Monday, May 8, 2017 6:23 PM /Cordros Capital
Lafarge Africa Plc (LAFARGE) stated in a press release today, that a resolution to raise the sum of N140 billion by way of a Rights Issue (RI), will be presented to its shareholders at the upcoming Annual General Meeting (AGM).
The Rights Issue …
It was stated in the press release that the RI will be offered at such price, time, and on such other terms as the directors of the company may deem fit. The amount to be raised, if applied to LAFARGE’s last traded price of N49.60, equates to new 2.8 billion ordinary shares that would be offered to existing shareholders of the company.
This potentially increases the overall outstanding shares of LAFARGE to 8.3 billion (from 5.5 billion).
However, considering the minimum period it takes (about three months) to conclude a capital raise via Rights Isue, using the stock’s current market price to estimate the potential additional shares resulting from the offer may not be a fair representation.
… Is Long Coming
In the notice of the AGM, it was stated that the Directors of LAFARGE will seek shareholders authorization to apply any shareholder loan due to any person, towards payment for any shares subscribed for by such person under the RI.
As at the end of Q1-2017, LAFARGE had shareholder loan worth USD581 million (N164 billion using the company’s 2016FY average NGN/USD of N283).
The facility was disbursed by Lafarge Holcim -- its parent company -- through various subsidiaries. Lafarge Holcim holds cumulative stake of 73% in the local subsidiary.
Recall that in July 2016, following significant unrealized FX losses in the first half, the management of LAFARGE converted its shareholder loan worth USD493 million to quasi-equity, allowing for (1) the elimination of the volatility impact of the USD borrowing on the income statement and (2) the repayment of the principal and the interests to be at the sole discretion of LAFARGE, according to the negotiation.
Since then, the management of LAFARGE had been asked on several occasions on the possibility of fully converting the parent debt to equity, and on each occasion (including during the latest Q1-17 conference call with analysts), the response was not in the affirmative.
Given its 73% stake in LAFARGE, we estimate the parent company’s share of the N140 billion to be N101.9 billion.
Pending further details, we assume that the balance of the Rights proceed from the minority shareholders will also be applied towards the repayment of the USD debt.
Altogether, we look for a net outstanding parent loan of N24.6 billion after the exercise, which LAFARGE will either (1) continue to recognize as quasi-equity or (2) completely eliminate, by raising debt capital using the N40 billion outstanding from last year’s N100 billion bond programme for which the company obtained regulatory approval.
We understand that the plan is to fully pay back the parent USD borrowings, but if that is the case, we wonder why LAFARGE is not raising capital sufficient to achieve this purpose once and for all.
Let Go of It
While the additional share issue risks diluting (should some existing shareholders reject their Rights) per share dividend and share holding, we view the RI as crucial for LAFARGE, given the company’s leveraged balance sheet, where we estimate normalized net debt to EBITDA (ND/EBITDA) to be around 6.7x as at end-2016FY.
If successful, we assume the RI would be earnings accretive from 2018F, wherein we look for (1) improvement in interest cover (from 0.89x in 2016FY to 4.2x) and (2) a decline in ND/EBITDA to around 0.7x.
Importantly, the debt repayment more reasonably addresses LAFARGE’s underlying FX risk, and allows management focus on profitable operations going forward.
Lafarge Africa Plc (LAFARGE) announced Q1-17 PAT of N5.2 billion (vs. –N1.9 billion in Q1-16), driven by (1) 55% y/y increase in revenue, (2) comparatively higher gross margin, and (3) higher investment and other incomes. The PAT, however, was behind consensus, owing to higher effective tax rate.
The strong start to the year notwithstanding, the low point of the result was the 1247 bps q/q contraction of margin, which contradicted management's claim that it continues to witness savings from (1) energy efficiency, via increasing substitution of alternative fuel and (2) de-correlation of FX, via local sourcing and energy diversification.
Although not communicated during the analysts’ call, management claimed the Q4-16 GM was driven higher by one-offs, relating to accounting treatment of gas contracts and some other costing.
That said, LAFARGE's latest result, excluding the surprises, was consistent with the performance in Q4-16, and in line with consensus expectation of an improvement in the company's performance following the tough operating environment in 2016.
Management retained its 0-2% demand growth, and flat to declining outlook, for both the Nigerian and South African markets respectively.
We retain BUY recommendation on the stock. Our estimates (under review) have not factored in the RI and the Q1-17 result.