Monday, March 13, 2017 6.15PM / ARM Research
Price increase was net positive for Nigerian operations in Q4
Ahead of FY 16 results announcement, parent company (Lafarge Holcim) of Lafarge Africa Plc (Lafarge) provided a glimpse into the performance of its Nigerian and South African operations on Friday.
In its release, Lafarge Holcim stated that the Nigerian operation experienced a 15% YoY contraction in cement volumes and lower average cement prices (-6.2% YoY).
By our estimates, Nigerian revenues should now come in 20% lower YoY at N149billion (9M 16: -32% YoY to N108.5 billion), suggesting that the price increase across Nigerian market was net positive for the business over Q4 16.
According to Lafarge Holcim, further aided by energy savings, EBITDA margins in Nigeria rose 10pps QoQ in Q4 16.
Elsewhere, cement volumes contracted 8.3% YoY in South Africa with related prices coming in 6.8% lower—both confirming earlier reports of rising competition in South African space.
Overall, group revenue should remain close to our FY 16 estimate, possibly in the region of N205 billion to N215 billion (2015: N267 billion).
Energy recovery arrive late to the party
On other fronts, Lafarge Holcim noted improvements in Lafarge’s energy flexibility campaign with Ewekoro II reportedly going from 0% use of alternative fuels to 40% in 2 months.
Precisely, after enduring sizable energy pressures in the first 10 months of the year, the parent company’s report now suggests gradual gains in energy savings for Lafarge over Q4 16.
However, pass-through from adverse fuel mix over the earlier months of the year should keep gross margin pressures intact over full year. (2016E gross margins: -17pps YoY to 13.5%).
Currency concerns to drive first FY loss
Overall, despite the implied net positive impact of price increase in Nigeria, emerging information suggest that South African weakness may limit top-line gains in Q4.
In addition, energy pressures for most of 2016, as well as documented logistic concerns and huge FX loss over 9M 16, should leave the company in loss position over FY 16 which we forecast at N41 billion (vs PAT of N27 billion in 2015).
Following the FX induced loss in June 2016, Lafarge succumbed to bearish sentiment with the stock down 35% in the last six months (vs NSEASI: -11%).
In addition, investors have priced in prospects of dilution following the conversion of its $493 million shareholder loan to quasi-equity in Q3 16.
The stock trades on 2016E EV/EBITDA of 29.5x (forward: 9.9x) vs. 8.2x (forward 7.8x) for Bloomberg peers. We have a NEUTRAL rating on the stock with FVE of N40.11.
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