Lafarge Africa Plc Upgraded from Neutral to Outperform on Marked Sell-off


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).

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