*Management sees light in the horizon
*Analysts disagree on investment recommendation

By Emeka Anaeto,  Economy Editor

The third quarter 2016, Q3’16, financial results of Lafarge Africa Plc turned in to the Nigerian stock Exchange previous week indicates the cement multinational is still very much in the woods after its’ Q2’16 abysmal report.

But its’ management, in a response to series of questions from Vanguard Investment Report, indicated that some of the fundamental problems have now been resolved, paving the way for a better performance going forward.

Group’s revenue was down by 15 per cent to N54 billion, the third consecutive quarterly drop.

It is believed that the economic headwind in Nigeria during the period under review took a heavy toll on the company’s result as its Nigerian market recorded negative growth at -29 per cent as against positive 19 per cent growth in South African operation.

Logistics challenges

The company continued to face difficulties in gas availability in Nigeria and industry observers remarked that coupled with logistics challenges and the interconnection of the newly added line in Mfamosing, operations and sales were also hampered.

With a massive mark-up in price of cement in September the outcome on financial results afterwards would be mixed as sales volume may drop while revenue and margins may rise.

Hence, the company recorded a pre-tax loss of N12 billion, extending its loss making to fourth consecutive quarter.

This was coming against the backdrop of the company’s struggle to curtail costs amidst rampaging inflation.

Cost of Sales, CoS, was restrained to a marginal increase of -0.24 per cent while Distribution and Admin Expenses, otherwise Operating Expenses, OPEX, rose significantly by 9.6 per cent.

The impact of poor revenue and cost over-run resonated into a hugely depressed profitability. Earnings Before Interest and Tax, EBIT, dropped by 90 per cent.

Cash generated from core operations declined massively by 172 per cent to N3.0 billion from N4.1 billion in the corresponding period of 2015.

Compounding the bottomline woes was the escalation of interest expenses at 179.8 per cent, coming with a 4.8 per cent decline in interest income, all showing a hugely challenged cash flow.

These indicate the company is carrying a financial burden of increased short-term funding liabilities from bank overdrafts.

Consequently, a Loss Before Tax of N40.3 billion was recorded as against N36 billion profit in the corresponding period of last year.

Profitability ratios headed south: The bottomline pressures is seen in the 9-month Gross Profit Margin, GPM, which receded by 22 percentage points to 11.3 per cent as against 33.4 per cent achieved in 2015. Consequently, the EBIT Margin dropped 39.7 percentage points and PBT Margin was down by 42.1 percentage points.

The profitability ratios show that the company struggled with narrow margin amidst low sales volume when cement prices were low for most part of the period under review.

The 40 per cent increase in price of cement appear less impactful in the Q3’16 result but it is expected to resonate fully in the current quarter.

Management Pulse

Lafarge has been battling persistent gas supply shortages for a long time now and this situation had added pressures to its output and cost of production.

But the management told Vanguard that it now has fuel flexibility, meaning that the company has other sources including coal, LPFO, Alternative Fuel, etc.

On the reasons for and impact of the cement price adjustment, the management said the measure “was in response to the general increase in input costs, energy cost, distribution and other imported spare parts costs. It will return our EBITDA (Earnings Before Interest Tax Depreciation and Amortisation) margin to 30+”

On declining profitability, they stated: “The reasons for the drop in profit, when compared with last year’s performance were lower price during the period, production limitation due to gas supply shortages, explosive restriction, Naira devaluation impact and increase in costs”.

The company had recorded a huge N30.7 billion loss arising from unrealized foreign exchange losses on shareholders and bank loans denominated in US Dollars.

However, the company said the loan had been restructured in Q3’16 with no more foreign exchange loss impact.

Analysts disagree on investment perspective
At the backdrop of a comparatively weak performance with strong prospects for recovery investment houses have given conflicting perspectives on investment decisions.

Analysts at ARM Investment Limited, a Lagos based investment house, stated: “Given the negative demand response across peers to the price increase, we expect Lafarge to experience constrained volume growth over Q4 16.

“Thus, in line with current run rate (-27% YoY in Nigeria), we now look for 26% YoY contraction in Nigerian cement volumes to 4.92MT (vs. -5% YoY to 6.3MT previously) with 2016 weighted prices now at N29,053 (vs. N23,500 in previous estimates).

“Similarly, given sustained energy pressures over 9M 16, we expect CoGS (Cost of Goods Sold) to rise by 9% to N178 billion (-3.6% YoY), implying 17.4 percentage points contraction in gross margin to 14%.

“However, going into 2017, we expect the company to benefit from higher prices (+5% YoY) and significant moderation in earnings volatility following the successful restructuring of its shareholder dollar loan.

“Overall, in line with its significantly smaller net debt position, we have upgraded our recommendation on the company to a ‘STRONG BUY’ (vs. ‘SELL’ in previous communication)”.

Giving its’ own perspective on Lafarge Africa, analysts at FSDH Merchant Bank Limited noted that foreign currency debt subsequent to the acquisition of Unicem has been restructured into equity. They also said that the drop in profit margins is a reflection of the increase in expenses as well as the lower selling price in Nigeria for most of 2016.

Continuing, the analysts stated that Lafarge stock was trading at lower earnings multiples than the emerging market building materials companies.

However, they projected that there would be increase in short-term financial liabilities on account of an increase in bank overdraft, and consequently the company may face short-term financial challenges. Hence, they stated: “We place a short-term ‘SELL’ rating on the stock”.