Lafarge Africa turns profitable amid costs and leverage challenges

Lafarge Africa Plc has returned to profitability a amid rising cost of production and amounting debt obligations as the cement maker continues to benefit from higher Nigerian and South African prices.

For the first six months through June 2017, Lafarge recorded a profit after tax of N19.37 billion from a loss position of N30.24 billion recorded the previous year.

The N19.37 billion profit compares with the N12.97 billion average estimate of 8 analysts surveyed by BusinessDay.

Sales increased by 44.21 percent to N154.83 billion in the period under review from N107.38 billion the previous year as the company has embarked on aggressive expansion plans with a view to bolstering sales.

However, weather conditions that dampened consumption impacted  negatively on quarter on quarter (Q/Q) sales.

“We note that in addition to the impact of rising prices on demand, the long, heavy rainy season in Nigeria between April and June may have contributed to lower cement consumption,” said analysts at Cordros Capital Limited in a note to BusinessDay.

Lafarge’s impressive performance at both the top line (sales) and the bottom-line (profit) resulted in strong margins.

Gross margins increased to 28.70 percent in June 2017 from 14.09 percent as at June 2016. Net margin, a measure of efficiency, moved to 12.74 percent in the period under review from -28.17percent.

Earnings before Interest and Tax (EBITA) margin increased to 18.51 percent in the period under review from -23.36 percent as at June 2016.

The Nigerian cement maker was able to manage direct costs attributable to projects as gross profit surged by 193.78 percent to N44.45 billion as at June 2017.

While Lafarge Africa recorded strong rebound in margins amid a volatile and tough macroeconomic environment, the company is still faced with production cost challenges brought on by shortages of gas at its South West operations.

The Nigerian cement markers’ variable costs, which is a component of cost of sales or total production costs, was up 15.43 percent to N70.39 billion in June 2017.

Total cost of sales were up 19.70 percent to N110.81 billion in June 2017 from N92.22 billion as at June 2016.

On the other hand variable cost to sales ratio fell to 45.46 percent in June 2017 from 56.47 percent as at June 2016 while cost of sales ratio dipped to 71.29 percent in June 2017 from 85.89 percent as at June 2016.

This means Lafarge has spent less on input costs to produce each unit of product despite energy challenges.

Total operating expenses were up 52.25 percent to N18.59 billion, driven by a 60.21 percent increase in operating expenses Opex.

A spate of attack by militants in the Niger Delta region on oil facilities resulted in shortage of gas and major players in the cement industry were hard hit.

As result of the aforementioned challenges, firms were forced to hike prices of products in order to give them the leeway to pass on the cost to consumers.

Lafarge Africa is highly geared, which means the large chunk its balance sheet is finance by debt. Debt to equity (D/E) ratio moved to 108.65 percent from 41.98 percent the previous year.

Total long term debt in the balance sheet increased by 97.51 percent to N206.44 billion in June 2017 from N104.52 billion as at June 2016.

However, interest coverage ratio of 2.80 earning means the Nigerian cement maker can meets its interest payment obligations. Finance cost was up 90.27 percent to N10.96 billion.

Lafarge is planning on raising N140 billion via Rights Issue, the proceeds of which would be utilized for the repayment of shareholder loans worth $581 million at the end of 2016.

“Unicem, a 100% owned subsidiary of the Company, has FX loan of approximately USD600m which was incurred for the completion of line 1 (2,5mtpa) and the commissioning of line 2 (2,5mtpa),” said the company in a statement on the website of the Nigerian Stock Exchange (NSE).

Analysts say an uptick in construction activities after the reason season, the implementation of the full 2017 fiscal budget, and the relative peace in the Niger Delta region could impact positively on cement volumes.

Nigerian government has approved a total of N7.44 trillion in its 2017 appropriation budget.

A sharp drop oil price since mid 2014 that undermine government spending and a severe shortage of dollars tipped the country in its first recession in 25 years.

Nigeria’s economy contracted by 0.52 percent in 2016 while inflation for the month of June stood at 16.10 percent, according to a recent report by the National Bureau of Statistics (NBS).

Cement under Manufacturing sector contracted by -5.32 percent in the fourth quarter of 2016 from -6.26 percent in the third quarter of the same year and 21.32 percent in the fourth quarter of 2015, according to recent by the NBS.

Lafarge Africa’s shares gained 9.89 percent to close at N60 as of 2:00 pm close of trading on Friday, valuing it at N329.43 billion. It has a year to date return of 46.52 percent, outperforming the NSE ASI all index of 26.59 percent.

 

BALA AUGIE