CSL Sees 67% Upside in Lafarge Africa, Recommends Stock
Lafarge Africa Plc attracted buy recommendations from equities analysts at CSL Stockbrokers Limited amidst the expectation that the cement company revenue would spike on volume growth in the second half of 2023. In the first half, the cement company’s price adjustment drove revenue higher but volume slumped.
In its equity report, CSL asked investors to buy WAPCO with an estimated 67% upside potential on its N45.96 target price against the reference price of N27.20 on Friday.
The company share price increased to N27.4 in the stock market on Monday amidst analysts’ expected demand surge in the second half of 2023. In the first half of 2023, cement industry aggregate demand declined following a moderate increase reported in Q4 2022.
“We see room for growth in demand in the second half of the year, as indications from the new government suggest an increase in capital expenditure in H2 2023. The new minister of works recently stated that all ongoing work on federal roads would be completed within the shortest possible time”.
However, the investment firm said it still believes the market is yet to price in Lafarge Africa’s improved operating performance fully. In its recently released H1 2023 results, Lafarge Africa’s revenue grew by 5.9% to N197.6 billion in H1 2023 from N186.5 billion in the comparable period in 2021.
The performance was supported by broad-based growth in cement sales and aggregate and concrete sales contributed to the marginal increase in topline growth in H1 2023, despite a decrease in sales of other products.
Its unaudited report showed that cement sales jumped by 10% to N102.4 billion as a result of price increment to the extent that was allowed by rising inflation conditions. Revenue from concrete sales increased 23.2% to N3.3 billion in the same period. On the downside, sales of the company’s other products slowed down by 51.9% to N85.4 billion.
Though sales revenue increased, the company experienced a drop in production volumes, according to the equity report. In terms of pricing, Lafarge implemented a price adjustment in Q1 2023, following the modifications made at the tail end of Q4 -2022.
Analysts revealed that the average cement price in Lafarge Africa was N74,770 in H1 2023, a 15.3% increase from the N64,827 reported in H1 2022. The cement company’s operating profit grew by 7.7% year on year to N52.2bn from N48.54 billion in H1 2022
“We note that the increase in price is necessary to protect profit margins as production volumes continue to decline. Production volumes closed in H1 2023 at 2.59 million MT from the 2.82MT in H1 2022, indicating an 8.1% decrease”, CSL Stockbrokers said.
Production volume decline in the period was attributed to the cash crunch crisis in the first quarter and the general election amidst a challenging macroeconomic environment.
CSL Stockbrokers said price will continue to reflect macro-economic happenings which point to higher prices, especially since it is in a seller’s market and margin protection is a key concern. On account of a projected price increment of 15.0% year on year and a sales volume of 5.00 million MT in 2023, analysts estimated Lafarge sales revenue to hit N397.43 billion.
However, the report suggests that Lafarge Africa Plc managed its cost profile efficiently in the first half despite the impact of FX devaluation on imported raw materials including rising energy costs.
CSL Stockbrokers reviewed that the company’s operating expenses (adjusted for depreciation) increased by 90.1% year on year to N51.5 billion in H1 2023 from N27.09 billion in H1 2022.
Lafarge recorded a 281.6% increase in net finance income to N3.02 billion in the first half. Analysts said the significant increase reflects a 24.4% year-on-year decline in finance cost while the company recorded a significant growth in finance income.
The growth in Finance Income was driven by a significant increase in interest income from short-term fixed deposits and current accounts. Pre-tax profit was up by 18% to N55.3 billion in H1 2023.
Due to the expiration of the tax holiday on the company’s profit from the Mafamosing line 2 plant in Calabar. Analysts also spotted that tax expenses increased to N19.83 billion from N9.46 billion in H1 2022. Its unaudited results showed that Lafarge’s net income declined by 5.2% year on year to N35.47 billion in H1 2023 from N37.41 billion in H1 2022.
“We note that the impact of the unification of the FX markets did not hit the company as badly as it hit its peers because the company’s balance sheet is deleveraged with significantly lower FX-denominated liabilities compared to its competitors, as the company prioritizes locally made materials.
“The management stated that they had been valuing their FX liabilities (as it is sourced from the parallel market) at a blended rate of N751/US$1 in H1 2023. Naira Steadies as Banks Issue Update on FX Purchase
“This helped the company manage the fluctuation better when the FX rates were floated in June. Looking ahead, we expect the company’s Net Finance Cost will remain at low levels for the rest of the year as its loans and liabilities are under control”, CSL Stockbrokers report reads. #CSL Sees 67% Upside in Lafarge Africa, Recommends Stock
