Wednesday, July 20, 2016 2:10pm /FBNQuest Research
Event: Lafarge Africa reports Q2 2016 results
Implications: Likely downward revisions to consensus 2016 PBT forecast
Positives: No obvious positives
Negatives: Lafarge reported a pretax loss of N28.0bn driven by fx losses of N27.5bn.
This morning the NSE published Lafarge Africa’s (Lafarge) Q2 2015 results which showed a pre-tax loss of -N28.0bn. The pre-tax loss was mainly driven by an unrealised foreign exchange loss of –N27.5bn.
However, thanks to a positive result of N5.1bn in other comprehensive income, the after-tax loss narrowed to N24.3bn. Moving up the P&L, a 30% y/y reduction in sales to N54.9bn and a 2411bp contraction in gross margin to 13.3% also weighed on the results. Sequentially, sales grew 5% q/q.
However, the pretax and after tax losses in Q2 are more significant than the –N2.2bn and –N6.4bn that the company reported in Q1 2016. The pretax loss reported in Q2 makes it the third consecutive quarter of negative earnings for Lafarge. Compared with our forecasts, sales missed by -22%.
We had also expected the company to turn a profit in the quarter (prior to the profit warning which was triggered by the naira devaluation) compared with the pre-tax and after-tax losses posted by the company.
Following the CBN’s adoption of a more flexible exchange rate regime, and the naira’s downward move to c.N282.5 from N197 previously, Lafarge had issued a profit warning which stated that it expected Q2 2016 earnings to be materially impacted by a N28.0bn unrealised foreign exchange loss.
The losses arise from fx denominated loans consisting of shareholder loans of US$310m and external loans of US$85m. While Lafarge was able to refinance most of its naira debt via its N60bn bond issue, it has not been able to refinance the fx component. Management also disclosed that it also brought in some fx loans of UNICEM into the Lafarge books.
At this time, we estimate that Lafarge has close to US$600m in fx denominated loans and its debt-to equity ratio is now up to around 1.6x from 0.9x previously. Excluding the exchange rate loss, we note that core operations and volume dispatches were also hampered by gas supply disruptions following vandalism to gas supply infrastructure.
The gas utilisation for Ewekoro II dipped to as low as 40% from around 70% previously during the quarter. Barring operational issues and a further sharp downward movement in the naira exchange rate, we expect H1 numbers to come in much better.
Consensus 2016 PBT forecast for Lafarge Africa is N13.6bn. Given the weak set of results, we expect to see a marked reduction to this forecast. Lafarge shares have underperformed the ASI this year. Ytd they have shed -28.5% compared with the -0.8% return delivered by the index.
Although the shares have been relatively resilient since the profit warning was announced, we expect them to come under more pressure over the coming days/weeks.
We rate Lafarge Neutral. Our estimates are under review.
Lafarge Africa Q2 2016 results: actual vs. FBNQuest Research estimates (N millions)
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