Equity Research Report Lafarge Africa Plc. A glimmer of light at the end of the tunnel May 14th, 218
Thousands Jan-17 Mar-17 May-17 Jul-17 Sep-17 Nov-17 Jan-18 Mar-18 Earnings Update 7 6 5 4 3 2 1 BUY Target Price ( ) 54. NSE Reuters Bloomberg Ticker Details Stock Price Trend WAPCO WAPCO.LG WAPCO NL Ownership Structure Lafarge SA 76.% Others 24.% Stock Information Current Price ( ) 41.1 Shares Outstanding (Mn) 8,673 Market Cap ( 'Mn) 367,753 Beta (5 yr. monthly) 1.1 Year-High ( ) 54.95 Year-Low ( ) 41. Upside potential +31.39% Y-t-D Return -8.44% WAPCO NSEASI 5 45 4 35 3 25 2 15 1 5 Company Brief Lafarge Africa Plc. (Lafarge Africa) is one of the leading manufacturers of building/concrete solutions. The company owns a diversified brand portfolio and operates in strategic locations in Nigeria and South Africa. It manufactures cement and other cementitious products such as; Elephant cement and ReadyMix. Sequel to the 82bps decrease in top-line and 13,39bps advancement in finance expense, the company s bottom-line sank deep in the red by 13,879bps to NGN-2.bn in Q1218. Moderating volumes amidst favourable pricing Following the decline in volumes observed in the Nigerian operations (Cement: - 5.24%, ReadyMix: -3.61%) due to price increases, total revenue pared.82% to NGN8.64bn in Q1218 (DANGCEM: +16.3%). We note however that on the flip side, net sales attributed to the South African operations trended northwards by 1.53%, despite the declining construction market witnessed since 212 and increasingly aggressive competition between six players. We attribute this to the impact from the implementation of a turnaround plan, following the series of production disruptions that were witnessed in the prior year. FY217 Revenue Segmentation Business Revenue (%) Geographic Revenue (%) Cement 8 Aggregates and concrete 19 Nigeria 68 Other products 2 South Africa 32 Historically, the company witnessed growth in its first-quarter revenue since 211, barring 216, when the economy was in a recession. However, in a briefing held on May 2 nd, 218, the company disclosed that in addition to the negative impact of higher prices to volume growth, production disruptions were witnessed in the Mfamosing plant in March as a result of some technical challenges associated with mastering a new line. We note that while growth in the company s market share remained flat, Dangote Cement, its major rival in the Nigerian market, recorded a high double-digit spike in market share in the same period. NSE Ticker Comparable Companies Last Price P/E P/B Y-t-D % Δ. DANGCEM 245. 21.18 4.92 +6.52% CCNN 19.5 7.6 1.7 +15.26% In FY218, we expect to witness an improvement in the company s top-line, owing to the management s current focus on improving its route to market efficiencies. We also expect the growth in revenues to be supported by our forecast of c.1% growth for the Nigerian cement market in 218, and the current focus on investment in infrastructure by the government. 9 8 7 WAPCO revenue WAPCO PAT DANGCEM revenue DANGCEM PAT 25, 2, 6 15, Favour Usifo favouru@morgancapitalgroup.com 5 4 1, 3 5, 1 P a g e 2 1 29 21 211 212 213 214 215 216 217 (5,) Source: Company financials
Earnings Update Variable costs heighten as prepaid gas spikes c.9% Variable costs advanced by 49.23% in the period, settling its contribution to total cost of sales higher at 59.8% from 41.5% in Q1217. A closer look at some of the variable components show that total raw materials and inventory costs moderated by 11.68% and 1.8%. Prepaid gas (other assets) however spiked 8.59% to NGN1.68bn in the period. Accordingly, we do not rule out a drag on variable costs by some expired power and fuel related costs in Q1218. We expect to witness a moderation in power related costs as the company intensifies its drive towards the use of cheaper fuel alternatives. On this note, the Mfamosing plant already runs 9% on gas. PAT dips c.139% YoY, dampened by