Thursday, July 21, 2016 5:45pm /Vetiva Research
· H1’16 volume down 11% on disruptions to energy supply
· N28 billion FX losses in Q2 further dampens earnings
· Energy outlook remains bleak, volume pressure might persist
· 12-month target price slashed to N70.24 (Previous: N86.07)
WAPCO reported loss after tax of N30.2 billion in H1’16 following another disappointing quarter. In line with the profit warning earlier released by management, Q2 performance of Nigeria operations was depressed by unrealized foreign exchange losses of c.N28 billion (on dollar denominated loans) amidst the 42% currency devaluation in June. We note that even if we strip out FX losses, Q2 performance would remain quite weak with bottom line still coming in as a loss.
Following the slump in Q1 topline in Nigeria operations, we anticipated that the 8% price increase effected in the final week of Q1, coupled as return to normalcy in South West and South East operations (following plant maintenance in Q1 and recovery from Q4 flood) to drive recovery in subsequent quarters.
However, whilst the price increase came to play as average cement prices in Nigeria rose 16% q/q in Q2, volume recovery expectation was cut short by disruption to energy supply. Gas supply was down to 75% and 50% from 88% and 90% in South West operations and South East operations in Q1 respectively.
Also, amidst upgrade to coal mill, coal use in ASHAKACEM declined to the 60s percentile (Q1:80s). Overall, group Q2 revenue could only recover 5% q/q to N54.9 billion (10% behind our estimate) even with a 23% q/q growth in the South African operation.
Still bleak energy outlook
From the 20 July analyst call, we understand that there are ongoing plans to increase the use of alternative fuel in South West and South East operations in a bid to mitigate energy risks going forward. Although we welcome the plan, we are however little convinced of any meaningful traction that will alter status quo before the year runs out.
As such, we think volume recovery might remain challenging in H2’16 even as outlook on gas supply remains bleak given heightened militant activity on Nigeria’s oil & gas infrastructure. We think Q2 levels may be a base case expectation for volume in the subsequent quarters, particularly in the South West and South East operations.
We are more optimistic on volume from ASHAKACEM given its zero exposure to gas. In all, we revise our FY’16 volume estimate for Nigeria to 6.2 million MT (Previous: 6.4 million) whilst our South Africa volume forecast is maintained at 2.9 million. Consequently, we revise our FY’16 turnover forecast is revised to N227.5 billion (N235.1 billion).
FY’16 earnings outlook incites lower valuation
Having raised N60 billion in the first tranche of its N100 billion bond programme (Interest rate of 14.6%), management explained that it is still weighing options on whether to explore the headroom to pay down more of its foreign currency loans. This however, will be contingent on improvement in liquidity at the interbank FX market.
We continue to watch that space closely. UNICEM’s new 2.5 million MT is also on track for commissioning in H2. After adjusting our model to reflect a cautious stance on energy supply and H2’16 volume, the effect of currency depreciation on dollar-indexed input costs and Q2 FX losses, we estimate FY’16 net loss of N42.6 billion.
Also, after updating our Cost of Debt assumption to reflect the bond issue, WAPCO’s WACC has risen to 14.7% (Previous: 12.4%). This, coupled with the increase in WAPCO’s number of outstanding shares (following acquisition of the final 50% stake in UNICEM), lowers our target price to N70.24 (Previous: N86.07).
1. Lafarge Africa Plc Reports Pre-tax Loss of N28bn Driven by FX Losses
2. Lafarge Africa Plc Profit warning: Any Cause for Panic?
3. Lafarge Africa Plc Issues Profit Warning for Q2'16 Results; To Be Impacted by Naira Devaluation
4. Lafarge Africa Plc is Moving to Neutral on Weak Q1 2016 Results
5. Lafarge Africa Plc Notifies Of a N100bn Bond Issuance Programme
6. Lafarge Africa Plc to Acquire Additional 50% Equity Interest in Unicem
7. Lafarge Africa Restructured to Solidify Earnings High Margin UNICEM to Improve Group Earnings
8. Lafarge Africa Plc increases Stakes in UNICEM
9. WAPCO Q1 16 Results - Marked Downward Revisions to Consensus 2016 PBT Forecast Expected
10. WAPCO Declares N1.87bn Loss in Q1 2016 Result SP N74.00k