In our last review of the company titled Lafarge Africa plc: Set to regain vibe after a disappointing past, we predicted that the cement maker maybe back on the path of profitability following the release of its third quarter result. Expectedly, following the release of its full year result, the cement maker rebounded back to profitability.
However, due to recent developments in the global economy which has seen the price of crude plummeting, coronavirus epidemic, and mounting competition, there are concerns that these headwinds are likely to drag the demand for cement and possibly harm cash flow going forward in 2020.
With COVID-19 induced economic downturn, and with its negative passthrough to private sector cement demand, also fiscal pressures faced by the Federal Government due to drop in crude oil revenue would ultimately lead to the rescheduling of infrastructure projects, and subsequently weigh on public investments.
Management said it anticipates the impact of the economic shutdown on cement volume to be more evident from Q2-20, since it’s volume growth in Q1-20 are already ahead of last year
Lafarge printed a revenue of N212.9bn in full year 2019, a 2.2percent decline when compared with full year 2018. The decline in revenue was on the back of lower revenue from Aggregate and Concrete which was down 21percent year-on-year to N5.bn amid the marginal decline in Cement Sales which was down 2percent year-on-year to N207.2billion.
EBITDA however grew 7percent year-on-year to N65.0billion, driven by the marked decline in Operating expense down 27.3percent to N20.5bn, which was due to steep decline in Admin Expenses adjusted for depreciation down 36.6percent to N15.4bn which offset the increase in Selling and Distribution Expenses up 30.7percent to N5.1bn.
The decline in Admin Expenses was on the back of a reduction in consultancy fees (N847.9m in FY 2019 vs N3.1bn in FY 2018) and technical service fees (N3.8bn in FY 2019 vs N6.3bn in FY 2018).
On the other hand, the rise in Selling and Distribution Expenses reflects increased spending on advertisement cost up 76percent to N2.0bn as competition in the cement industry intensify.
The company also recorded a sharp decline in Finance Cost down 53percent year-on-year to N220.bn in Full year 2019 as compared to N41.6bn in FY 2018, which was driven by the decline in Interest on borrowings (N18.1bn in FY 2019 vs N27.7bn in FY 2018) and the absence of FX loss in 2019 (FY 2018; N8bn). The decline in Interest on borrowings was due to the deleveraging efforts of management, following the rights issue of N89.2bn in 2019.
Notably, the company’s borrowings fell by 79percent year-onyear to N64.2bn in FY 2019 from N301.5bn as at FY 2018, due to the dual impact of the capital raise via Rights Issue and the disposal of Lafarge South Africa Holdco (LSAH). This sharp decline in Gross debt led to a significant improvement in the leverage position of the company (Debt/ equity ratio of 0.19x in FY 2019 compared to 2.24x in FY 2018), with net debt stood at N37.1bn in FY 2019 compared to N288.9bn in FY 2018.
Lafarge’s impressive 2019 fullyear standalone earnings is not surprising following the divestment of its Lafarge South Africa Holdco. (LSAH) that has been the major drag to the group’s business over the last few years. Prior to the disengagement, LSAH had reported a loss of NGN9.4 billion over 7M-19.
According to Mustapha Wahab, analyst at Cordros Capital, at that run-rate and assuming no divestment, the group would have reported another loss after tax of N570.0 million,
Also, the repayment of all WAPCO’S FX related borrowings means that the company’s earnings are now less volatile despite the recent oil price collapseinduced currency pressure.
The proceeds from LSAH disengagement have been used to offset all its Foreign Currency debt of $293 million, including accrued interest of $23 million. From N266.20 billion in 2018, debt (ex-overdraft) has declined to N64.19 billion, paving the way for a 56.1percent year-on-year decline in finance charges over 2019FY. Total debt may likely reduce further to N48.2 billion, due to the maturity of one of its bonds in 2019 (N26 billion)
The merger story
The company had bought Lafarge South Africa Holdings in a bid to expand operations, however, the post-acquisition period in South Africa didn’t go as planned as the country’s cement sector became less unfriendly as the country slided into recession, increased competition, importation of cement in South Africa and increase in the price of cement price peaked.
Lafarge Africa was incorporated in Nigeria in 1959. The Company formerly known as Lafarge Cement WAPCO Nigeria Plc changed its name after a special resolution was passed by the shareholders at an Annual General Meeting held on Wednesday 9 July 2014.
The change of name became effective with the acquisition of shares in Lafarge South Africa Holdings Limited (LSAH), United Cement Company of Nigeria Limited (UNICEM), Ashakacem PLC (Ashakacem) and Atlas Cement Company Limited (Atlas).
On July 15, 2016, Lafarge S.A. France and Holcim Limited, Switzerland two large global players merged to form Lafargeholcim Group based in Zurich, Switzerland. Consequently, Lafarge Africa is now a subsidiary company of Lafarge Holcim.
Ashakacem Limited was incorporated in Nigeria on 7 August 1974 as a private limited liability company and was converted to a public limited liability company in July 1990. In April 2017, the shareholders of Ashakacem at an Extraordinary General Meeting (EGM) passed a resolution to delist the company from the official list of the Nigerian Stock Exchange (NSE).
Subsequent to the delisting of the company, the shareholders of Ashakacem at a meeting ordered by the Court held an EGM on October 23, 2017 at which a Scheme to re-organize the issued share capital of the company was passed. The resolution passed at the court ordered meeting was subsequently filed and sanctioned by the Federal High Court and the sanction officially gazetted.
At the conclusion of the scheme, Lafarge Africa owns 100percent of the issued share capital of Ashakacem. AshakaCem’s main business is the manufacturing and marketing of cementitious materials. Ashaka Cem has a production capacity of 1.0mtpa.
Wapsila Nigeria Limited was incorporated in Nigeria on 1 December 2014 as a wholly owned subsidiary of Lafarge Africa Plc. Its main business is the generation and sale of power.
The Company is yet to commence operations as at 31 December 2019.
In November 2019 through a shareholder meeting ordered by the Federal High Court and the resolutions sanctioned by it, Lafarge Readymix Nig Ltd. was merged into Lafarge Africa effectively from 30th November, 2019. The Court Sanction was registered with the CAC and published in the official Gazette of the Federal Government of Nigeria.
Way forward
Lafarge’s improved balance sheet creates scope for limited exposure to exchange rate volatility, reduced finance expense and acquisition of additional debt for capital expenditure if needed.
Also the company remains a compelling proposition in the medium to long term due to its recent restructuring, with company’s cash flow expected to recover strongly in full year 2022 alongside expected improvement in domestic macro.
How well management respond to the triple-whammy effect of coronavirus epidemic, plunging crude oil revenue, and intense competition will put to test the resilience of the cement maker
