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Lafarge Africa Plc: A green shoot already?

…Basks in a surprising tax credit
…Analysts see bright future

By Emeka Anaeto

Lafarge Africa Plc lastweek announced its 2016 full year (FY:2016) financial results last week, comfortably outperforming analysts’ estimates on key earnings metrics.

FY:2016 revenue fell 17.8% year-on-year (YoY) to N219.7 billion, slightly ahead of analysts’ estimate of N216.5 billion, while the Pre-tax loss of N22.8 billion also beat forecasts of N44.3 billion.

The positive earnings surprise was largely driven by the impressive fourth quarter 2016 (Q4‘16) performance that was significantly buoyed by upwards adjustments on cement prices in Nigeria.

The multinational cement giant also so improved margins with the improved utilization of alternative energy including biomass and petcoke which resulted in a more efficient kiln fuel mix.

Consequently, Q4 stand-alone Earnings Before Interest Tax, Depreciation and Amortisation (EBITDA) expanded 291.7% Yo–Y to N18.8 billion (75.2% of total adjusted FY:2016 EBITDA) while EBITDA margin rose 22.8 percentage points  YoY to 32% in the Quarter.“However, the greatest boost to bottom-line figures came as tax credit of N39.7 billion from deferred tax assets generated from the UNICEM operations pre-acquisition, which erased the pre-tax loss and consequently brought post-tax profit to N16.9 billion against a consensus forecast of a post-tax loss of N30.3 billion.

•Michel Puchercos, Group Managing Director/Chief Executive Officer, Lafarge Africa

Despite the positive fillip to earnings delivered by the impressive Q4‘16 operating performance and tax credit, 2016 was a largely underwhelming year for Lafarge as volume, revenue and margins came under pressure, particularly in the first three-Quarters of the year.

Nigeria cement sales volume across three operating segments (WAPCO, UNICEM, ASHAKA) fell 20.3% YoY to 5.4MMT from 6.3MMT in FY:2015 due to a loss in market share in 9M:2016 and impact of the September price action on Q4 volumes.

Analysts also believed revenue from Nigeria which fell 15.2% YoY to N148.3 billion was on account of aggressive price competition for much of the year which consequently dragged Group Revenue as South Africa sales also disappointed down 11.0% YoY to N67.3bn on sluggish economic growth and price competition.

The low mark-up on cement sales in Nigeria in addition to higher energy cost following disruption to gas supply weighed on operating margins as adjusted EBITDA and EBIT margins in FY:2016 weakened 11.1 and 12.4 percentage points YoY to 11.8% and 4.5% respectively. Revaluation of foreign exchange (FX) denominated debt further impacted on bottom-line with an FX loss of N22.7 billion reported in FY:2016.““

2017 Outlook, analysts’ forecasts

Analysts at Afrinvest West Africa, a Lagos based investment house, had, in a recent update on the Group noted that the Company and indeed the cement industry is past peak cost due to increased diversification of energy sources to reduce vulnerability to gas shortages.

Further update from Lafarge management shows the energy optimization plan is progressing faster than expected with all production plants in Nigeria expected to utilize Alternative Fuel by FY:2018. This, in addition to the ramp-up of capacity in newly expanded UNICEM plant and weaker price competition in Nigeria, portends a positive outlook for revenue and operating margins in 2017.

Bolaji Balogun, Chairman, Lafarge Africa

Consequently the analysts forecast revenue to rise 25.5% to N275.7 billion in 2017 and EBITDA and EBIT margins to expand 12.0 and 13.0 percentage points to 23.8% and 17.5% respectively.“They stated: ‘‘Although we expect the interbank FX rate to depreciate by FY:2017, the impact on Lafarge’s Profit/Loss statement will be net positive unlike the high FX losses reported in 2016 due to high external leverage. About 96.7% or US$493.0 million of US$510.0 million shareholder loan consolidated post-acquisition of  UNICEM has been converted to an interest-bearing equity instrument and another outstanding US$86.0 million third-party loan owed to Nigerian banks have been refinanced with a shareholder loan from the parent Company (LafargeHolcim Group) which was hedged  through a one-year Non-Deliverable Futures (NDF) transaction at N274.5/US$.

‘‘The derivate asset contributed to an unrealized FX gain in Q4:2016 and we expect a realized gain to be booked by 9M:2017.

‘‘However, we note that the final treatment of the restructured shareholder loan is yet to be concluded and the probability of dilution of shareholders’ value remains high if interest-bearing equity instrument is converted to a common stock.

‘‘Nonetheless, the risk of further P&L volatility from another Naira devaluation in the short term has been mitigated and we expect profit after tax to rise 43.1% in FY:2017 to N24.2 billion and estimate earnings per share (EPS) to settle at N4.41.’’“Following the Q4 earnings surprise, the stock has rallied 10.8% with investors taking a general positive view of forward earnings.

For analysts at Cordros Capital, another Lagos based investment house, the FY’16, in overall, was positive indication of light at the end of the dark tunnel.

They had noted last week that ‘‘after four successive quarters of losses, Lafarge reported N17.56 billion pre-tax profit in Q4-2016 on the following counts: price-driven 1,004 bases points (bps) year-on-year (YoY) and 3,290 bps quarter-on-quarter (QoQ) gross margin expansion; other gains/operating income of N9.97 billion (vs. losses in previous quarters); and investment/finance income of N2.88 billion (highest since Q2-2015).

‘‘Of the above mentioned items that impacted the fourth quarter result, the restoration of gross margin to the pre-2015 price-crash levels (given the uncertainty of other items) will be most defining of Lafarge’s return to profitable performance in 2017.

‘‘Consequently, we have revised 2017 PAT forecast higher to N25.8 billion, from N11.2 billion previously. The PAT is also reflective of the elimination of forex-related losses as well as relatively higher sales volume.’’

Cement prices in Nigeria are currently above the end-2016 levels, following the additional increases (twice) effected this quarter. Industry observers estimate Lafarge’s realized average Nigerian price to be 42% above 2016 average. In addition, they see relatively lower per tonne production cost, given the earlier-than-expected progress made with energy substitution, and considering that about 50% of 2017 capital expenditure outlay will be committed to delivering energy optimization.

Consequently, analysts at Cordros Capital stated: “Notwithstanding the generally modest Nigerian cement consumption outlook, we forecast Lafarge’s Nigerian cement sales volume to increase by 7%, as markets lost in 2016 on production challenges (which limited supply capability) are reclaimed. For reference, Q4- 2016 realized volume was 39% and 3% above Q3 and Q2 levels (during which energy challenges adversely impacted production) respectively, despite the relatively higher price.

“In addition to pricing and efficiency gains, we estimate 2017 EBITDA of N64.34 billion, higher than both the previous estimate of N50.2 billion, and the N29.65 billion reported in 2016.

“Following the revision to our forecasts, we have increased 2017 target price (TP) to N80.56 (from N60.10) and retain  ‘BUY’recommendation on 107.37% upside.

“While acknowledging the risks to earnings recovery in the short term, we think Lafarge’s shares have faced intense pressure and expect the market price to rise to our 2017 TP on relatively (compared to 2016) better performance.

“Key risk is that notwithstanding the expected lower production cost, the strength of Lafarge’s profitability in 2017 has greater dependence on pricing development where we think the market leader (Dangote Cement) might pull a negative surprise.”



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