Thursday, July 26, 2018 / 12:38 PM / Vetiva Research
· SA business, high finance costs remain pressure points
· Nigeria operation remains strong, EBIT margin improves q/q
· Unveils deleveraging plans to support earnings
· Estimates, TP revised lower on S.A struggles
Faltering South Africa drags earnings…yet again
Lafarge Africa recently released its H1’18 results, reporting weak earnings for the period. In spite of a 5% y/y increase in topline to ₦162.3 billion (Vetiva: ₦157.9 billion), the Group reported a Loss-after-tax of ₦3.9 billion, a long way off H1’17 PAT (₦19.7 billion) and our ₦1.0 billion loss expectation. Notably, the pressure points remained the same; an ailing SA business and high finance costs. The Nigerian business was flattish y/y, with H1’18 EBITDA coming in at ₦35.1 billion, much in line with H1’17 (₦36.2 billion) – albeit at a lower margin (240bps lower y/y to 30%).
However, South African operations remain challenged within the quarter, reporting negative EBITDA (-₦3.3 billion) for the fourth consecutive quarter and dragging H1’18 Group EBITDA 25% lower y/y to ₦27.7 billion. In addition, the Group reported a 128% jump in Net finance costs to ₦22.7 billion (Vetiva: ₦16.3 billion), driven by higher borrowing costs as well as a ₦4.3 billion FX loss in Q2’18 standalone. Following this, Group Earnings before tax fell to a ₦6.3 billion loss (Vetiva: ₦1.7 billion loss), whilst after-tax earnings fell to a loss of ₦3.9 billion, softened by a ₦2.4 billion tax credit in Q2.
Nigeria business remains healthy
As earlier highlighted, Nigerian operations remained healthy. Slightly higher prices in Q2 supported a 3% q/q rise in revenue to ₦59.3 billion, even as volumes stayed flat at 1.3 million MT (Vetiva: 1.2 million MT) within the quarter. Furthermore, supported by an improving fuel mix, EBITDA rose 14% q/q to ₦19.1 billion at a higher margin of 32% (Q1’18: 29%). However, operations in South Africa continues to drag the Group performance.
In spite of an 8% rise in Revenue to ₦22.4 billion, EBITDA for the region came in at a ₦3.3 billion loss within the quarter, albeit a modest improvement on the ₦4 billion loss reported in Q1’18. We note that management remains optimistic about a turnaround in this business in the near term. We understand that management has implemented strategies which include reducing operations in Readymix and Aggregates (both currently lossmaking), reviewing procurement contracts, and improving general business logistics. We are however more cautious and wait to see some traction on the proposed plans.
Proposes deleveraging to improve performance
As noted in our Q1 report “Still navigating murky waters”, improvements in Lafarge’s debt balance post-rights have been muted, due to new additions. Moreover, finance costs have remained elevated, contributing to the weak earnings in recent quarters. To combat this, management has unveiled a two-pronged plan to reduce borrowings. Firstly, the board approved a plan to reduce existing shareholder loans (currently at $315 million) to $293 million. In addition, Lafarge Africa plans to issue a fresh ₦90 billion Rights issue in 2018 to refinance short term naira loans and improve working capital. We await further details on the program from management before including the issue in our model.
Target price cut amidst persistent struggles in S.A business
Following better-than expected volume turnout from the Nigerian business and in line with our positive outlook for the Nigerian cement sector, we raise our FY’18 cement volume expectations modestly to 5.0 million MT (Previous: 4.9 million MT). After accounting for higher prices in Q2, this translates to an FY’18 Revenue of ₦228 billion (Previous: ₦216 billion).
Meanwhile, whilst we remain cautious about the SA operations, we retain our expectation of 2.5% revenue growth in the region, following a price hike in Q2. Overall, we raise our FY’18 group revenue expectation to ₦324 billion (Previous: ₦312 billion), translating to an 8% y/y growth. However, after adjusting our cost estimates to reflect H1’18 run rate, we cut our FY’18 EBITDA expectation from ₦54 billion to ₦48 billion, translating to a margin of 15%.
Furthermore, given the huge debt profile and the pressure from high borrowing cost, we expect Finance costs to remain elevated. After accounting for interest and tax, we slash our bottom line expectation to a ₦5 billion loss (Previous: ₦2 billion profit) and our target price to ₦39.16 (Previous: ₦57.63).
With the South African business accounting for a large part of topline (c.30%), we believe the outlook for the group will be driven largely by the pace of turnaround in the region. Therefore, whilst the upside to our target price suggests a buy, we place a HOLD on Lafarge as we continue to monitor the situation in South Africa.
Onyeka Ijeoma firstname.lastname@example.org
1. Lafarge Africa Plc Q2 18 Results - Unchanged Rhetoric As Earnings Remain Depressed