Analysts See Lafarge Africa Outperforming Cement Oligarch Rivals in Stock Market
Equity analysts at Cordros Capital Limited hinted that they remained overweight on Lafarge Africa Plc (Ticker: WAPCO) after earnings beat in the financial year 2021.
The overweight rating indicates an attractiveness that propelled equity analysts’ decision to bet large on the stock with the hope WAPCO will outperform rivals in the cement oligarch family on the Nigerian Exchange.
At the weekend, investors on the Nigerian bourse valued WAPCO for N384.170 billion on 16.107 billion shares outstanding. In 2021, the cement company delivered impressive earnings with 65.4% profit growth on a healthy balance sheet driven by a better leverage position.
Analysts at Cordros Capital assigned a N35.72 price target to the company stock, translating to a potential upside of more than 51% against reference market price, from N34.44.
Having recorded pre-tax losses in the 2016-2018 financial years, Lafarge Africa sustained profitability for the third consecutive year, reporting a post-tax profit of N51 billion, Codros analysts said.
The company’s earnings performance was underpinned by topline growth and moderation in finance cost, analysts added while projecting a better result for the financial year 2022.
“In 2022, we expect continued growth in earnings, supported by favourable price/volume mix and low finance cost given its low leverage position”, analysts said in the equity report On leverage position, it was noted that Lafarge Africa’s debt to equity ratio was minimal at 0.06x as of 2021
However, analysts are expecting softer volume growth this year due to slower expansion in private sector demand, given the significant hike in cement prices over the past two years amidst weak public sector demand.
“That said, we expect continued moderation in finance cost to remain supportive of earnings, as Management guided that the company does not intend to raise debt capital over the short term but rather fund investments using the cash generated from operations”.
Codros Capital analysts said they find Lafarge attractive at current levels, as the stock trades at a forward price-earnings ratio of 6.8x, a discount to a four-year average of 17.4x.
Amidst uncertainties in the macroeconomic condition, analysts have however projected that the cement company’s revenue will grow slower in the financial year 2022.
Detail from its financial statement shows that revenue expanded by 27.1% in 2021, on the back of 26.1% improvements in the sales of cement which accounted for a 97.3% share of total revenue.
Also, sales of aggregate and concrete inched up 61.5%, the segment accounted for 2.6% of Lafarge Africa revenue in the year, the company’s financials show.
In the equity report, Cordros Capital analysts said the double-digit growth in cement sales was price-driven, given the higher increase in price per tonne of 18.8% year on year compared to volumes.
The company’s volume expanded 6.1% to 5.5MMT, according to analysts. The investment firm analysts believe demand from builders of individual homes supported volume expansion given the rebound in activities in the real estate sector, rising by 2.3% in 2021 compared with a contraction of 9.2% in 2020.
Given elevated inflationary pressures and rising energy prices, analysts indicate they are expecting another round of price increment in 2022. “We do not think Management will be able to implement the magnitude of price hike seen in 2021 due to increased price sensitivity at the retail segment.
“As such, we expect slower topline growth in 2022, more so that the anticipated upward adjustment of lending rates of banks may further constrain activities in the real estate sector in the second half of 2022”.
Cordros Capital estimates Lafarge Africa’s sales volume to grow by 4.0% to 5.7MMT in the financial year 2022 with an expectation of a 3% increase in price per tonne, translating to 7% growth to N313.47 billion in 2022.
In 2022, analysts see energy costs exerting pressure on the company’s margin. In 2021, Lafarge Africa’s gross margin declined marginally by 15 basis points to 58.9% in 2021 due to a 27.6% increase in the cost of sales ex-depreciation compared to 27.1% revenue growth.
Analysts said the rise in the cost of sales was due to the pass-through impact of the local currency’s devaluation on energy cost, essential materials such as gypsum, and spare parts associated with maintaining plants.
“We expect margins to come under pressure given the surge in energy prices and expectation of a moderate increase in price per tonne at 3.0% in 2022 compare against 18.8% in 2021”. Analysts are projecting the company earnings before interest tax depreciation and amortisation to grow by 4.9% in 2022, but forecast EBITDA margin will moderate by 60 basis points to 32.7% in the year.
However, noting the quality of the company’s capital structure, analysts believe that a low leverage position will remain supportive of earnings in the year.
The 65.7% pretax profit growth in 2021 was also supported by a 45.7% deceleration in finance costs. Analysts said this is a reflection of the company’s deleveraged balance sheet.
Notably, gross debt declined by 53.2% to N23.28 billion, following the redemption of its N34.08 billion bond and repayment of N2.00 billion loan from the Bank of Industry (BOI).
Lafarge Africa told analysts conference that it has no plans to tap into debt financing in the short term. Thus, Cordros Capital said it expects no material increase in leverage, projected that interest expense will decline by 26.7% year on year.
BUA Cement which traded at N70.75 was valued at N2.396 trillion on 33.864 billion outstanding shares. Dangote Cement was valued at N4.666 trillion on 17 billion shares outstanding.
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