Wednesday, July 27, 2016 10.28AM / FBNQuest Research
Limited cut to our PT on roll-over; Upgrading to Outperform
Following Lafarge Africa’s (Lafarge) Q2 2016 results which came in well behind our forecasts, we have cut our EPS forecasts by -57% on average over the 2017E-18E period. Regardless of the cuts to our EPS forecasts and a 200bps increase to our risk-free rate to 14.5%, our new price target of N71.8 is barely unchanged mainly because we have rolled forward our valuation to 2017E.
Having shed -19.7% in the last one month (vs. -8.8% NSE ASI), the shares now provide a potential upside of +21.7% from current levels. Consequently, we upgrade our recommendation on the stock to Outperform from Neutral.
Pre-tax loss of N28.0bn driven mainly by fx losses
Lafarge’s Q2 2016 results showed a pre-tax loss of -N28.0bn. The pre-tax loss was mainly driven by an unrealised foreign exchange loss of –N27.5bn. However, thanks to a positive result of N5.1bn in other comprehensive income, the after-tax loss narrowed to N24.3bn.
Moving up the P&L, a 30% y/y reduction in sales to N54.9bn and a 2411bp contraction in gross margin to 13.3% also weighed on the results. Sequentially, sales grew 5% q/q.
However, the pre-tax and after tax losses in Q2 are more significant than the –N2.2bn and –N6.4bn that the company reported in Q1 2016. The pre-tax loss reported in Q2 makes it the third consecutive quarter of negative earnings for Lafarge.
Fuel supply issues were also a drag on earnings
Although the unrealised fx loss was the primary drag on earnings, challenges surrounding energy adequacy, particularly disruption to gas supplies to plants in the the south-west (and to a lesser extent the south-east), high cost of alternative fuel (LPFO) and weaker pricing y/y also weighed on earnings.
Given the issues with gas supply, management intends to increase the use of alternative fuels at the south-west operations (particularly Ewekoro 1) by investing in equipment to increase flexibility in fuel utilisation. We expect the company to report a pre-tax loss of around -N31.6bn in 2016E.
Beyond 2016, we expect volume despatches to increase by 11% y/y in 2017E following the commencement of operations of UNICEM line 2. As such, we forecast 2017E sales growth of 14% y/y to N250.6bn. We also see PBT coming in at N10.0bn (vs. -N31.6bn 2016E).
1. Energy Risk, FX Pressure Spell Bleak Outlook for Lafarge Africa Plc
2. Lafarge Africa Plc Reports Pre-tax Loss of N28bn Driven by FX Losses
3. Lafarge Africa Plc Profit warning: Any Cause for Panic?
4. Lafarge Africa Plc Issues Profit Warning for Q2'16 Results; To Be Impacted by Naira Devaluation
5. Lafarge Africa Plc is Moving to Neutral on Weak Q1 2016 Results
6. Lafarge Africa Plc Notifies Of a N100bn Bond Issuance Programme
7. Lafarge Africa Plc to Acquire Additional 50% Equity Interest in Unicem
8. Lafarge Africa Restructured to Solidify Earnings High Margin UNICEM to Improve Group Earnings
9. Lafarge Africa Plc increases Stakes in UNICEM
10. WAPCO Q1 16 Results - Marked Downward Revisions to Consensus 2016 PBT Forecast Expected
11. WAPCO Declares N1.87bn Loss in Q1 2016 Result SP N74.00k