Monday, June 25, 2018 4:40PM / FBNQuest Research
Material cuts to our 2018-19E EPS forecasts and price target
Lafarge Africa’s Q1 2018 results surprised negatively, making it the third consecutive quarter of tepid performance by the company. As such, we have cut our EPS forecasts significantly over the 2018-20E period and our price target by c.19% to N37.8. In addition to a surge in net interest expense due to increased leverage as quasi-equity loans were converted to debt, negative surprises in opex and gross margins also contributed to the weak results.
From an operational standpoint, a -N4.1bn loss on the EBITDA line delivered by the South African business (vs.-N156m Q1 2017) also weighed heavily on earnings and resulted in a 283bps y/y reduction in the company’s recurring EBITDA margin to 15.7% (vs.21.9% Q1 2017). Although management maintained its 2018E EBITDA margin guidance for Nigeria and South Africa at 35% and single-digits respectively, we are less optimistic than guidance.
For EBITDA margin to meet guidance, the company will have to deliver an average quarterly EBITDA run-rate of close to N20bn over the next three quarters. Consequently, our EBITDA margin forecast of 27% and -8.0% for Nigeria and South Africa respectively are conservative vs guidance. At current levels, Lafarge shares are trading close to our price target. Consequently, we retain our Neutral recommendation on the shares.
Pre-Tax Loss Of –N2.9bn In Q1 Due To Spike In Costs & Interest Exp
Lafarge’s Q1 2018 results showed that the company reported pre-tax and post-tax losses of –N2.9bn and –N2.0bn respectively. The weak earnings were driven by a combination of factors including a significant gross margin contraction of 338bp y/y to 22.3%, a 41% y/y rise in opex and a 133% y/y spike in net interest expense. Sales came in flat y/y but grew 7% q/q.
The pre-tax and after tax losses compare with pre-tax and after-tax losses of – N35.1bn and –N29.4bn that the company reported in Q4 2017. Compared with our forecasts, sales were in line with our N81.2bn forecast.
However, PBT and PAT missed our forecasts because of negative surprises in gross margin, interest expense and opex.