Lafarge Africa fails to impress investors with decline in 2015 profits

Lafarge Africa Plc, one of the leading cement and building solutions provider released its full year 2015 results last week at the Nigerian Stock Exchange (NSE). 

In the full year to December 31, 2015, Lafarge Africa consolidated statement of profit and other income at the Nigerian bourse shows the Group’s revenue rose marginally from N260.8billion to N267.23billion. Gross profit decreased from N83.027billion to N82.53billion.

Profit Before Tax declined from N40.4billion in 2014 to N29.27billion while the group’s after tax profit for the year lowered from a record high of N33.82billion to N26.99billion.

Research analysts at Meristem Securities expect investors to continue to swiftly react to earnings releases like this, and noted that the direction of investor sentiments in the coming weeks will be determined by the quality of corporate actions.

The results show that Lafarge Africa’s full year earnings Per Share (EPS) dipped to 629kobo from 767kobo in 2014. The board of directors of Lafarge Africa Plc declared N3 dividend per share (against N3.60 in 2014) and 1 for 10 bonus share.

“Unlike its major rival Dangote Cement whose unit volume for Nigeria grew by 3percent year-on-year (y/y) to 13.3 million metric tonnes (mmt), Lafarge’s cement volumes came in flattish (minus 1percent) at 6.3 million metric tones. Consequently, we believe that its market share declined marginally to about 29percent in 2015 from 30percent in the prior year.

“Apart from the weak macro-economic fundamentals in Nigeria, we believe that increased competition and a tough operating environment played a part in the slight reduction in unit volumes”, said Tunde Abidoye-led team of research analysts at FBNQuest.

These analysts in their first reaction to Lafarge Africa plc full year results further noted that on a divisional basis, the drag on Lafarge Africa plc bottom-line “was underpinned by the weak performance of UNICEM, Lafarge South-Africa Holdings (South Africa) and Ashaka Cement (Ashaka).”

“While UNICEM delivered an after-tax loss of N4.2bn in 2015, Ashaka and South Africa both saw their PAT declining by 40percent year-on-year (y/y) and 33percent y/y to N2.8bn respectively. Specifically, an unrealised exchange rate loss of N10billion related to UNICEM and one-off restructuring costs of N4.6bn weighed on earnings. Excluding these one-off costs, PBT would have increased by 9percent y/y to N43.9bn. Relative to our forecast, sales of N267.2billion are not directly comparable due to the consolidation of UNICEM,” FBNQuest analysts stated.

“Although volume and market share numbers for South African operation were not provided, the segment’s contribution to sales and profit after tax (PAT) fell to 28.3percent and 10.4percent from 29.4percent and 12.1percent in 2014 respectively. Lafarge’s PBT came in behind consensus 2015 profit before tax (PBT) forecast of N44.7billion. As such, we expect to see marked downward revisions to consensus 2016 PBT forecast and a negative reaction from the market.

“Lafarge shares have underperformed the ASI this year. Ytd they have shed -13.2percent compared with the -10.3percent return delivered by the ASI. At current levels, on our published forecasts, the shares are trading on a 2016E P/E multiple of 11.1x for 25% EPS growth in 2016E. These compare with the 15.9x P/E multiple for 11% EPS growth that rival Dangote Cement is trading on. Our estimates are under review”, the FBNQuest analysts added.

Lafarge said in a release preceding its full year results release that group after tax profit declined by 20 percent compared with 2014, “when taking into account the one-off restructuring costs and the unrealised exchange impact on the Mfamosing operations foreign currency borrowings from the parent group, LafargeHolcim, the world’s largest building materials company.”

Peter Hoddinott, CEO, Lafarge Africa plc said in the statement that, “our company continues to deliver good performance with significant upsides to come as new cement and power generation capacities come on stream and synergy benefits from the merger in Nigeria flow through. Our business integration process has been successful and as a Company we are optimistic to deliver improving performances in 2016 and beyond, improving value to our shareholders”.

“The one-off impact of the adjustment to the naira value of the foreign currency borrowing, due to the deterioration in the naira exchange rate, is to a large extent an accounting exercise as Lafarge Africa plc is not foreseen to repay the shareholder loans in the foreseeable future, which makes up the majority of the foreign currency borrowing. Excluding these one-off/none operational impacts, profit improved by 6% versus last year behind the strong underlying fundamentals of Lafarge Africa Plc’s operations. Cash flow from operations was robust at N57.9 billion.

“The Nigerian operations of Lafarge Africa have been successfully unified and rationalized under one management team while being cognizant of the different stakeholders. Lafarge Africa has strengthened its foundation further by increasing its shareholding in Mfamosing operations from 35% to 50%, with full management control and consolidation. Similarly, the shareholding in Ashakacem Plc. also increased from 58.61% to 82.46% in the year. The unified management team promises to drive efficiencies and ultimately generate synergy savings of N9 billion for the group by mid-2018,” Lafarge Africa stated.

Meanwhile, Tominiyi Ramon team of analysts at Vetiva Capital Management Limited said: “Notwithstanding the one-off items that plagued profitability and contribution of UNICEM in 2015, we see the consolidation of the company as a boost to WAPCO earnings going forward.” “Apart from taking the group’s total immediate capacity to 11.5 million MT (Ex-UNICEM and ASHAKACEM expansions), UNICEM also comes in with a strong EBITDA margin (buoyed by gas utilization) that hovered around 40% up until Q4’15 when the plant operation was disrupted by technical issues and floods.

“Although UNICEM comes with huge debt on its books (FY’15: N136 billion), we believe a large chunk of the debt would have been taken to finance its ongoing expansion project to double capacity to 5 million MT and expect the project to self- liquidate the debt. The expansion is scheduled for completion by Q4’16. By FY’17, we estimate UNICEM’s revenue at N81.2 billion, potentially contributing 27% of group revenue (Current: 20%). Risks to our estimates on UNICEM include volatility in exchange rate as we note that almost half of the company’s debt is foreign currency denominated”, Vetiva analysts further stated.

Iheanyi Nwachukwu