Tuesday, April 12, 2016 12:05PM /FBNQuest Research
Outperform rating unchanged despite cuts to our EPS f’csts
Following Lafarge Africa’s (Lafarge) weaker-than-expected 2015 results, we have cut our EPS forecasts by an average of -36% over the 2016-17E period. In addition to the weak 2015 results, the cuts to our EPS forecasts are driven by a) a 6% reduction to our 2016E pricing assumption for Nigeria to c.N27,854 (US$135) per tonne, b) a 4.2x increase to our interest expense forecast to N17.7bn and c) our negative forecast of -N4bn in other expense (vs. N887 previously) coming from UNICEM’s consolidation.
Despite the scale of the cuts to our EPS forecasts, our new price target of N90.9 is around 17% lower than our previous target because we have reduced our capex estimates by an average of 14% over the 2016-17E period. Lafarge shares have underperformed the NSE this year, shedding -22.5% ytd (vs. -13.9% for the NSE ASI).
Given the sell-off in the shares ytd, our price target implies a potential upside of 21%. As such, we retain our Outperform rating.
Weak 2015 results; PBT down 28% y/y…
Lafarge’s 2015 results showed that PBT and PAT declined by -28% y/y and -20% y/y to N29.8bn and N27.0bn respectively, despite the consolidation of UNICEM’s numbers for the first time.
The y/y decline on the bottom line was driven by a 135% y/y spike in other operating expense to N13.3bn, a 14% y/y rise in net interest expense to -N9.0bn and to a lesser extent a -95bps y/y contraction in gross margin to 30.9%. These negatives completely offset a 3% y/y growth in sales to N267.2bn and resulted in PBT declining by 28% y/y.
Thanks to a lower effective tax rate of 11.0% (vs 15.5% in 2014), the decline on the PAT line narrowed slightly to -20% y/y.
…driven by subdued pricing & one-off items in Q4 2015
Apart from weak pricing in Q4, which saw prices decline by around N9,000 per tonne, restructuring costs of N4.5bn and a N10bn FX loss for UNICEM also weighed on the results.. Management now intends to scale back the planned expansion of Ashaka Cement to 1.5 million tonnes (mt) from 3mt previously. As such, we have cut our capex spend by around 14% over the 2016-17E period to an average of N30.9bn per year.
Beyond Q4, although we believe that the sector will benefit from the increased share for capital spending in government’s 2016 budget proposal, we do not expect this to have a meaningful impact until H2 2016, due to the delay in the passage of the budget. While we forecast flattish sales growth to N265.3bn in 2016E, we see EPS growth of 19% y/y on the back of weak base effects.
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