Post-consolidation benefit: Increased economies of scale


December 31st, 2014/ DLM Research

Investment Summary:

Consequent to the release of the first consolidated nine-month results of Lafarge Africa Plc (formerly Lafarge WAPCO), we update our views and reiterate our long term BUY recommendation on the stock. Nevertheless, in this note, despite investor‘s over-reaction to the recent DCP‘s 14% price reduction which has been reversed, we reviewed our 12-month target price upward to 131.24 per share, (previous TP: 120.00) on the back of strong cash flow following the strategic business consolidation and management plans to exceed performance standards.

In an effort to expand regionally and position for strong growth, the company continued its merger and acquisition strategy –with the acquisition of 1.312billion (58.61%) shares of Ashaka Cement and increase of shareholdings in UNICEM. This will provide leverage for Lafarge to scale-up regionally and boost the overall market share. Particularly, whilst the addition of UNICEM came as expected, we see it as a direct response to competitor‘s moves – a desire to strengthen its competitive strength, strengthen cash flow for future growth given its post-merger strong balance sheet position. Nevertheless, we do not expect the company to provoke or instigate any price war, which is rational when a company is not the biggest player in an oligopolistic environment. With current cement capacity of 12 million metric tonnes per annum, Lafarge is already positioning for future growth with an additional 5.5mmt expected by 2017. However, we expect profitability margins to improve supported by strong operating assets mix, demand-supply balance and the operational leverage benefits from new plants coming on stream. Our long term outlook is strongly positive as we stable price in the industry as DCP has gradually increased its cement price.

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