borrowing costs A one-off charge from the ongoing software (SAP) integration and an advancement in net finance expense (+133.9%) caused net income to close in the red at NGN-2.bn. Following the liquidation of Nigerian Cement Holdings in 217, an outstanding Quasi-Equity instrument of USD344.mm was incorporated in the loan books of Lafarge Africa. Consequently, some outstanding debt obligations were settled in a debt to equity conversion in December 217. The company issued a commercial paper in the previous quarter and rolled-over some related party loans. Although, we expect to see a move out of the current loss position this year, supported by increasing efficiencies in the SA operations and increasing top-line growth from better selling strategies in the Nigerian space, we expect borrowing costs to remain a headwind in 218. Current market sentiment: Investors remain uncertain Negative sentiments have caused the counter to shed c.8% YtD to close at NGN41.1 (DANGCEM: +6.52%, CCNN: +25.26%) on the 11 th of May, 218. Similarly, the Relative Strength Index (RSI) signals that the ticker currently trades close to the oversold region. In Q1217, the stock traded at its five -year low of about NGN32.65 while its five-year high was around NGN111.85 in September 214. A fierce battle ensued between the bears and the bulls, causing the stock to remain flat for several sessions. Despite the current negative sentiments, we expect a gradual improvement in margins during subsequent quarters and the activities of bargain hunters to foster the influx of bids on the counter during the year. It is important to note that the company recently joined the premium board on the Nigerian stock exchange. Summary and Target Price Given the expected ramp up in productivity in the South African region from the ongoing turn-around plans, we expect to witness a boost in operational efficiencies in the South African Market. For the Nigerian operations, we expect costs to be curtailed by the current energy optimisation plans, and revenues to ramp up from the current drive on route to market efficiencies. Consequently, we expect revenues to advance by c. 9% in FY218. Our earnings projections and expectations of a return of positive sentiments on the counter lead us to a target price of NGN54., which represents an upside of 31.39% from its close price on the 11 th of May, 218. 2 P a g e
Earnings Update Key Metrics Income statement Mar- Dec- Sep- Jun- Mar- Dec- Sep- Jun- Mar- 218 217 217 217 217 216 216 216 216 Revenue 8,643 75,485 68,829 73,529 81,311 58,67 53,679 54,944 52,421 Interest Inc.(Exp.) (8,492) (23,865) (7,345) (6,58) (3,61) (27,863) (2,832) (2,528) (2,35) Net Income Before Taxes Net Income After Taxes Balance Sheet (2,946) (35,414) (17,67) 8,714 9,446 17,278 (1,183) (27,969) (2,216) (2,2) (35,539) (18,794) 14,571 5,161 54,31 (7,156) (28,373) (1,873) Total Assets 562,558 577,727 69,527 67,491 523,76 51,374 56,45 492,537 476,892 Total Liabilities 46,46 42,741 571,152 53,538 452,12 443,822 312,316 361,868 355,746 Retained Earnings 158,256 16,258 71,771 116,672 17,679 12,843 48,431 55,252 1,148 Total Equity 156,152 156,987 38,375 76,952 71,658 57,551 193,729 13,67 121,146 Shares Outstanding 8,673 5,576 5,791 5,791 5,791 5,481 5,294 5,294 5,294 Ratios Industry median Gross Margin 22.3% -9.5% 19.6% 32.% 25.7% 38.4% 5.5% 13.4% 14.8% 41.2% EBITDA Margin 14.8% -5.8% -6.3% 26.2% 24.2% 83.6% -5.5% -39.1% 7.3% 19.% Net Margin -2.5% -47.1% -27.3% 19.8% 6.3% 92.6% -13.3% -51.6% -3.6% 6.9% Asset Turnover.14.13.11.13.16.12.11.11.11.13 ROE (1.3%) (36.4%) (32.8%) 19.6% 7.5% 43.2% (4.5%) (22.5%) (1.6%) 2.1% Source: MorganCapital Research, Thomson Reuters 3 P a g e
