Lafarge Africa: No obvious positives in Q3’16

Earlier this week, Lafarge Africa Plc, Nigeria’s second l a r g e s t c e m e nt m a n u f a c t u r e r releas e d its unaudite d consolidated and separate financial results for the nine months period ended September 30, 2016.

There were no obvious positives in the results of the company. Its income statement at the Nigerian Stock Exchange (NSE) showed loss before tax (LBT) of N40.367billion from profit before tax (PBT) of N36.511billion in Q3’15; representing 210.56% decline. Also, the company’s Loss After Tax (LAT) stood at N37.402billion against an after tax profit of N32.393billion in Q3’15. The cement maker with market capitalisation in excess of N237.9billion and shares outstanding of 5,010,391,991 units reported nine months revenue decline by 25.11% to N161.043billion in Q3’16, from N215.039billion in the corresponding Q3 period of 2015.

Stock investors had pricedin these negatives leading to its share price dip to N47.5 in the early trading hours on Tuesday from a high of N50 at the beginning of trading this week. Before now, the share price of Lafarge Africa Plc had reached a 52-week high of N95.45 and 52-week low of N42. With this negative net position, analysts believe it is very unlikely the Lafarge would reward shareholders with dividend payment for the full year (FY) 2016E.

Lafarge Africa Plc recorded remarkable increase in selling and marketing expenses by 18.35% to N3.898billion, from N3.294billion in Q3’15. The Q3’16 basic loss per share (LPS) attributable to owners of the parent company is 689kobo from an earnings per share (EPS) of 696kobo in Q3’15. Administrative expenses declined remarkably from a record N19.056billion in Q3’15 to N16.307billion in Q3’16. “Lafarge Africa Plc released its 9M’16 score card in which it reported uninspiring numbers for the period. 9M’16 saw the company continue to report reduced sales as revenue was reported at N161.04 billion (versus N215.03 billion in 9M’15) representing a decline of 25.11%.

Lafarge has continued to suffer from two major factors which include the unavailability of foreign exchange (FX) and the unavailability of gas to power its plants. The company was said to have been forced to shut down operations at its Sagamu plant for six weeks due to power disruptions while it continued to produce at 75% instead of a 100% at its Ewekoro plant due to gas shortages and has been forced to switch to Low Pour Fuel Oil (LPFO) as an alternate source of power which in turn drives up the company’s cost of production”, said Chiazor Victor team of research analysts at Capital Bancorp Plc.

“Given its current earnings result, it is evident that the company is positioned to close FY’16E at an uninspiring note given that we do not anticipate any changes to operations significant enough to turn things around. Though current earnings are not impressive, our valuation still projects a recovery in the long-term and maintain a long-term target price of N63.71 per share estimating an upside potential of 34.12%. We therefore place a BUY recommendation on the company shares and advice investment be made with patient capital for optimal return on investment,” Capital Bancorp analysts further added.

“The pretax loss of N40.4billion delivered by Lafarge for 9M 2016 is worse than the loss of N38.5billion that consensus is forecasting for 2016. Year-to-date, Lafarge shares have shed -46%, compared with the -5% return delivered by the Index”, according to Tunde Abidoye team of research analysts at FBNQuest in their first reaction to Lafarge Africa Plc nine months results. Nevertheless, the analysts expect to see a reduction to consensus 2016 pre-tax loss forecast, particularly due to near elimination of the FX impact on the P&L following the loan conversion to quasi equity.

“The most significant a n n o u n c e m e n t t h a t Lafarge made was that it had renegotiated around $493million shareholder loans (out of a total loan balance of c. $594million) to quasi equity with effect from July 1, 2016, with the principal repayable at the borrower’s discretion”, FBNQuest analysts said. “Management also stated that the interest (average of 6%) on the debt will also be paid at the borrower’s discretion and will be recognised through retained earnings (similar to dividends). Although the share of UNICEM’s loan on Lafarge books as at H1 2016 was around $395million (consisting of shareholder loans of $310million and external loans of $85million), the loan balance increased by c. $197million following the full consolidation of UNICEM shares. The $197million represents shareholders loans from Lafarge’s intermediate subsidiaries – Egyptian Cement Holdings (ECH) and Nigerian Cement Holdings (NCH) – which were used to finance the purchase of UNICEM shares.

Overall, the main benefit of the $493million loan conversion to quasi-equity is to reduce the volatility of exchange rate fluctuations on the P&L,” the analysts added. Going forward, analysts expect Lafarge’s investments in alternative sources of energy to resolve its issue of gas disruptions and shortages but until that becomes evident it is expected that the company’s cost of sale will remain on the high given the current state epileptic gas supply in the country. On a positive note (in terms of outlook), the management of Lafarge Africa Plc expects the upward price review of around 40percent taken in September and the cost savings measures which include a higher mix of cheaper alternative fuels to help in boosting earnings before interest, tax, depreciation and amortization (EBITDA) margin to around 30percent in fourthquarter (Q4) versus 0.6percent in Q3 2016. Its management also disclosed that UNICEM line 2 is expected to deliver cement before the end of the year.

In a statement following the third-quarter results released at the Nigerian bourse, Michel Puchercos, CEO, Lafarge Africa Plc said, “Our focus on volume and prices started to deliver during the 3rd quarter. In September, all our plants were running at record performance level, Mfamosing Line 2 started its operation on August 28th (clinker) and prices increased by 650N/bag in September representing above 40% price change.”

“In spite of the recessionary economic environment and market uncertainties, our company is positioned to deliver improved performance going forward. Our immediate objective is to optimize our processes, reduce operational costs and deliver strong EBITDA margins. However, uncertainty remains on the macroeconomic environment and its effect on the cement market,” Puchercos stated.