Lafarge Africa records N28.3B Profit After Tax
Lafarge Africa Plc (“WAPCO” or “the Group”) one of the largest manufacturers of cement in the country has declared an impressive 20.3 percent year-on-year revenue in half-year 2021.
According to the report by United capital research, the increase was buoyed by improved sales volumes across its cement and aggregate segments, as well as higher pricing. The cement manufacturer’s key cost lines rose faster than sales, driving gross margin compression.
Overall, WAPCO’s steady bottom-line improvement remains highly encouraging as PAT expanded by 21.4% y/y to N28.3bn (110.0% q/q in Q2-2021) and net margin expanded by 18bps to 19.5%. We review the half-year performance and provide our outlook on the business.
Robust demand and higher pricing support Revenue growth
The cement industry in Nigeria has enjoyed strong growth in recent quarters and WAPCO has evidently not been left out. Revenue grew impressively by 20.3% y/y in H1-2021. This was on the back of cement price increases, which drove a 12.0% y/y increase in average Revenue-per-tonne to an estimated N50,005.17, while volumes expanded by c.5.2% y/y to 2.9mmt in the first half of the year. Segmentally, Cement sales grew by 19.2% y/y to N141.4bn as Aggregate and Concrete sales surged 84.6% y/y to N3.6bn. The double-digit Revenue increase emanated from resilient cement demand in the period, which was notably attributed to strong demand from homebuilders. Nonetheless, much of the expansion is owed to the low base of Q2-2021, as volumes were flattish in Q1-2021. Consequently, Revenue growth in H1-2021 reflects the low base from Q2-2020 (-5.1% y/y) as Q2-2021 Revenue advanced by 29.4%, compared with 12.2% y/y growth in Q1-2021. On price increments, we note that higher cost pressures due to currency devaluation drove price increases early in the year, which supported a 41.0% q/q Revenue growth in Q1-2021.
EBITDA margin buckles due to inflationary and currency pressures
Cost of Sales for the cement manufacturer climbed by 23.0% y/y, on the back of a 53.2% y/y surge in production fixed costs linked to USD-denominated expenses. This forced a 147bps contraction in Gross Margin to 33.1%, from 34.6% in H1-2020. WAPCO’s OPEX-to-sales ratio, however, contracted from 8.3% in H1-2020 to 7.4% in H1-2021 due to a 13.1% y/y contraction in Q1-2021. Consequently, EBITDA margin declined by 291bps to 36.1%.
Deleveraging efforts underpin profitability
WAPCO sustained its efforts in deleveraging its balance sheet as debt balance declined by 60.3% YTD to N19.8bn as of H1-2021, from N49.7bn as of FY-2020. Consequently, interest expense tumbled 39.9% y/y to N2.7bn. As a result, Pre-tax profit surged 27.8% y/y to N36.7bn, while Post-tax profit grew at a slower 21.4% y/y to N28.3bn, due to higher effective tax (H1-2021: 22.9% vs H1-2020: 18.9%). WAPCO also saw margins expand on the back of the impact of its deleveraging efforts on profitability. As such, PBT and PAT margin expanded to 25.3% (from 23.9% in H1-2020) and 19.5% (from 19.4%). Notably, the company has completed the disposal of its c.35.0% stake in Continental Blue Investment Ghana Ltd (CBI) that was approved in Jan-2021, which translated to a gain on disposal of N826.9m as reported in the H1-2021 financials.
Outlook: Demand, deleveraging, to support sales and profitability
Cement demand dynamics in H2-2021 are crucial to the group’s performance in the period. The lower interest rate environment would improve access to debt capital to finance construction activities. This is likely to support real estate and construction in H2-2021. Public demand is expected to remain strong in the half-year, with the FG’s increased focus on infrastructure and impressive non-oil revenue receipts. However, the high base of H2-2020 will likely calm growth.
WAPCO has employed a different strategy compared with peers in meeting rising demand. While competitors focus on growth through capacity expansion, the Group is looking within, concentrating on debottlenecking existing plants to unlock capacity. Nonetheless, we anticipate steady demand in H2-2021 and expect WAPCO’s cement sales volume to amount to 2.8mmt in H2-2021, balancing the downside risks of potentially disruptive rains in Q3-2021 and the supportive unlocked capacity from the Ewekoro debottlenecking exercise. Consequently, our revenue projection for FY-2021 is an expansion of 24.0% to N285.9bn.
The Group’s renewed focus is a positive, as evidenced by improvements in key liquidity and profitability metrics. However, distance needs to be covered as regards cost management. USD-linked expenses are likely to remain a cog in the wheel, given recent currency depreciation. The inflationary environment will equally remain detrimental to the producer’s cost of materials and other operating cost lines. Yet, we believe a push for higher volumes will be prioritized over price increments in H2-2021, given competitive dynamics and capacity expansion from competitors which threaten WAPCO’s market position. We like the cement manufacturer’s balance sheet restructuring efforts in recent quarters, as well as its disposal of counterproductive assets in non-Nigerian markets which has seen a consistent reduction in financing costs, improved cash balances and profitability. We expect finance costs to remain low through H2-2021 (FY-2021e: N5.7bn). This, alongside an effective tax rate assumption of 25.0%, informs our EPS growth forecast of 61.2% y/y to N3.2/s, an upward revision from N2.2/s.
BUY rating maintained as ticker remains significantly undervalued
Adjusting our model estimates for the updated forecasts, we review our year-end target price upward to N31.2/share, from N27.7/ share. The stock’s current market price of N22.00/share reflects a 21.7% discount to our year-end target price. Also, the counter currently trades at a P/E of 9.9x, compared with domestic peers, DANGCEM (12.5x) and BUACEMENT (28.5x). Thus, we maintain our BUY rating on the ticker.