Lafarge Rated Buy after Exciting Earnings Outturn in Q1-2021
After a solid start to the year, equity analysts at Chapel Hill Denham said they have retained buy rating on Lafarge Africa Plc. (Ticker: WAPCO) stock, with a 12-month target price of N34.22.
Recall the second largest among the cement oligarchs recently published unaudited Q1-2021 results with annualised earnings per share of N2.27.
According to analysts, reported earnings per ordinary share came 13.3% stronger than what the cement company reported in the comparable period in 2020.
Chapel Hill Denham equity research analysts believe this comes in a stark disappointment when compared with N3.30 estimated, trailing the Bloomberg consensus of N2.98.
Analysts highlight that the combination of strong revenue growth at 12.2% and the continued deceleration in finance charges, as the key drivers of the EPS growth.
“In our view, an update on the debottlenecking of Ashaka as well as Ewokoro will likely be key areas of interest during investors’ and analysts’ conference call”.
What Analysts Like About Result
In its review, Chapel Hill Denham stated that Lafarge Africa needs to be consistent for its share price to fully reflect fundamentals.
“We like that Lafarge delivered on revenue growth and moderation in finance charges, albeit cost pressure appears to put a spanner in the works, a development that now appears to be a recurring event, especially in the first quarter of each year.”, Chapel Hill Denham noted.
It added that for the sake of clarity, as with Q1-2020, the company achieved revenue growth of 12.2% year on year but cost of goods sold raced higher at 13.7%.
By pattern, there is indication that cost of goods sold has remained stubbornly high, outpacing revenue growth even in the period under review.
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Analysts’ equity note reads that while management did not provide a breakdown, Chapel Hill Denham guides that revenue growth was driven by a favourable volume-price mix.
“While management has said, during its last conference call, that the higher prices, especially in 2020, were attributable to regional mix factors rather than an actual price increase, our channel checks suggest that Q1-2021 ex-factory prices were, indeed, ahead of Q1-2021 levels”, the firm stated.
It said, “We imagine that the significant cost pressure, occasioned by Naira devaluation must have induced management to raise prices in the period.
“Meanwhile, we believe that the volume growth was aided by the gradual resumption of construction activities, following the COVID-19 outbreak last year.
“Beyond that, relative to last year, public finance is stronger, due to higher oil inflows. This must have contributed to higher cement demand due to higher capital expenditure implementation”, analysts at Chapel Hill Denham explained.
Analysts said they had expected Lafarge to continue to benefit from its de-leveraged balance sheet, with finance charges declining by another 18.2%. That, together with a robust revenue growth, supported the 13.3% year on year profit after tax growth in Q1-21.
According to the company’s financial statement, net operating cash flow was boosted by over six-fold, driven by a stronger working capital management, which in turn, underpinned a stronger cash generation as cash balance is now 44% higher year to date.
It was noted that costs remain a key pressure to the company’s earnings profile. As noted earlier, cost of goods sold expanded 13.7% ahead of revenue growth of 12.2% year on year.
“We noted that production cost and variable cost grew by 14.7% and 14.9% on a per ton basis, both of which reflected the double whammy impact of the environment of stubbornly higher inflationary pressure, coupled with Naira devaluation”.
The negative pass-through from the foregoing is a 96 basis points deterioration in gross margin as analysts said management will likely consider implementing a faster price increase to, at the best, protect margin.
Lafarge Rated Buy after Exciting Earnings Outturn in Q1-2021

