Tuesday, April 20,
2021 / 03:03PM /by
FBNQuest Research / Header Image Credit: Lafarge Africa
Higher production costs and opex weigh on near-term outlook
Lafarge Africa's Q4 '20 results missed our forecasts. Earnings were affected by a combination of lower revenues and a negative surprise on the cogs line. In 2020, Lafarge grew cement volume sales by around 6% y/y, slower than peers, mainly due to lower cement output in Q4. At the start of Q4, management decided to replace the electrostatic precipitator and bag filters at Ewekoro line 1 due to environmental concerns. Operations are expected to resume by mid-June '21 on this line.
Besides this, there were also operational disruptions at both Ewekoro and Mfamosing plants which were only resolved in Q1 '21. Looking ahead, we expect that the Nigerian cement market will continue to expand, driven by lower interest rates for real estate and construction projects. We project cement volume sales growth for Lafarge of around 5% y/y, assuming a capacity utilisation of 49% for '21f, as operations should normalise by mid-year.
On costs, we expect efforts to replace relatively expensive fuels would have a meaningful impact in the medium term. As such, both prior and possible future fx devaluations will materially weigh on Lafarge's cost line during this fiscal year, as gas prices are linked to the US dollar. We now expect Lafarge's EBITDA margin to be flattish y/y at c.32% vs. the improvement we had previously anticipated from operational cost efficiencies and alternative fuel adoption.
Overall, we have cut our EPS estimate over the '21-23f period by around 13%. Our new price target of N25.8 is down by around 20% because we have raised our risk-free rate assumption by +100bps to 11% to reflect the relatively higher yield environment. Our price target implies a potential upside of 26% from current levels. In terms of expansion, Lafarge has not disclosed any potential acquisitions.
However, capex for '21f is primarily focused on
Management guides to a capex of USD60-70m for '21f. Lafarge shares are trading on a '21f EV/EBITDA multiple of 3.5x compared with 8.3x for DangCem. Year-to-date, Lafarge shares have shed -2.6% vs. the NSE ASI's -3.5% decline. We retain our Outperform rating on the stock.
Q4 '20 results surprised negatively
Lafarge reported Q4 earnings of NGN2.6bn, compares with a loss after tax of -NGN5.1bn in Q4 '19. A moderation in manufacturing and operating expenses helped earnings. Although the y/y performance improved, the results represent the firm's worst quarterly performance in 2020. Management proposed a dividend of NGN1.00 (similar to 2019) which implies a yield of c.4.9%.
On a full-year basis, while sales of NGN230.6bn were up 8% y/y, PBT of NGN37.6bn grew 110% y/y. PAT of NGN30.8bn declined by around -73% y/y because Lafarge booked gains of NGN99.6bn from the sale of its South African business in 2019.