Wednesday, November 04, 2015 6:14 PM / Taiwo Ologbon-Ori . Research
The 9months earnings report presented by Lafarge Africa Plc recently revealed mixed outlook with attendant weakness across the key indicators- In our opinion, this may incite bearish pressure towards the share price of the company soon as market value had depleted by 3.51% in the last 9days.
The turnover posture of the company closed weak at N168.14nillion, representing 5% positive growth against N159.39billion recorded in Q3'14.
Though, the firm sustained top-line growth but we observed weakness when compared with 12.05% (YoY) performance growth posted in Q2'15. This indicates weak product and market penetration as competition grows during the period under review. The unrest that slowed down operations of the ASHAKA in the early year contributed to this outlook while marginal weakness in revenues from South Africa operations also had its impact.
Also, the weakness observed in the operating income and the bottom-line which declined by -12.37% and -6.95% respectively cannot be distant from the factors mentioned above.
We remained worried towards Q3’15 PAT performance (-6.95% fall) of the firm when compared with 22.82% growth (YoY) recorded in Q2'15. The sustained growth in operating and admin expenses remained a burden on the bottom-line of the company amid weak sales. This has translated to weaker PAT Margin, Earnings per share and Returns on Equity accordingly.
The firm's profit margin went down to 18% against 20% recorded Q3'2014, similar pattern was observed in EPS accordingly- an indication of decline in profit base as against expectation during the period, impacted by weak sales and high operating cost coupled with the impact of unrest in the Ashaka area, which was estimated at N2.5billion according to the management. Nevertheless, we commend the 12.83% PAT growth recorded on QoQ basis.
Furthermore, the 10.07% growth in inventory of the cement company gives us concern as this suggests falling market share, which may increase liquidity challenge in near term and of course adversely further impact operating expenses observed above. Though, the overall decline in market demand impacted this outlook significantly. Also, just as noted above, the early year marginal set-back experienced from unrest in Ashaka area could not be distant from this.
In addition to this, the sustained growth in negative working capital posture of the firm by 23% to close at N3.6billion against N2.9billion recorded in 2014 gives us concern. Though, this could be attributable to the sustained aggressive posture of the firm towards investing to capture desired future growth of the cement market impacted this posture. We remained optimistic as the firm sets to optimise its cost structure.
Industry & Competition
The competition within the industry remain stiff as Dangote Cement Plc maintained market lead as sales turnover had indicated in Q3'15
See table. The price slash in Dangote Cement product remains a significant change in fundamentals of the industry and it appeared to have increased sales pressure on the key competitors’ sales and net profit.
Also, considering inventory posture of the market, analysis revealed a general decline in cement demand during the period under review as market averaged 20% growth in its inventory while Lafarge Africa closed with 10.07% growth, far below market average. Meanwhile, other market players closed above market average.
We are also of the view that the falling revenue of the government may further slow down the overall demand in the industry as government may lower its spending on infrastructures and constructions till mid-next year 2016.
However, the active disposure of new government towards partnership with private sectors in addressing infrastructure and house deficit in the country may buffer the anticipated shortfall in demand for cement.
As soon as new government finds its feet, settles down for nation building and infrastructural upgrade in mid-long term, we expect the industry demand to grow significantly.
Price Performance Review
Despite an impressive YTD performance of 19.27% growth in market value, sub-sector analysis revealed the stock to close among low performing stocks in the last one year.
However, further analysis of 9months returns within the sub-sector revealed WAPCO to top the sub-sector with 16.31% market growth while the average growth stood at -2.17%.
From technical standpoint, the share price of the firm is under moderate sell pressure, struggling to stabilize at N95.95kobo (key support point). In the last two weeks, the stock had maintained southwards posture, recording 3.51% loss.
Further analysis revealed a sustained weak bargain tendency from investors while stock remains volatile, driven by profit-taking propensity as the stock booked 8.12% loss and remained unstable in the last 16weeks, following 57.14% growth in market value experienced between December 19th 2014 and August 14th 2015.
Furthermore, technical indicators revealed sustained growing sell tendency from investors while the stock is trading below its 15DMA, 45DMA and 100DMA to close neutral in both short term and mid-long term periods.
Conclusively, the stock has low chance and moderate liability to sustain the low-key demand recorded in the last trading session.
The cut in price remained a fundamental change within the industry and this appeared to have heightened challenges during the period. Apart from the price cut, we are of the opinion that some key underlining factors are taking toll on the performance of the firm as Lafarge Africa sales closed with weak growth with attendant growth in its inventory.
The general decline in market demand toward cement coupled with adverse impact of unrest experienced by Ashaka early this year might have increased pressure on cash-flow.
While we remain optimistic towards improved market share on the back of anticipated growth in market demand, we foresee growing operating expenses, which may increase burden on the bottom-line if the market penetration shrinks further.