Lafarge Africa Divests From SA Operations; Approves Merger Proposal For ReadyMix Business Segment

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Wednesday, June 19, 2019   /07:57PM / By Proshare Research / Header Image Credit:  Proshare

 

The Board of Directors of Lafarge Africa Plc recently gave a nod of approval to its recent Q4 2018 and Q1 2019 Results. Nigeria’s second largest building materials (Cement) company closed the year 2018 with a net sales figure of N308.43bn representing a year-on-year (Y-o-Y) growth of 3.1%. Loss before tax moved from N-34.03bn in FY 2017 to N-19.51bn in FY 2018, or what amounted to an earnings before tax growth of 42%. The earnings growth took place in a market that jogged ahead at a modest 6.76% on a compound annual basis (CAGR).

The company’s Q1 2019 Results saw net sales dip by -2.6% on increased volume. The fall in net sales reflected temporary price pressure instigated by one of Lafarge’s competitors adopting a price-advantage market strategy. This may not be sustained for long, as lower economies of scale and higher unit costs would likely squeeze margins and force the company to reverse its price cut to protect profitability and guarantee cost recovery. 

Meanwhile in Q1 2019, Lafarge was able to achieve operating earnings before interest, taxation, depreciation and amortisation (EBITDA) of N15.3bn up +8% from N14.2bn in Q1 2018. This showed that in its core business of manufacturing cement, the company strummed up a stronger performance its core business. Operating profit went up by 35% from N6.3bn in Q1 2018 to N8.4bn in Q1 2019. The company pulled this off by significant improvement in its South Africa operations and progress in its major Nigerian activities. Cement volumes went up by +2.5% despite a depressed market and price moved up by +5% in February and March 2019 (this was 90 basis points above inflation rate of 4.1%).

 

The sell off and Nigerian Angle 

In 2019 Lafarge Africa will by Q3 2019 have disposed of its South African operations. This, as far as some analysts are concerned, will liberate the company to group domestic Nigerian scale and scope and enhance the cement makers overall market value. According to the company the sell-off should lead to a number of benefits for the entity which will include the following:

 

  • Selling off a loss leading enterprise with a medium-term turnaround perspective
  • Raising $317m to pay off a related-party loan of $293m
  • Boosting Lafarge Africa’s adjusted free cash flow (AFCF), given the reduction in debt service payments
  • Canceling out all foreign currency-related borrowing liabilities and reduce annual interest expense by N9.9bn on account of the full repayment of the foreign debt
  • Creating opportunity for Lafarge to expand existing plant capacity and improve economies of scale and scope
  • Allowing the company’s management focus on its Nigerian operations that hitherto accounted for about three quarters of the building material manufacturers total business
  • Improving the company’s statement of financial position from 2019 onwards

 

It appears that after the paying off of its shareholders loan the company will be left with following debts:

·         2nd Tranche of its Corporate Bond of N33.8bn with maturity in June 2021

·         CBN Power Intervention Funds through Bank of Industry (BOI) of N19.9bn

 

Cutting back debt should improve the enterprise value (EV) of the company and deleverage its whole operation improving its equity price when market professionals price-in the value of reduced operational and financial risk.

 

Illustration 1 Lafarge Africa’s Corporate Action 2019

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In Q1 2019, the Nigerian market saw trade volumes rise by +6% and Lafarge Africa’s sales (by volume) grow by +5%. The first quarter sales were boosted by the January SAP Go-Live campaign but the quarterly figures was tempered by a plant strike in February. March sales were the highest of the last three years. However, price erosion as a result of a rise in capacity of a rival resulted in sales growth of +0.6%. 

Lafarge Africa’s Nigerian operating performance hit N20.6bn supported by a new Route-to-Market strategy and the company’s Energy and Alternative Fuel strategy, including rethinking of logistics and industrial activities. This led to a cost saving of about N1bn. 

 

Q2 Outlook 

The push towards cost efficiency should see the company improve earnings per share in Q2 2019 and taken advantage of accounting provisions of IFRS16 (which replaced IAS 17) should improve the company’s bottom line earnings as it is able to spread depreciation charges on its leased assets on a Fair Value (FV) basis. This is of particular advantage to Lafarge as most of its logistic assets are leased in a different business model from the market leader, Dangote Cement, which has direct purchase ownership of logistic assets of about 7,000 articulated long trucks.  

To hold down costs further Lafarge’s Alternative energy strategy may provide significant 2019 cost gains in dragging down energy expenses in the South West and South East. The company’s Northern operations are still largely dependent on gas but if the strategy works well enough in the South the company may think of adopting Alternative energy solutions to cost containment in other parts of the country, especially the North east. Insight into the company’s energy migration is given in Table1 below.

 

Table 1 Lafarge Africa’s Fuel Cost Mix 2016-2017


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Preparing For A Rebound 

The reconstruction of the Apapa Port Road by Dangote Group and Nigerian Flour Mills under a Public Private Partnership (PPP) may open an opportunity for the increasing use of concrete for road construction as the current price of cement provides opportunity for constructing more durable roads at the same cost as the less durable asphalt alternative. 

Furthermore, with a housing gap of 17m housing units the upside potential for cement growth is still large in Nigeria, but a lot of the upside relies on the various levels of government having resources for capital expenditure. This in turn is tied to oil revenues and creates market risk factors beyond the control of cement makers. So far the numbers have held up nicely for building material manufacturers but how long this will last is anyone’s guess. 

To ensure that the business remains viable and sustainable, finding the right energy and power mix to guarantee affordable pricing of the product will be critical in months and perhaps years ahead.  Lafarge’s efforts at discovering the right mix amongst energy alternatives may become a definitive move in securing future profitability. Near term consequences of deleveraging and operating cost containment suggests that Lafarge (contrary to recent analysts perspectives) will see earnings growth from reduced debt repayment provisions and IFRS16 adjustments in 2019 and this , in turn, should lead to hidden value equity opportunities.

 

Chart 1 Lafarge Africa Plc Price and Volume Movement Q1 2019

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Source: NSE/Proshare Research

 

Investor outlook for Lafarge Africa is currently sober. Over Q1 2019 (see chart above) the stock so some aggressive volume movement in January which pushed the price to move above a support value of N11 per share. Between January and February the share price shuffled between N12.00 and N12.50 before breaking out by mid quarter as a result of heavy trading. The large volume movement continued to nudge the price to between N12.50 and N 13.50. By March investment analysts waiting for FY 2018 Results of the company decided to mark its value down resulting in a drop in price to just over N12.00 on slightly rising volume. 

The company’s recent FY 2018 and Q1 2019 Results should lift spirits as analysts go back to recalculate their numbers and review the context of potential  earnings in 2019.

 

Update on Divestment and Merger 

Lafarge Africa Plc notified of its decision to divest from its South Africa operations by selling to another affiliate of the LafargeHolcim Group. This strategic decision is expected to strengthen its balance sheet going forward when the sale is finally completed in Q3 2019. 

As parts of the resolutions reached at its board meeting held on June 18, 2019, the Board of Lafarge Africa Plc also considered and approved proposal for the merger of Lafarge Ready Mix Nigeria Limited which is a wholly owned subsidiary of Lafarge Africa and Lafarge Africa Plc. 

When the proposed merger is eventually concluded, Lafarge Africa Plc is expected to be the surviving entity.

 

Visit Lafarge Plc IR Page in Proshare MARKETS

 

Graph – One Year Share Price Movement

 

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Table - Q1 2019 Results

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