Lafarge WAPCO: Investment Firm Sets 12-month Price Target at ₦26
Chapel Hill Denham, a strongly rated investment firm, has handed a rather bullish recommendation on Lafarge WAPCO stocks as it advises investors to buy. Analysts at the investment set a 12-month forecast share price target for Lafarge Plc at ₦26 while equity analysts at the firm maintain a buy rating on the stock.
This is more than 116% upside potential as the company’s stock traded at ₦12 on Tuesday on the floor of the Nigerian Stock Exchange. Lafarge Africa Plc published its unaudited first half 2020 results last weekend.
Chapel Hill Denham estimated WAPCO annualised EPS rose by 61.0% in H1-20 with the 46.4% and 68.6% moderation in administrative expenses and finance costs as the backbones.
Analysts stated that the EPS, however, trails the firm’s forecast of ₦1.92 for the financial year 2020.
“We see the performance as resilient, considering that 5.1% decline in revenue as not sharp, despite Covid-19”, Chapel Hill Denham analysts noted. Stating the positive side to the company’s first-half performance, Chapel Hill Denham stated that the cement giant’s cost of sales was down by 13.8% year on year.
On a quarter on quarter, there was a 28.9% decline.
This reflects the impact of the 9.1% decline in variable costs, particularly 7.8% drop in fuel & power that occurred on favourable energy mix and 51.2% decline raw materials on lower production volumes.
And probably, according to analysts note the utilisation of raw materials that had earlier been charged in Q1-20.
“We noted the 9.6% year to date inventory increase in Q1-20”, analysts noted. The 41.5% year on year contraction in operating expenses in Q2-20 was a positive surprise, analysts at Chapel Hill Denham noted.
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The firm stated that this was mainly driven by the 46.4% year on year decline in administrative expenses, there was 29.5% decline on quarter on quarter basis.
Office and general expenses dropped 85.4% year on year to ₦0.54 billion in Q2-20 as against ₦3.72 billion in Q2-19 as the specific line of cost savings, partially reflecting the impact of telecommuting.
Selling and distribution expenses were also down by 15.2% as distribution across the country was limited by lockdowns.
These factors explain the 29.7% year on year and +81.8% quarter on quarter increase in operating profit to ₦21.17 billion in Q2-20.
Thus, Lafarge settled the period with an operating margin of 37.2% as against 27.3% in Q2-19 and 18.3% in Q1-20. Chapel Hill Denham said the positive impact of balance sheet restructuring continued in Q2-20 with finance costs falling by as much as 68.6% year on year.
When compared with the first quarter of 2020, finance costs dropped by 21.4%, a result of debt repayment of ₦89.48 billion in 2019 from the proceeds of a rights issue.
Accordingly, the gross debt stood at ₦54.95 billion as at Q2-20 having declined by 75.8% year on year and 14.4% year to date with net debt at ₦15.07 billion which translates to 59.4% decline year to date on stronger cash flows.
As guided by management during the Q1-20 analyst call, inventories were down by 2.2% year to date as the impact of Covid-19 on the business became evident in mid-April.
“Our earlier concern about the level of capital expenditure (CAPEX) in a soft macro environment was also addressed in Q2-20.
“Capex declined by 20.7% quarter on quarter to ₦2.29 billion in Q2-20 in what is considered as critical CAPEX”, Chapel Hill Denham stated in its equity report.
Notably, analysts said the CAPEX intensity declined to 4.3% in H1-20 compare to 6.7% in H1-19 and Chapel Hill Denham’s forecast of 6.7%.
Meanwhile, analysts expressed concern on some sides of the WAPCO scorecard.
“Revenue decline is a concern, but we highlight that it is not specific to Lafarge as the entire economy reels during this pandemic”, analysts explained.
Notably, Chapel Hill Denham said Dangote Cement sales volumes in Nigeria were down by 15.6% quarter on quarter in Q2-20 with revenue growth of 1.2% in H1-20.
By analysts’ estimate, Lafarge’s sales volumes were down by about 3.5% year on year in Q2-20, leading to 5.1% year on year and a 10.8% quarter on quarter revenue fall in Q2-20.
However, a relatively stronger Q1-20 revenue resulted in a 2.3% year on year increase in revenue in H1-20 tracking behind analysts forecast of 3.5% year on year.
“We stress that stable cement prices, post the 2.3% increase towards the end of 2019, have been supportive of revenue so far in 2020. Volume recovery post the rainy season should also underpin revenue growth in the second half of 2020”, Chapel Hill Denham stated.
Lafarge WAPCO: Investment Firm Sets 12-month Price Target at ₦26
