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Lafarge Africa Plc - Q2-17 PAT; Strong Delivery, Amidst Energy and Leverage Challenges

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Thursday, July 20, 2017 5:39 PM /Cordros Capital Research 

Lafarge Africa Plc (LAFARGE) released Q2-17 result this afternoon, wherein revenue grew by 33.8% y/y while net profit was N14.57 billion, from a loss of N28.37 billion same period of last year. 

Compared to Q1-17 however, revenue and PBT were down 9.6% and 7.7% respectively, while net profit, helped by a N6.2 billion deferred tax credit, grew by 182.3%. The revenue of N73.5 billion was in line with consensus while the net profit of N14.6 billion almost doubled consensus’ N7.7 billion. 

The y/y revenue growth was expected, as relatively higher Nigerian and South African cement prices continue to compensate for softer demand. But given the stability of prices (especially in Nigeria) since the increases implemented thus far this year, including in April, we link the q/q revenue contraction to lower sales volume. 

We note that in addition to the impact of rising prices on demand, the long, heavy rainy season in Nigeria between April and June may have contributed to lower cement consumption. 

On segment basis, cement revenue declined by 16% q/q while aggregate/concrete and other revenues grew by 19% and 29% q/q respectively. 

Noteworthy from the second quarter result is the strong rebound in gross margin to 32%, from 25.7% in Q1-17 and 14.9% in Q1-16. 

While noting possibly transmission from (1) additional increase in cement price and (2) underlying exchange rate-related cost savings, we would seek management guidance on this line, given that similar growth in Q4-16 was subsequently attributed (by the management of LAFARGE) to higher by one-offs relating to accounting treatment of some costs and gas contracts. 

Meanwhile, we suspect from the significant increase in variable cost (84% q/q), notwithstanding lower sales volume, that LAFARGE is still faced with production cost challenges (we understand the company’s South West operation had issues with energy). 

On the negative , operating expenses increased by 77.3% y/y and 22.4% q/q, driven by admin expenses which increased by 21% y/y (42% q/q), in continuation from the 53% y/y increase recorded in Q1. 

Also on the negative, net finance charge increased 200.6% y/y, driven by declines in interest income on short term fixed deposits and loan receivable, but principally, by the increase in interest expenses on borrowings (+42.7% q/q and +77.3% y/y). 

Total borrowings at the end of the period was N244.7 billion, from N127.6 billion at the end of 2016FY and N142.1 billion in Q1-17. 

LAFARGE is in the process of raising N140 billion via Rights Issue, the proceeds of which would be utilized for the repayment of shareholder loans worth USD581 million at the end of 2016FY. 

As stated earlier, LAFARGE’s recognition of a deferred tax credit of N6.2 billion was a major boost to net profit. Recall that the company recognized sizeable tax credits in the third and final quarters of 2016.

Overall, over H1, LAFARGE has reported net profit of N19.7 billion, well-ahead of consensus’ N12.9 billion. We look for positive reaction to the latest result on expected upward revision to forecasts. Our estimates are under review. 

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