephant Cement backs solution provision with power, maturity, resilience, durability and reliability, which explains why it has consistently won the NIS Certificate for product quality by the Standard Organization of Nigeria (SON) for over two decades. Lafarge s long-term presence in the business, its high degree of vertical integration and advance in product research and innovation gives the Company a competitive advantage in terms of product quality and consistency, product differentiation as well as allowing stronger operational efficiencies. ReadyMix ReadyMix is concrete mixed to project specifications and delivered to construction sites when needed. A product of Lafarge Nigeria s commitment to innovation, the solution is specifically designed to meet construction needs. PowerMax PowerMax cement is Premium Technical cement that combines excellent strength performance at all ages with versatility and enhanced durability benefits. Its characteristics of superior workability and good early strength, in particular, positions the brand as the effective solution to the productivity demands of large construction projects while also satisfying the needs of homeowner building projects. Other brands include Supaset Cement and Sulphate Resisting Cement (SRC). CBP Equity Research Page 2
SWOT ANALYSIS Strengths Ready Mix expansion on track with further plant expansion in Q3 2014. - The enlarged company will be one of the leading building materials companies in Sub-Saharan Africa, with a strong presence in Africa s two largest economies, Nigeria and South Africa. - The Company plans to expand its product lines - Increased installed capacity after merger - the group will have circa 12mtpa of installed capacity in Nigeria and South Africa and a further 5.5mtpa capacity expansion and debottleneck project are already planned in Unicem and Ashakacem Weaknesses - The company s Quarries (Ewekoro and Shagamu), which supply 95% of the raw materials are located in a flat plain and prone to flooding. The com pany s operations suffered disruptions from flooding in 2007 and 2010 Opportunities Cement sales expected to improve in H2, 2014 with normal seasonal fluctuations. Cement demand for office space and residential properties remains high, despite rainy season. - Attractive markets with high and sustainable growth prospects - African megatrends driving GDP growth are accelerating consumption of cement - Need for infrastructural spending, rapid urbanization and housing need in Nigeria - High barriers create sustainable competitive advantages - Availability of low-cost natural gas near plants - Ideal location for duty-free exports into ECOWAS Threat - Shortage in power supply and disruptions in the natural gas supply - The company is faced with stiff competition from Dangote Cement Plc (DCP),as DCP continued to expand its total installed capacity in Nigeria and penetrates other African Countries SHAREHOLDING STRUCTURE Pre-Election Activities - While we expect some volatility, construction activities will be supported by increased government fiscal spending ahead of political campaigns. Pre-Transaction Holding Structure of the Company: Name Existing Holding Shares % Associated International Cement (UK) Limited 1,095,025,626.00 36.48 Lafarge Nigeria Limited 705,982,502.00 23.52 Financiere Lafarge SAS - 0 Lafarge Nigeria (UK) Limited - 0 Lafarge Cement International B.V - 0 Stanbic Nominees 352,548,870.00 11.75 Odu'a Investment Company Limited 151,321,349.00 5.04 Other Shareholders 696,721,657.00 23.21 3,001,600,004.00 100.00 CBP Equity Research Page 3
Post-Transaction Holding Structure of the planned merger: Name BOARD OF DIRECTORS Post-Transaction Holding Shares Associated International Cement (UK) Limited 1,095,025,626.00 24.86 Lafarge Nigeria Limited 705,982,502.00 16.03 Financiere Lafarge SAS 724,758,803.00 16.46 Lafarge Nigeria (UK) Limited 388,594,185.00 8.82 Lafarge Cement International B.V 289,222,996.00 6.57 Stanbic Nominees 352,548,870.00 8 Odu'a Investment Company Limited 151,321,349.00 3.44 Other Shareholders 696,721,657.00 15.82 The Board of Directors of the Company consists of the following: S/N Name 1 Chief Olusegun Oladipo Osunkeye Chairman 2 Mr. Jean-Christophe Barbant Vice Chairman 3 Mr. Joseph Hudson Managing Director 4 Mr. Alfred Amobi CFO 5 Chief Joseph Oladele Sanusi 6 Mr. Mobolaji Oludamilola Balogun 7 Mr. Guillaume Roux 8 Mrs. Oludewa Edodo Thorpe 