Tuesday, July 25, 2017 3:40PM/ Vetiva Research
· H1’17 revenue up 44% y/y but down 10% q/q
· EBITDA margin rises 200bps q/q driven by pricing and fuel efficiency
· Tax credit drives 180% q/q PAT rise
· Target Price revised to ₦79.26 (Previous: ₦77.32)
Q2 Bottom Line Supported By Massive Tax Credit
Lafarge Africa wrapped up the first half of the year on a strong note, reporting H1’17 PAT of ₦19.7 billion. This result is not only impressive from a y/y perspective (H1’16: ₦30.2 billion loss), but also when compared to estimates – Vetiva: ₦17.5 billion, Consensus: ₦12.9 billion.
Q2 standalone generated a bottom line of ₦14.6 billion, thanks to a ₦5.9 billion tax credit recognized over the quarter. However, even without the tax credit, earnings would still have come in very decent with PBT printing 8% above consensus.
Although administrative expenses (up 52% y/y) and net finance costs (up 118% y/y) served as pressure points over the half-year, amidst a faster rise in Q2, the impact was largely muted on bottom-line due to strong earnings from operations and the tax credit boost.
Volumes to Remain Pressured On Stronger Cement Pricing
As expected, strong Nigerian cement prices (+68% y/y) continued to weigh on volume (down 20% y/y) but still bodes well for topline growth as the region’s H1’17 revenue rose 45% to ₦111.4 billion.
The absence of the disruptions that plagued volume roll out in the corresponding period of 2016 also supported production; plant maintenance in South West operations, upgrade to ASHAKACEM’s coal mill, and gas shortages arising from attacks on pipeline installations in the Niger Delta.
On a q/q basis however, the region’s Q2 revenue was down 11% amidst a 20% q/q drop in volume. Whilst we acknowledge the further price increase effected in April (on an already high price), we believe the intense rainfall over the quarter equally played a role in the volume decline.
Similarly, South Africa operation recorded an 8% q/q decline in revenue amidst strong cement prices coupled with the recessionary effect on the construction sector.
Meanwhile, Group EBITDA margin over the Q2 period improved significantly both from a y/y and q/q basis. Nigerian operation’s EBITDA margin particularly surged to 37.4% (Q1’17: 30.2%, H1’16: 13.1%) buoyed by the strong cement prices, stable operations resulting from absence of disruptions earlier highlighted, and increasing use of cheaper alternative fuels.
The South African EBITDA margin also firmed up to 5.3% over the quarter (Q1’17: -0.9%, H1’16: 1.7%) due to stronger cement prices and stronger cost discipline.
Overall, the group’s H1’17 EBITDA came in at ₦38.6 billion (H1’16: ₦10.6 billion), with EBITDA margin berthing at 24.9% (H1’16: 9.8%).
Target Price Revised Higher; Buy Rating Maintained
Whilst potential economic recovery and expected increase in FG’s building and construction activities post-budget approval provide some upside to Nigeria’s cement consumption in H2’17, we believe strong cement prices and the intense rainfall outlook would significantly cap volume roll out at Q2 levels.
We also expect South Africa volumes to remain depressed amidst tough economic conditions. As such, we cut our FY’17 volume for Nigeria to 4.8 million MT (Previous: 5.5 million MT; Ytd: 2.5 million MT).
Despite the volume pressure, we expect topline to remain strong; forecast FY’17 revenue growth of 34% to ₦294.4 billion (previous: ₦294.9 billion).
We revise our FY’17 EBITDA higher to ₦72.1 billion (Previous: ₦63.4 billion) amidst increasing traction in the use of cheaper alternative fuels as well as strong cement price outlook, but our PBT lower to ₦31.6 billion (Previous: ₦33.2 billion) after revising our debt projections.
Although management highlighted that there are more capital allowances available to be recognized, we however take a more conservative approach in our H2’17 forecast and thus subject total expected earnings to tax.
We therefore revise our FY’17 tax forecast lower to ₦2.5 billion (previous: ₦5.2 billion) after adjusting for the effect of tax credit in H1’17.
Consequently, we revise our FY’17 PAT slightly higher to ₦29.1 billion (Previous: ₦28.0 billion). After updating our model, we revise our target price to ₦79.26 (Previous: ₦77.32) and maintain a BUY rating on WAPCO.
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