Lafarge Africa Plc Profit warning: Any Cause for Panic?


Thursday, July 14, 2016 2.15PM/ ARM Research

FX revaluation loss to swing Lafarge into red
Last week, Lafarge Africa Plc. (Lafarge) filed a profit warning at the NSE with management stating that FX losses (N28 billion) incurred on dollar debt from its UNICEM subsidiary and impact of disruptions to gas supply on cement production weighed on Q2 16 performance.

Incorporating the impact of the FX revaluation loss into our models, we estimate that Lafarge should report an after-tax loss of N25 billion for Q2 16 (vs. previous estimate of N7 billion profit).

Gas outages stoke margin contractionIn addition to the FX related shocks to earnings, management’s commentary in the filing about further volume contraction in the period, after a 5% slide in Q1 16, points to a tamer outlook for 2016E revenues than we envisaged previously (+10% YoY). Consequently, we now expect Nigerian volumes to contract 5% YoY to 6.28MT, and holding current price (N30,800/MT) steady over the rest of 2016, results in forecasted group revenues of N268 billion for FY 2016 (vs. N294 billion previously).

Higher net debt drives FVE compression
Largely reflecting the increased debt, adjustments to our model results in 25% contraction in our FVE for Lafarge to N60.55 (Last close: N61.56). The stock currently trades at estimated 2016 EV/EBITDA of 25.3x, ahead of Bloomberg EMEA average of 8.0x. Consequently, we downgrade our recommendation on the stock to UNDERWEIGHT (vs. NEUTRAL in previous communication).

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