9 Mr. Adebayo Jimoh 10 Mr. Jean-Carlos Anglo 11 Mr. Adeboye Adefioye 12 Mr. Thierry Metro % 4,404,175,988.00 100.00 ANALYSIS OF FINANCIALS Trends in Turnover and Earnings Growths LAFARGE Africa has maintained a positive turnover growth momentum in the last five years. The Company grew its top line from N45.59bn in 2009 to N98.80bn in 2013, translating to a CAGR of 21.33%. It is estimated that Turnover will grow by 164.22% by 2018 to reach N261.04bn. The Company s bottom line growth has been impressive in recent times. Profit after Tax (PAT) grew from N5.06bn in 2009 to N28.27bn in 2013 translating to a 5-Year CAGR of 53.77%. This growth was tracked by efficient cost cutting strategies that have seen margins exhibited a rising trend. PAT Margin has grown from 11.09% in 2009 to 28.61% in 2013. However, margins may fall further in coming years as the Company invests in capital intensive projects that will CBP Equity Research Page 4
throw up higher maintenance, administrative and finance costs. Therefore management s proactive approach in efficient cost maneuvering is very key to margins improvement. Liquidity and Solvency The Company has maintained an unimpressive liquidity trend as shown by the current ratio which moved from 1.63x in 2009 to 0.89x in 2013. This implies that the Company s readily available assets now cover only 89% of its current liabilities compared to 163% in 2009. A similar trend is replicated in its quick ratio. Equity Multiplier from 1.99x in 2009 to 1.73x in 2013. The debt to equity ratio has historically shot up from 0.99x in 2009 to 1.72x in 2011, it went down marginally in 2012 but up again to 1.32x in 2013. We observe that the Company s capital structure is increasingly showing less conservative financing as the Company is highly leveraged. It is expedient that the Company improves the ratio to prevent volatile earnings as a result of interest expense burden. The Company has maintained an unimpressive liquidity trend as shown by the current ratio and this trend is replicated in its quick ratio. Capital Structure Lafarge Africa s shareholders funds grew from N43.17bn in 2009 to N92.98bn in 2013, representing a CAGR of 20.77%. Total Assets also grew by 16.59% from N87.16bn in 2009 to N161.08bn in 2013. The Company has been able to maintain an upward level of efficiency in its asset utilization. This is reflected in the rising path of total assets turnover ratio which rose marginally from 0.52x in 2009 to 0.61x in 2013. However, current asset turnover fell from 3.69x in 2012 to 2.75x in 2013. This implies that the company has been more efficient in its use of fixed assets than in current assets. Moreover, LAFARGE s operational costs thread a growth path of 10.46% CAGR, as Opex-to-Sales ratio averaged 9.57% from 2009 to 2013. DuPont Analysis (Basic Earnings Power) LAFARGE financial strategy in terms of debt, equity, tax and operating decisions have kept ROE at a 5-Year CAGR of 27.33%. The financial cost ratio which weighs the interest burden of the Company assumed a rising trend from 2010 to 2013 (indicating a lesser interest burden) while Working Capital Turnover fell within same period. Despite a rise in the financial cost ratio, ROE still maintain its upward trend. As shown by DuPont identity components, we suggest that the Company should have a more effective working capital CBP Equity Research Page 5
management as this would enhance greater margin improvement and subsequently, an improved ROE. Conversely, the Company s uptrend in ROA over the last five years has been conditioned by a rising return on sales. However, if the Company s current assets level, especially cash (as Cash Turnover has not been impressive over the years) is well utilized to generate more sales, this could spur greater increases in ROA. VALUATION, ASSUMPTIONS AND RATINGS To arrive at the intrinsic value for Lafarge Africa, we employed the discounted cash flow model (DCF) with a two - stage Discounted Dividend and Enterprise Value Models. Our risk-free rate is 12.17% (premised on 30-year FGN Bond), a risk premium of 6.84% and a volatility index (beta) of 1.05. The CAPM-derived cost of equity is 19.55%. We adopted a terminal growth rate of 5% consistent with our perceived growth potential of the Company as well as forecast long run economic growth rate. Using 3,001.60mn shares in issue, the DCF Model generates N142.34. The DDM Model generates N146.28 