LAFARGE CEMENT WAPCO NIGERIA PLC Deleveraging, Cost Efficiency and Tax Write-back Buoy Earnings Lafarge WAPCO ( WAPCO ), the South-West cement major, turned in interesting numbers in its 2013FY results recording 12.3% y-o-y revenue growth; a reflection of fairly sustained level of construction activity in its market niche. Cost of sales grew 8.43% y-o-y as against the 0.05% decline in Q3:2013, attributable to production cost pressures in the fourth quarter as experienced in Q2:2013. However, cost efficiency surpassed 2012 levels with cost-to-sales ratio at 60.7% (in line with our 61% estimate) as opposed to 62.87% in 2012FY. Debt pay-off and tax write backs in the year uplifted full year profits (NGN28.27bn) by 92.14% over 2012 figures (NGN14.71bn). The company proposed a DPS of NGN3.30 (35% pay-out) implying a yield of 3% at its current market price. We maintain our HOLD recommendation on the counter though we revised our 12-M target price from NGN128.91 to NGN121.9. Revenue Grew By 12%; Though Intense Competition Limits Faster Growth Rates: 2013FY revenues settled at NGN98.8bn, 12.3% over NGN87.97bn in 2012FY, owing to sustained construction growth particularly across the South-West region where WAPCO majorly operates and despatches its cement brands, in spite of the tight competitive environment and its attendant impacts on higher growth rates. We estimate WAPCO s 2013 capacity utilisation rate at about 73% of the company s 4.5mmtpa installed capacity. Full year turnover came in 2.33% below our estimated NGN101.16bn as the company s fourth quarter sales (NGN24.52bn) was 1.1% lower than Q3 (NGN24.8bn) compared with our expectations of 5% growth. We forecast 2014 revenues at NGN110.65bn representing 12% growth rate. Despite Costs Pressures, WAPCO Stayed Cost Efficient: While the company commenced 2013 with dropping cost-to-sales ratio, mounting pressures in Q2 partly owing to lower gas utilisation rate resulted in higher costs. Though the company relatively managed costs as at Q3:2013, we believe reduced gas utilisation rate in Q4:2013 translated to the 8.43% y-o-y growth in cost of sales by 2013FY. Nonetheless, WAPCO fared better in cost management for the year compared with 2012FY as reflected by the lower cost-to-sales figure of 60.7% (62.9%, 2012FY). We expect this feat to be sustained in 2014FY as gas efficiency improves with our cost-tosales estimate at 59%. OPEX to sales rose to 7.87% (vs. 7.14% in 2012FY). We attribute this to increased sales efforts in the year, which we anticipated given the relatively strong competition in the cement marketplace. The company s operations remained profitable as EBIT expanded 18.08% y-o-y while EBIT margin was 31.95% (vs. 30.39% in 2012FY). Following its deleveraging strategy in 2013FY, WAPCO significantly tapered its borrowings by c.60% resulting to the 29.59% decline in finance charges, translating to a huge earnings immunisation for equity holders. Similarly, following the plant pioneer tax status, write back of tax expenses (backdated to 2012FY, subsequent to the 2.5mmtpa capacity ramp up via Ewekoro II plant Lakatabu in Ogun State) also boosted the company s earnings with additional NGN552mn in tax credits. 2013FY Earnings Surged, Nearly Doubling 2012FY Level: PAT jumped 92.14% to settle at NGN28.27bn (4.6% over our NGN27.03bn estimate) as compared to NGN14.71bn posted in 2012FY. In spite of moderately higher production and operating costs, earnings expanded on the back of lower finance charges and reduced debt profile. Net margin was 28.61% (vs. 16.72% in 2012FY) slightly higher than our estimate of 27.4%. We forecast 2014FY profit and net margin at NGN30.66bn and 27.7% as we do not expect a continuation of tax credits. 2013FY EARNINGS UPDATE NSE: WAPCO; Bloomberg: WAPCO NL TP: NGN121.9 Rating: HOLD Key Metrics Current price 109.10 Actual P/E 11.58x Forward P/E 10.68x Avg. Vol (mn) 1.275 Key Fundamental Metrics EPS 9.42 BVPS 30.97 Net Margin 28.61% ROAE 35.04% ROAA 18.06% Leverage 1.73 Mkt. Cap (bn) 327.48 EV/EBITDA 13.31 Key Price Metrics Today - 0.82% WtD -1.71% MtD 3.37% QtD -5.13% YtD -5.13% 52-Weeks 43.55% 52-Week Share Price Trajectory 120.00 100.00 80.00 60.00 NSE, Bloomberg, Meristem Research Analyst: Aderonke Akinsola aderonkeakinsola@meristemng.com
