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Lafarge Africa Plc Gross Margin Contracts in Q3'16 Results; Shares Rated Outperform

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Tuesday, November 1, 2016 12:48 PM / FBNQuest Research

Event: Lafarge Africa reports Q3 2016 results
Implications: Slight reduction to consensus 2016E pre-tax loss forecast likely
Positives: No obvious positives
Negatives: Lafarge reported a pretax loss of -N11.6bn driven by a gross margin contraction of 2,243bps y/y to 5.5% and a -N3.4bn fx loss.   

Lafarge Africa’s (Lafarge) Q3 2016 results which were published yesterday showed that the company delivered a pre-tax loss of -N11.6bn compared with a PBT of N6.0bn in the prior year.

The pretax loss was driven by a combination of factors including a gross margin contraction of 2,243bps y/y to 5.5% and a 589% y/y spike in other expense to N3.7bn. The spike in other expense was mainly due to a N3.4bn exchange rate loss following the 10% depreciation of naira over the June-September period.

Further up the P&L, a 15% y/y decline in sales to N53.7bn also weighed on the results. Thanks to a tax credit of N3.0bn and a positive result of N2.9bn in other comprehensive income, the after-tax loss narrowed to –N5.6bn (this compares with N2.4bn in Q3 2015).  Lafarge restated its H1 2016 numbers. 

As such sequential trends are not comparable. Relative to our forecasts, sales missed by 7%. However, Lafarge’s pre-tax and after tax losses were better than the -N18.9bn and  -N15.1bn that we had forecasted for both lines respectively.

The most significant announcement that Lafarge made yesterday was that it had renegotiated around US$493m shareholder loans (out of a total loan balance of c.US594m) to quasi equity with effect from July 1, 2016, with the principal repayable at the borrower’s discretion.

Management also stated that the interest (avg. of 6%) on the debt will also be paid at the borrower’s discretion and will be recognised through retained earnings (similar to dividends). Although the share of UNICEM’s loan on Lafarge books as at H1 2016 was around US$395m (consisting of shareholder loans of US$310m and external loans of US$85m), the loan balance increased by c.US$197m following the full consolidation of UNICEM shares.

The US$197m represent shareholders loans from Lafarge’s intermediate subsidiaries - Egyptian Cement Holdings (ECH) and Nigerian Cement Holdings (NCH) - which were used to finance the purchase of UNICEM shares. Overall, the main benefit of the US$493m loan conversion to quasi-equity is to reduce the volatility of exchange rate fluctuations on the P&L.

In terms of volume performance, unit volumes were down y/y across all the plants in Nigeria. While Ashaka’s Q3 unit volumes were down by around 7% y/y to 0.15 million metric tonnes (mmt), volumes for WAPCO and UNICEM declined even more, by 21% y/y and 47% y/y to around 0.21mmt and 0.7mmt respectively.

The volume shortfall, particularly for WAPCO and UNICEM, was due to gas supply disruptions as a result of  the vandalised gas pipeline infrastructure across the western and eastern gas grids. Logistics challenges due to deterioration of road conditions also played a major part.

Lafarge’s gross margin was also severely impacted by elevated fuel costs due to the utilisation of more expensive fuels. In terms of outlook, management expects the upward price review of around 40% taken in September and the cost savings measures which include a higher mix of cheaper alternative fuels to help in boosting EBITDA margin to around 30% in Q4 vs 0.6% in Q3 2016.

Management also disclosed that UNICEM line 2 is expected to deliver cement before the end of the year. The pretax loss of –N40.4bn delivered by Lafarge for 9M 2016 is worse than the -N38.5bn that consensus is forecasting for 2016.

Nevertheless, we expect to see a reduction to consensus 2016 pre-tax loss forecast, particularly due to near elimination of the fx impact on the P&L following the loan conversion to quasi equity. Ytd Lafarge shares have shed -46.0%, compared with the -5.0% return delivered by the index.

We rate Lafarge Outperform. Our estimates are under review.

 Lafarge Africa Q3 2016 results: actual vs. FBNQuest Research estimates (N millions)

 

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