while the Enterprise Value generates N117.37...we arrive at a value of N132.35, which is our fair value. We therefore place a HOLD on WAPCO Shares. Premised on the above analysis, coupled with appropriate consideration of comparable pricings and attached weights, our fair value for LAFARGE AFRICA gives N132.35. This implies that the current price is at 9.33% discount to valuation. We therefore place a HOLD recommendation on Lafarge Africa. Ratings Specification BUY: Fair value of the stock is above the current market price by at least 15 percent HOLD: Fair value of the stock ranges between -15 percent and 15 percent from the current market price. SELL: Fair value of the stock is more than 15 percent below the current market price. CBP Equity Research Page 6
LAFARGE AFRICA PLC S KEY RATIOS RATIO ANALYSIS 2010 2011 2012 2013 Growth Performance Turnover Growth (3.84)% 42.56% 40.74% 12.32% Operating Profit Growth (0.51)% 41.45% 123.58% 19.24% Pre-tax Growth (8.37)% 20.73% 108.08% 30.34% Post-tax Growth (3.44)% 74.32% 72.89% 92.14% Total Assets Growth 35.93% 28.86% (0.47)% 6.01% Shareholders' Funds Growth 10.48% 16.07% 21.96% 36.00% Profitability Gross Margin 27.33% 31.37% 36.83% 39.30% Operating Margin 18.78% 18.64% 29.60% 31.43% Net Profit Margin 11.13% 13.61% 16.72% 28.61% Return on Equity (RoE) 10.11% 15.18% 21.52% 30.40% Return on Asset (RoA) 4.12% 5.57% 9.68% 17.55% Operating Efficiency Cost-Income Ratio 45.50% 68.31% 24.42% 25.05% Asset Utilization Rate 0.37 0.41 0.58 0.61 Cost of sales/turnover 72.67% 68.63% 63.17% 60.70% Liquidity Current Ratio 0.30 0.76 0.75 0.89 Acid Test Ratio 0.14 0.44 0.34 0.60 Operating Cashflow/EBIT 1.49 2.53 0.94 1.17 Long-term Stability Debt-Equity Ratio 1.45 1.72 (0.29) 0.13 Interest Cover (Times) N/A 6.71 4.94 8.20 CBP Equity Research Page 7
Disclaimer & Disclosure The value of any investment is subject to fluctuations, i.e. may arise and fall. Past performance is no guide to the future. The rate of exchange between currencies may cause the value of investment to increase or decrease. Hence investors may not get back the full value of their original investment. This document is not an offer to buy or sell any security. This document does not provide individually tailored investment advice. It has been prepared without regard to the individual financial circumstances and objectives of persons who receive it. The appropriateness of a particular investment will depend on an investor s individual circumstances and objectives. The investments and shares referred to in this document may not be suitable for all investors. This document is based on information Capital Bancorp Plc received from publicly available reports and industry sources. Capital Bancorp Plc may not have verified all of this information with third parties. Neither Capital Bancorp Plc nor its advisors, shareholders, directors or employees can guarantee the accuracy, reasonableness or completeness of the information received from any sources consulted for this publication, and neither Capital Bancorp Limited nor its advisors, shareholders, directors or employees accepts any liability whatsoever (in negligence or otherwise) for any loss howsoever arising from any use of this document. This document is not to be relied upon and should not be a substitute for the exercise of independent judgment. This document includes certain statements, estimates and projections with respect to the anticipated future performance of securities listed on the Nigerian Stock Exchange and as to the market for these shares. Such statements, estimates and projections are based on information that we consider reliable and may reflect various assumptions made concerning anticipated economic developments, which have not been independently verified and may or may not prove correct. No representation or warranty is made as to the accuracy of such statements, estimates and projections or as to their appropriateness for the purpose intended and it should not be relied upon such. Opinions expressed are current opinions as of the date appearing on this material only and may change without notice. Other third parties may have issued other reports that are inconsistent with, and reach different conclusions from, the information presented in this report. Those reports reflect the different assumptions, views and analytical methods of the analysis who prepared them. CBP Equity Research Page 8