Tuesday, July 17, 2018 /09:45 AM/Vetiva Research
· SA business continues to drag earnings; Bottom line hits ₦2 billion loss
· Nigeria operation remains strong, EBIT margin improves q/q
· Estimates, target price lowered as cost pressures weigh
Bottom line falls to loss position amidst stronger costs
Extending the poor run from FY’17, Lafarge Africa recently released its Q1’18 result reporting weak earnings in the period. The disappointing performance was on the back of poor contributions from both Nigeria and South African businesses. Although Nigerian operations remained relatively stable with Q1’18 EBITDA margin coming in at 29% (FY’17: 30%, Q1’17: 30), the region’s PBT however declined 72% y/y to ₦3 billion due to high Net finance costs (up 193% to ₦8 billion) and a one-off charge of ₦0.7 billion from the implementation of ERP software.
We highlight that the much anticipated improvement in WAPCO’s finance expense post-Rights Issue has been largely muted due to an increase in debt balance. Performance of the South African operations was however more disappointing, with EBITDA coming in negative at ₦4 billion, worse than the ₦156 million recorded the prior year. Similar to recent trend, the region’s dismal numbers dragged the Group’s earnings before tax to a loss of ₦3 billion (Q1’17: ₦9 billion PBT).
Whilst management maintains that there are ongoing measures to address the industrial challenges at the South Africa Lichtenburg plant, the poor numbers from the region suggest that such measures are yet to bear meaningful fruits. Overall, Group’s Revenue was flat at ₦81 billion, whilst EBITDA fell 33% y/y to ₦12 billion. Despite recognizing a tax credit of ₦1 billion, the Group’s bottom-line came in negative at ₦2 billion, quite disappointing when compared with Q1’17 PAT of ₦5 billion and our ₦1 billion LAT estimate.
SA business continues to drag performance
We understand that the South Africa plant suffered continuous downtime in FY’17 which persisted in Q1’18. As earlier noted, a turnaround plan is being implemented to redirect the business to profitability, however, we remain cautious of this space until such plans get to a notable traction. On the other hand, operations of the Nigerian business remained decent.
As anticipated, mildly lower cement prices supported demand as volumes rose 23% q/q to 1.3 million MT (Q1’17: 1.4 MT). Consequently, revenue also rose 18% q/q to ₦58 billion, albeit modestly lower than Q1’17 (₦59 billion). Also, despite the price moderation and one-off charges, operating margin improved to 20% (Q4’17: 18% ex one offs, Q1’17: 23%) as the company continued to ramp up its use of cheaper alternative fuels.
Valuation lowered amidst revision to estimates
After taking into account stronger cement volumes in Nigeria in Q1, we raise our FY volume expectation to 4.9 million MT (Previous: 4.8 million MT). We also understand that cement production in Nigeria was impacted by technical challenges at the Mfamosing plant. With management stating that the plant is now operating optimally, we expect additional upside for volumes. With our erstwhile expectation of a 5% decrease in average cement selling price in 2018 (to support volumes), our FY’18 Revenue for Nigeria operations is forecast at ₦216 billion (Previous: ₦211 billion).
Also, whilst management expects flat to mild contraction in the South African cement market, we maintain our expectation of 2.5% revenue growth in the region, given that the company missed out on sales in FY’17 due to production disruptions. Overall, we raise our FY’18 group revenue expectation to ₦312 billion (Previous: ₦307 billion), translating to a 4% y/y growth.
Meanwhile, after adjusting for the one-off charge of ₦0.8 billion relating to the implementation of ERP software in Q1’18, we raise our FY operating expenses figure, reflecting higher Q1 run rate. We therefore arrive at a reduced FY’18 EBITDA of ₦54 billion (Previous: ₦56 billion). We also anticipate higher interest costs as debt balance remains elevated, contrary to our expectation of a lighter debt balance post-restructuring.
The increased balance was driven by a commercial paper issued in Q4 as well as roll-over and addition of some related party loans. So far, management has not given a clear plan for repayment of its large USD-denominated debt balance. After making the revisions, we arrive at a reduced FY’18 PAT estimate of ₦2 billion and a lower target price of ₦57.63 (Previous: ₦63.15).