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Lafarge Africa Q3 2016 Results Review - Retaining Outperform Rating on Marked Sell-off

Proshare

Thursday, November 24, 2016 10:19  AM /FBNQuest Research

Material cuts to our EPS fcst’s & PT on negative cost outlook
Although Lafarge Africa’s (Lafarge) Q3 2016 results showed that its pre-tax loss was better than our –N18.9bn forecast, the loss was still sizable at-N11.6bn. Lower unit volumes (-27% y/y), a significant spike in energy costs due to gas shortages and fx, and logistics challenges were the key cost drivers.

Given the negative outlook on costs, we have cut our EPS forecasts by -30% on average over the 2017E-18E period and our price target by a similar margin to N62.2.

Despite these cuts, our new price target offers a potential upside of 41% from current levels, mainly because Lafarge shares have sold-off this year (-49.9% vs. -10.9% NSE ASI). As such, we retain our Outperform recommendation on the shares.

Pre-tax loss of -N11.6bn driven by inflationary cost pressures & fx
Lafarge’s Q3 results showed 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.

Earnings volatility to be muted by loan restructuring
A strong positive going forward is the renegotiation of US$493m of shareholder loans (out of c.US$594m) to quasi-equity effective from July 1, 2016, with the principal repayable at the borrower’s discretion.

According to management, 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).

Overall, the main benefit of the US$493m loan conversion is to reduce the impact of exchange rate fluctuations. On the back of this, we have cut our 2017-18E interest expense forecasts by 18%. However, we expect elevated costs to prove more significant going forward, hence an average cut of 34% to our PBT forecasts over the period.

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