Wednesday, July 26, 2017 5:48 PM /FBNQuest Research
19% Increase to Our PT; Upgrading to Outperform
We upgrade our recommendation on Lafarge Africa (Lafarge) to Outperform from Neutral following its stellar Q2 2017 results which surprised positively.
Although PBT was in line with our forecast, PAT beat soundly (by 260%), largely due to positive surprises on the tax and other comprehensive income (OCI) lines.
While a tax rebate of N5.9bn was due to capital allowances on UNICEM, the OCI was boosted by an exchange rate gain of N5.6bn. Further up the P&L, the results were underpinned by solid topline growth of 34% y/y, due largely to a supportive pricing environment.
Beyond Q2, we expect higher pricing in Nigeria to continue to offset the subdued outlook for unit volume growth, for which we forecast an -11% y/y decline for Lafarge’s Nigerian operations in 2017.
Consequently, we have increased our EPS forecasts by around 25% on average over the 2017-19E period and our price target by 19% to N75.6. Given the spike in deferred tax assets to N45.2bn (from N2.6bn in Q1 2017) and management’s disclosure of additional capital allowances for UNICEM, we have reduced our effective tax rate for 2017E to 10.8% from 30% previously.
Since the publication of its results, Lafarge shares have gained 15.4% (vs. +9.1% ASI). Notwithstanding, at current levels, the shares are trading on a 2017E P/E multiple of 7.6x compared with 15.2x for Dangote Cement.
Our new price target implies a potential upside of 24% from current levels.
Q2 PBT improved to N20.3bn vs. a marked loss in Q2 2016
Lafarge’s Q2 PBT came in at N8.7bn, compared with a pre-tax loss of – N28.0bn in Q2 2016. The key drivers behind the PBT result were sales growth of 34% y/y and a 1,864bp expansion in gross margin to 32.0%.
These positives completely offset a 78% y/y rise in opex and a 138% y/y spike in net interest expense. Thanks to a tax credit of N5.9bn and a positive result of N5.8bn on the other comprehensive income (OCI) line, PAT came in at N20.3bn.
Sequentially, sales and PBT were down by 10% q/q and 8% q/q respectively. However, PAT expanded by 44% q/q thanks to the positive results on the tax and OCI lines. Compared with our forecasts, sales missed by 11%.
Although PBT was in line with our N8.6bn forecast, PAT beat by 260%, mainly due to the tax rebate of N5.9bn and the positive result of N5.8bn on the OCI line. On a half year basis, sales grew by 44% y/y to N154.8bn.
PBT and PAT also grew to N18.2bn and N34.5bn, compared with the pretax and after tax losses of -N30.2bn and –N30.7bn that the company delivered in H1 2016.
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