Tuesday, May 17, 2016 10:42AM/FBNQuest Research
Last week, the board of Lafarge Africa (Lafarge) approved the acquisition of the balance of 50% equity interest in United Cement Company (UNICEM) from Egyptian Cement Holdings BV, a company indirectly held by Lafarge SA. To conclude the acquisition, Lafarge would have to issue about 413.2 million additional shares to bring its share count to almost 5.0 billion shares. The deal is coming at a time when UNICEM plant’s capacity is being doubled to 5 million metric tonnes (mmt).
The proposed acquisition is based on a total market capitalisation of US$295m (for 100% equity) or an implied share price of US$0.36 (N71 per share). In our meeting over the weekend, management disclosed that the implied transaction sum of US$147.5m (for 50% equity stake) was based on an EV/EBITDA (2017E) multiple of 5.3x. This suggests that management expects UNICEM to generate EBITDA of around N44.9bn in 2017E. Despite the imminent coming on-stream of UNICEM, line 2 which is set to commence production in Q3 2016, we find these estimates aggressive due to the time required to ramp-up production to optimal levels.
In 2015E, UNICEM generated an EBITDA of around N19.2bn, which translates to an EBITDA margin of 35.4%. As such, on our estimates, the UNICEM deal implies a trailing (2015) EV/ EBITDA multiple of around 12.4x or an 85% premium to Lafarge Africa’s 6.7x 2015 multiple. After making adjustments for production ramp-up for line 2, we forecast EBITDA of N23.8bn for UNICEM in 2017E (36.0% EBITDA margin). This implies an EV/EBITDA multiple of around 10.0x. Although this multiple is higher than the 6.6x 2017E multiple that Lafarge Africa is trading on, it is still well below the 10.5x multiple that Dangote Cement is trading on.
Lafarge Africa shares were up by 4.7% to N71.2 on the Friday and are up by another 4.0% today. Given the share price movement, we can only conclude that the market is viewing the deal favourably due to potential synergies and the enhanced scale of the firm. Until there is more clarity on the numbers, at this time, it is difficult to assess the potential impact of the deal on the bottom line. Ytd Lafarge Africa shares have shed -23.6% compared with the -6.4% loss delivered by the ASI. At current, levels on our published forecasts, the shares are trading on a 2016E P/E multiple of 14.5x for 11% EPS growth in 2017E.
Our estimates are under review.