Lafarge Africa: Attractive Opportunity, Analysts Say in Fresh Valuation
Rated buy, analysts at CardinalStone Securities have upgraded Lafarge Africa Plc.’s (Ticker: WAPCO) valuation, say the cement company is still an attractive opportunity after a strong earnings performance in the second quarter of 2021.
In its equity report, Meristem Securities projected the company’s revenue for the financial year 2021 to print at N259.88 billion, as against N251.65 billion in the financial year 2020.
In the equity research report, CardinalStone Securities projected to see the company’s return on equity of 12.3% in the financial year 2021, a strong growth expectation when compared with 8.8% growth delivered in 2020, higher than the 3-year average of 3.1%.
According to analysts, the improved key performance metrics strengthen buy rating on the company stock with a 12-month target price of N29.03 a share.
CardinalStone said WAPCO is trading on the financial year 2021 enterprise value as a proportion of the company’s earnings before interest, tax, depreciation and amortisation of 3.6x, consider to be significantly cheaper than its five-year mean of 8.0x and domestic peer average of 14.3x.
Meanwhile, on the downside to the estimation, analysts said higher-than-normal rainfalls remain the most significant risk to the expectations. Adding that, further naira devaluation and FX liquidity crunch could also push production costs beyond forecasts.
Analysts highlighted that like other cement manufacturers, Lafarge Africa Plc benefitted from the upbeat domestic demand for cement, defying concerns over the country’s weak economic growth and consumer discretionary income.
According to WAPCO and insights from market research, private consumption (homebuilders and real estate) accounts for about 70% of cement consumption.
The support, according to analysts and the projected ramp-up of government capital expenditure, which recorded about 32% implementation as of May 2021, is likely to drive WAPCO’s volume 10.0% higher year on year in 2021.
Despite the positive feel on the company’s performance and demand outlook, Lafarge continues to grapple with multiple pressures including rising costs profile and naira devaluation including insecurities plus a possibility of inestimable effects of covid-19 delta variant spreads.
Specifically, analysts spotted rising production, noting that this remains a worry despite price increases. In the first half of the year, WAPCO’s operating margin dipped by 80 basis points year on year to 26.4%. This was driven by rising cost pressures which offset the impact of about a 9.0% year on year increase in cement prices.
The company’s financial statement shows that cost of goods sold expanded 23% year on year, which analysts noted to reflect a devaluation-induced rise in gas prices, an increase in electricity tariff in September 2020, and an overall inflationary pass through.
In addition to these ‘drags’, analysts see the implementation of the previously postponed routine plant maintenance and higher freight cost adding pressure which also weighed on the cost of goods sold in the period.
“Despite the cost realities, we expect the financial year 2021 operating margin to be 1.2 percentage points higher year on year at 22.0%. This view is premised on the high base effect stoked by the heavy expenditure on energy costs in H2’20 as well as improved cement prices in the current year.
“Our positive outlook on core operating performance as well as projected temperance in interest expense should cascade to N45.8 billion profit after tax, up 48.3% year on year and return on equity of 12.3%”, CardinalStone Projected.
The equity report noted however that the estimate is WAPCO’s first double-digit return on equity in six years.
Explaining the company’s fundamentals, analysts said WAPCO is seeing significant traction on the cash front, noting that management has steadily improved the strength of its balance sheet over the last few years, evinced by the turnaround in its cash position after the divestiture from Lafarge South Africa Holdings in 2019.
CardinalStone analysts said between December 2018 and June 2021, the firm has moved from a negative cash balance of N23.8 billion to a positive cash balance of N56.6 billion. The turnaround was underpinned by strong cash flow from operations over the period.
“The improvement in key metrics further buttresses our positive assessment of WAPCO’s cash management…the support from operating cash flows, H-2021 cash balance was driven by the N4.1 billion inflow from the divestment from the operationally inefficient Ghanaian subsidiary”.
The divestment was concluded on June 30, 2021, with WAPCO receiving $8.2 million from the transaction after adjusting for other settlements.
Overall, the company’s net cash position now looks the strongest in over 18 years, signalling a possible increase in 2021 dividend payment, CardinalStone stated. However, analysts noted some near term cash pressures such as higher capital expenditure and debt repayments.
Specifically, the equity report said capital expenditure is likely to gain traction over the next 18-24 months due to ongoing debottlenecking projects in Ewekoro and Ashaka.
Lafarge Africa also plans to repay N16.2 billion over the next twelve months, the move which analysts see as another downside risk to the company’s cash position.
The investment firm added that the other end of the spectrum, WAPCO’s house clearing (ex-LSAH) has eased its interest expense burden. Gross debt has declined by 93.5% to N19.7 billion in the first half of 2021 from N19.8 billion in 2018.
The cleaner books have consequently improved its Interest coverage, which shot up from 1.3x in 2018 to 14.4x in the first half. Nonetheless, WAPCO’s interest coverage is still way behind the domestic peer average of 25.2x, according to CardinalStone.
Noting that the company’s focus on the Nigerian market has proven to be profitable, Meristem Securities analysts also rated the WAPCO buy on the expectation of higher revenue per tonne that prompt a revision in earnings before interest tax, depreciation and amortisation forecast for 2021 to N83.44 billion.
Meristem Securities said this presents an upside potential of 32.28% from its N22 per share closing price on the reference day.
“Barring any significant economic setback from the emergence of the delta strain of COVID-19, we maintain our positive outlook for the company’s sales in 2021.
“We expect cement demand to remain strong in Nigeria given the scope for infrastructure investments that exist, and the opportunity presented by concrete-based roads.
“However, volumes this year could be limited by an already stretched operational capacity pending the completion of the Ashaka plant revamp.
“The Ashaka plant debottlenecking should unlock 2MTPA capacity. We also expect higher ex-factory price -projection of N45,000 per tonne for 2020 – to drive topline growth”, Meristem added.
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Lafarge Africa: Attractive Opportunity, Analysts Say in Fresh Valuation