Prospects Remain the Same Though Target Price Revised Downward to NGN121.9: Our 5-year forecasts stay the same. However, owing to the adjustments of beta estimates and price multiples to our blended valuation model (relative and absolute valuations), our target price was reviewed downward to NGN121.9 from NGN128.9. 2014FY EPS is forecast at NGN10.22 (vs. NGN9.42 in 2013FY). The stock s trailing P/E of 11.58x is at a discount to harmonized sector average P/E of 14.31x and the industry leader s (DANGCEM) 19.37x P/E. At current prices, expected capital gain is 11.7% indicating a HOLD. Turnover vs. Turnover Growth: Historical and Forecast PAT vs. Net Margin: Historical and Forecast 160.00 140.00 120.00 100.00 80.00 60.00 40.00 20.00 42.56% 40.74% Turnover (NGN 'bn) Turnover growth 12.00% 12.32% 10.00% 50.00% 40.00% 30.00% 20.00% 15.00% 10.00% 35.00 30.00 25.00 20.00 15.00 10.00 5.00 PAT (NGN'bn) 28.6% 27.7% 13.8% 16.7% Net Margin 27.4% 23.5% 35.0% 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.00 0.00% 0.00 0.0% 2011 2012 2013 2014f 2015f 2016f 2011 2012 2013 2014f 2015f 2016f Source: Company s financials, Meristem Research Financial Highlights (NGN billion) LAFARGE CEMENT WAPCO NIGERIA PLC 2013FY Profit & Loss Account 2013 2012 2014f Turnover 98.798 87.965 110.654 Cost of Sales 59.969 55.305 65.286 Gross Profit 38.829 32.660 45.368 OPEX 7.778 6.277 7.746 Investment income 0.514 0.348 0.885 Operating Profit 31.565 26.731 37.622 Financial Charges 3.850 5.467 2.434 PBT 27.715 21.264 36.073 PAT 28.267 14.712 30.662 Balance Sheet Property Plant and Equipment 125.170 128.095 140.99 Inventories 11.736 12.933 14.278 Debtors and other Receivables 3.737 1.982 5.354 Cash and cash equivalents 20.420 8.892 17.847 Other Assets 0.018 0.046 Total Assets 161.082 151.949 178.475 Shareholders' fund 92.972 68.359 Trade and other Payables 25.373 24.943 24.094 Current Financial Liabilities 13.100 4.415 8.924 Non-Current Financial Liabilities 13.009 37.357 12.493 Total Liabilities 68.110 83.589 64.541 Price multiples/ratios Shares Outstanding 3.00 Proposed Dividend NGNk3.30/Share Cost -to-sales 60.70% Dividend Yield 3.02% Gross Profit Margin 39.30% Payout Ratio 35% OPEX Margin 7.87% Closure Date 28th April, 2014 Operating Margin 31.95% Date of Payment To be announced Net Margin 28.61% AGM Date 21st May, 2014 AGM Venue MUSON Centre, Onikan Lagos
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Movements in Price Target Company Name: Lafarge WAPCO Date Price (N) Previous Target Price(N) New Target Price (N) Previous Recommendation 21/03/2014 109.10 128.91 121.9 HOLD HOLD New Recommendation Company disclosures Meristem or the analyst(s) responsible for the coverage may have financial or beneficial interest in securities or related investments discussed in this report, which could, unintentionally, affect the objectivity of this report. Material interests, which Meristem or the analyst(s) have with companies or in securities discussed in this report, are disclosed below: Company Lafarge Cement Wapco Nigeria Plc Disclosure a. The analyst(s) hold(s) personal positions (directly or indirectly) in a class of the common equity securities of the company. b. The analyst responsible for this report, as indicated on the front page, is a board member, officer or director of the company c. Meristem beneficially owns 1% or more of the equity securities of the company d. Meristem has been the lead manager or co-lead manager of any publicly disclosed offer of securities of the company over the past 12 months. e. Meristem beneficially holds a major interest in the debt of the company f. Meristem has received compensation for investment banking activities from the company within the last 12 months g. Meristem intends to seek, or anticipates receipt of compensation for investment banking services from the company in the next 3 months h. The content of this research report has been communicated with the company, following which this research has been materially amended before its distribution i. The company is a client of the stock broking division of the Meristem group. j. The company is a client of the investment banking division of the Meristem group. k. The company owns more than 5% of the issued share capital of Meristem l. Meristem has other financial or other material interest in the company. Conflict of Interest It is the policy of Meristem Securities Limited and its subsidiaries and affiliates (Individually and collectively referred to as Meristem ) that research analysts may not be involved in activities that suggest that they are representing the interests of Meristem in a way likely to appear to be inconsistent with providing independent investment research. In addition, research analysts reporting lines are structured so as to avoid any conflict of interests. For example, research analysts are not subject to the supervision or control of anyone in Meristem s Investment Banking or Sales and trading departments. However, such sales and trading departments may trade, as principal, on the basis of the research analysts published research. Therefore, the proprietary interests of those Sales and Trading departments may conflict with your interests.
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