Fair Value Estimate Earnings Update In arriving at our fair value estimate, our analyst(s) utilised a blend of valuation methodologies such as; the Discounted Cash Flow (DCF), Residual Income (RI) and Dividend Discount and Relative Multiples methodologies. Consequently, a weighted average price is obtained based on specific company characteristics, industry standards and the broader economy. Investment Ratings BUY: We expect a total return of over 2% within the next twelve months on the counter. ACCUMULATE: We expect a total return of between 1% and 2% within the next twelve months on the counter. HOLD: We expect a total return less than 1% within the next twelve months on the counter. REDUCE: We expect a total return less than or equal to % within the next twelve months on the counter. SELL: We advise clients to sell the stock as it trades at a premium to its intrinsic value. UR: Under Review - We currently do not have an investment recommendation on the stock. 4 P a g e
Earnings Update MorganCapital Securities Limited ("MorganCapital"), formerly known as International Capital Securities Limited, was incorporated on 28th January, 1997; and was issued a license as a Dealing Member of the NSE on 3rd October, 1997, after obtaining license of the Securities & Exchange Commission (SEC) as a Broker/Dealer. The Company has remained a dealing member firm of the NSE since then (over 17years ago). In 29, MorganCapital got licensed by the SEC to perform an additional role as an Issuing House/Financial Adviser. MorganCapital was recently accredited by the Nigerian Stock Exchange as a Designated Adviser to the Alternative Securities Market (ASeM) Board, after a very rigorous and competitive process. MorganCapital is a full fledge Investment Banking, Securities Trading and Principal Investments Firm, with licenses from the Nigerian Securities & Exchange Commission and the Nigerian Stock Exchange. MorganCapital provides a comprehensive range of investment banking and financial advisory services to private, public sector, corporate, and institutional clients. In the past 15months (up to March, 213), our Firm has participated in fund raising programs that assisted State Governments in Nigeria to raise over N11bn in Bonds (either as Issuing House/Stockbrokers/Placement Agents). We have also assisted numerous private sector organizations in accessing funds from the Capital Market. Our firm has very strong contacts with many African-focused & emerging markets investors/fund managers. MorganCapital has advised on a number of transactions in the Nigerian Capital Markets, including provision of Financial Advisory Service to the Federal Government of Nigeria, through the Bureau of Public Enterprises ("BPE") for the concessioning of the National Arts Theater, the Tafawa Balewa Square, the Lagos Trade fair complex and the 6 National Stadia. MorganCapital also advised the BPE on the proposed sale of the Ijora Power Plant, the Calabar Power Plant and the Oji River coal-fired power plant. Our group is focused on providing unbiased financial advisory and investment banking services to individuals and institutions that are seeking to invest in Africa or already involved in investing in Africa. One of our goals is to be the BEST link to the Nigerian Capital Market. CONTACT US Research Favour Usifo favouru@morgancapitalgroup.com Investment Banking Adewale Adetiba adewalea@morgancapitalgroup.com Kehinde Olasehinde kehindeo@morgancapitalgroup.com Securities Dealing Ogochukwu Njoku ogochukwun@morgancapitalgroup.com Michael Joel michaelj@morgancapitalgroup.com For further information, please contact: MorganCapital Securities Limited The Pent House 3 Biaduo Street, Off Keffi Street S/West Ikoyi Lagos, Nigeria Tel: 234-(1) 3429613, 234-(1)454114 Email: info@morgancapitalgroup.com www.morgancapitalgroup.com Disclaimer: This report by MorganCapital Securities Ltd is for information purposes only. The company and its employees do not guarantee the accuracy of the information provided as such information was gathered from primary and secondary reliable sources. We, therefore, do not take responsibility for any loss arising from the use of the information. 5 P a g e