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Lafarge Cement WAPCO FY'10 Earnings Release - 060411




Tuesday, April 05, 2011, Vetiva Research
Do find below extracts of Vetiva research’s earning review of Lafarge Cement WAPCO (WAPCO) Plc FY'10 Release:
Analysis of result
Lafarge WAPCO’s turnover at N43.84 billion largely aligns with our expectation, coming in 2% higher than our forecast of N42.9 billion. On a QoQ basis, we saw an 8% growth in top-line to N10.795 billion, from N9.998 in the Q3’10. Profits were however unsatisfactory as reported PBT of N8.464 billion declined by 8.4% contrary to our expectation of a 24.7% increase.
According to Lafarge WAPCO’s management, the decline in bottom-line was caused by operational challenges (which led to the shutting down of the Ewekoro Plant for 41 days in Q4’10), and the resultant higher production costs from old clinker stock milled to produce cement.
Investment Thesis
We retain a long term positive outlook on Lafarge WAPCO, despite the disappointing net earnings in FY’10 results. Our optimism is predicated on four key reasons;
1.    The strong top-line growth and higher efficiency that the second Ewekoro (Lakatabu) Plant would add to the company’s operation when the plant comes on-stream later this year.
2.    We are convinced that the company’s management would work more tenaciously to deliver good numbers given the current debt overhang (about C225 million secured for the construction of the new plant) on the company.
3.    The backing and commitment of the parent – Lafarge SA – remains strong, given its huge investments in the expansion of the company.
4.    The opportunities presented by the deficit of physical infrastructure in Nigeria simply show that the growth potential of the cement sector cannot be overemphasized, despite increasing competition. We believe Lafarge WAPCO, given its strong brand name is  poised to maximize this growth potential.
Revisions to our forecasts
While we still expect strong growth in FY’11 numbers (turnover: 53%; PBT: 77%), Q1’11, contrary to the historical pattern would likely account for the smallest portion of FY’11 earnings.
The boost expected in FY’11 earnings would stem from increased production output by H1’11. Hence for Q1’11, we project a turnover of N12.85 billion, which would translate into an increase of 18.8% from Q4’10 and  a pre-tax profit of N1.95 billion.
After adjusting for the FY’10 numbers, we arrive at a revised target price of N49.55, obtained by rolling our DCF estimate of the company’s fair value one year forward at its WACC. Our revised target price of N49.55 still supports a “Buy” rating on the company’s shares as it implies a potential return of 28.7% relative to today’s closing price of N38.50.
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