Lafarge Africa Plc is Moving to Neutral on Weak Q1 2016 Results


Monday, July 04 2016 9:05AM /FBNQuest Research 

12% cut to our PT; moving our rating to Neutral from Outperform:
We are lowering our recommendation on Lafarge Africa (Lafarge) to Neutral from Outperform following its Q1 2016 results which surprised negatively. On the back of the weaker-than-expected results, we have cut our EPS forecasts by around 24% over the 2016-18E period. However, our new price target of around N72.7 is about 12% lower.

Despite the lacklustre results, Lafarge shares have gained about 10% since the results were published (vs. 17% for the ASI).  On a relative basis, Lafarge shares are trading on a 2016E P/E multiple of 24.8x for 64% y/y EPS growth in 2017E. Although, the 2017E EPS growth looks compelling, it is flattered by base effects. Our new price target implies a potential upside of 3.8% from current levels. Consequently, this justifies our Neutral rating on the stock.

Lafarge delivered a pre-tax loss of -N2.2bn…:
Lafarge’s Q1 2016 sales declined by -29% y/y to N52.4bn, driven by a combination of production challenges and benign cement prices. Although opex declined by -15% y/y and finance charges were flattish y/y, the weakness on the topline, combined with a gross margin contraction of -1,876bps y/y to 14.9% resulted in a pretax loss of –N2.2bn (vs. N6.1bn in Q1 2015). Further down the P&L, the after-tax loss widened to -N6.4bn (vs. N5.1bn Q1 2015), due to a negative result of –N5.5bn on the other comprehensive line. The sequential trends are not comparable due to the consolidation of UNICEM into the group for the first time in Q4 2015.

Driven by weak volumes y/y and subdued pricing:
The y/y contraction in sales was driven by a 5% y/y decline in volumes for the Nigerian operation (due to maintenance works at Ewekoro 1 &2), and softer cement prices (-28% y/y) following the pricing actions of rival Dangote Cement. A drop in the gas utilisation rate to 80% (vs. 90% in Q1 2015) also weighed on margins. Although unit volume for South Africa grew by 11% y/y, the segment’s sales were down 4% y/y due to benign cement prices.

In addition, operational challenges also resulted in the segment delivering an EBITDA of –N100m. Beyond Q1, we have increased our 2016E sales forecast by just a touch to N267.8bn (+0.9%) due to an 8% upward review in cement prices. However, we have cut our EPS forecast by 45% to N2.82 because we believe that costs will continue to be impacted by the challenging operating environment.

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