Lafarge

Balance sheet repair: Meristem advises investors to buy Lafarge WAPCO stock

Lafarge WAPCO restructuring efforts cleaning up its balance sheet and operational issues started yielding results before the coronavirus pandemic hits the global economy.

This externalities, an uncertainty that the management never factored into its strategic plan has turned initial gains by in about 360 degree.

Meristem Securities Limited however advised its customers and investment communities to buy the stock following an estimated upside potential of 35.18%.

“After adjusting for its net debt of ₦37.08 billion, we arrived at a 2020 target price of ₦14.87, which represents an upside potential of 35.18%.

“Therefore, we rate the counter a BUY”, the firm stated.

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At ₦10.70, Lafarge WAPCO market capitalisation closed at ₦172.353 billion on 16,107,795,496 shares outstanding.

Recall that in 2019, Lafarge Africa Plc reported a revenue decline of 2.21%, from ₦217.81 billion in 2018 to ₦213 billion.

This directly resulted from the dip in earnings across its business segments.

Particularly, revenue from the cement segment, along with the aggregate and concrete segment, slipped by 1.55% and 21.17% respectively.

Analysts explained that topline performance for the year was impeded by the slowdown in economic activity caused by the presidential election delays.

This also include the late budget passage, along with other macroeconomic headwinds such as rising inflation and a downbeat real estate sector.

“We expect revenue growth to remain subdued in 2020 as the coronavirus outbreak and the resulting lockdown dampens economic outlook”, analysts stated.

Thus, Meristem stated that it expects revenue in 2020 to settle at ₦190.70 billion which represents a 10.47% decline.

Lower Interest Burden Buoys Bottom-line

In the review, analysts explained that while the decline in revenue and a 4.21% increase in direct costs resulted in a slimmer gross margin.

In the period, gross margin dropped off to 26.27% from 30.81% in 2018.

Analysts said decision to streamline operations through the sale of the South African subsidiary has brought improved operational efficiency..

This was reflected in the wider earnings before interest, tax, depreciation and amortisation (EBITDA) margin of 30.55% reported in 2019, compared to the restated margin of 26.25% posted in 2018.

Then, finance costs dropped sharply by 51.46%; a direct benefit of reduced debt obligations following the settlement of related party loans.

Lafarge was able to record a profit for the first time in three years.

Pre-tax profit settled at ₦17.89 billion compare to ₦1.50 billion loss in 2018.

The company’s profit for the year was supported by a ₦99.59 billion profit from discontinued operations at ₦115.10 billion.

In 2018, Lafarge declared ₦8.80 billion loss. Driven by its former margin-dilutive subsidiary in South Africa.

The outlook for the company’s performance is dampened by the outbreak of the Corona Virus and the potential impact of further Naira devaluation on business costs.

Nonetheless, Meristem said it expects bottom-line in 2020 to remain afloat.

This was premised on its reduced interest burden, an existing pioneer status on the Mfamosing line II and its substantial holdings of unutilised tax loss provisions -₦23.58 billion.

Balance Sheet Health Improves Following Restructuring

Analysts said: “We are encouraged by the company’s improved balance sheet position post-divestment of the South African subsidiary.

“Prior to the restructuring, the company was heavily geared, at 2.24 times as against 0.35 times, with short term debt accounting for 42.87% of total debt stock”.

However, after the divestment and the successful balance sheet restructuring via a series of rights issue in 2018, the company’s total debt stock dropped significantly.

The audited financial statement shows that debt stock dropped 78.72% to ₦64.21 billion compare to ₦301.73 billion in 2018.

Short term debt now accounts for 17.98% of total debt. Then, net debt to EBITDA ratio also improved to 0.57 times as against 5.06 times in 2018.

“We recognize that the company has shown improvements in its cash generation ability observed in its shorter cash conversion cycle of about 89 days compared to about 149 days in 2018.

“We also see that much of the company’s drive for value creation is now derived from an improved net margin of 54.04% as against negative position of 4.04% in 2018.

This also come with a slightly higher asset turnover of 0.43 times as against 0.40 times in 2018, while its reduced leverage profile has significantly lowered its risks

Recommendation

Analysts said although early indicators are positive, the company still has some way to go towards delivering value to shareholders.

Meristem explained that the company’s return on equity (ex-discontinued operations) of 4.50% still lags its estimated cost of equity at 11.37%.

Also, its cause is not helped by the expected impact of COVID-19 on the business environment in the near term.

“Thus, in deriving our value estimates for 2020, we projected an EBITDA of ₦61.33 billion and applied a target Enterprise Value/EBITDA multiple of 4.51 times”, analysts stated.

Balance sheet repair: Meristem advises investors to buy Lafarge WAPCO stock

 

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