Lafarge Africa Share Price Jumps on Improved Earnings Performance

Lafarge Africa Share Price Jumps on Improved Earnings Performance

Lafarge Africa Plc revved up its 9-months earnings performance on account of its balance restructuring efforts, the company’s unaudited 9M-2020 results.

On improve earnings results, the company stock jumped to N18 per share from N17.90 on what analysts called better than expected profitability.

The cement company’s profit after tax grew 37.1% from ₦20.573 billion in 9-month 2019 to ₦28.196 billion a year after.

Its unaudited results showed that revenue bounced back from COVID-19 induced declines in Q2-20, notching higher by 31.4% year on year in Q3-20 relative to Q3-19.

Its Q3 results showed a turnover of ₦59.337 billion as against ₦45.172 billion in the Q2 of the financial year 2020.

Based on the third quarter performance scorecard, it is observed that cost of sales moved past increased revenue in the period.

Specifically, cost of sales rose 36.5% to ₦45.553 billion in Q3 as against ₦33.361 billion in Q2 of the same year.

More than 82% growth recorded in finance income helped salvaging the company’s earnings scorecard in the period.

In Q3-2020, finance income rose from ₦189 million to ₦344 billion.

Then, supporting the earnings, finance expenses tail off 4.2% quarter on quarter to ₦3.112 billion from ₦3.249 billion.

Lafarge Africa’s annualised earnings per share expanded by 37.1% in 9M-20, mostly stemming from a volume-led expansion in revenue , up +10.3% year on year and a significant 54.5% decline in finance charges, both of which dovetail with our expectation, Chapel Hill Denham said.

However, at ₦2.33, analysts explained that the reported EPS still marginally trail financial year 2020 forecast of ₦2.47, on an annualised basis.

In its equity note, Chapel Hill Denham explained that while it does not downplay the impact of the recent favourable pricing environment, the firm believes the revenue growth was driven by sharper volume growth, going by attribution analysis.

Commenting on the feat, analysts said stronger economic recovery and robust private sector demand must have aided cement consumption in Q3, a move which Lafarge benefitted from, in our view.

Sequentially, revenue grew by 4.4% year on year amid the traditional rainfall season in July-Sept, which has historically weighed on sales.

“For evidence, our channel checks suggest that cement demand has recovered from the COVID-19 downturn in Q2-2020”, analysts stated.

Chapel Hill Denham said: “As we had expected, Lafarge continues to benefit from what now appears to be a deleveraged balance sheet”.

Notably, as with the previous quarter, gross borrowings declined further by 18.1% year on year, paving the way for 54.5% and 4.2% fall in finance charges in 9M-20 and Q3-20 respectively.

Analysts however stated that the positive pass-through impact of that is a 2.8% year on year growth in profit after tax in Q3-2020.

The analysis of the result showed that Lafarge net operating cash flow was stronger in Q3-2020, growing more than two-fold year on year to ₦28.72 billion.

“This, in our view, was a fall out of better working capital management”, analysts at Chapel Hill Denham stated.

Precisely, the group reported ₦2.09 billion and ₦3.10 billion decline in inventory and trade receivables, both of which underpinned cash generation during the period.

Elsewhere, in its renewed strategy of preserving cash, especially in the face of the COVID-19 pandemic, we like the moderation in Lafarge’s capital expenditure intensity to 1.9% in Q3-20, from 12.8% in Q3-19.

On a 9M-20 basis, the company’s capital intensity is now trailing the prior year, with 9M-20 CAPEX intensity reported at 3.5%, from 8.5% in 9M-19.

Expressing its concern over the result, Chapel Hill Denham said although Q3-2020, earnings before interest tax, depreciation and amortisation (EBITDA) narrowly grew by 0.9%.

This was related to margin declined significantly at 8.3 percentage points, as 36.5% increase in cost of goods sold ran ahead of 31.4% growth in revenue.

On cost of goods sold, the pressure emanated from 61.2% increase in variable cost and 66.4% uptick in production cost, both of which offset 26.4% decline in maintenance cost.

“While management had downplayed the impact of naira depreciation on input cost during our last engagement, we believe the cost of goods sold growth is reflective of FX losses, induced by movement in energy prices”, Chapel Hill Denham said.

Meanwhile, analysts said they retain BUY rating on Lafarge with a 12-month target price of ₦31.11.

Of particular note is about 55% reduction in the company’s finance expenses, which is as a result of improved financing mix.

The company’s capital structure shows that borrowing declined 18.1% from ₦65.268 billion in the 9-month 2019 result to ₦53.441 billion a year after.

It also appears that the company was able to convert current assets items into cash, as both inventories and receivables declined year on year.

The movement reflected positively on the company’s cash flow.

Lafarge Africa’s adjusted free cash flow rose 42.8% from ₦39.77 billion in 9M-2019 to ₦56.796 billion a year after.

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Lafarge Africa Share Price Jumps on Improved Earnings Performance