GCR Upgrades Lafarge Africa Rating to AA+ With Stable Outlook
GCR Ratings has upgraded Lafarge Africa Plc’s national scale long-term issuer rating to AA+ (NG) from AA (NG) previously, according to a recently released rating note. The rating firm also affirmed the short-term issuer rating at A1+ (NG) with a stable outlook.
According to GCR, The Stable Outlook mirrors the agency’s expectation that Lafarge Africa would maintain a strong leverage and liquidity position over the next 18 months. It expects this expectation to be supported by the huge cash holding and the scale back of capital spending.
“We also expect that the group will maintain a defensive market position by increasing focus on its core market”, the rating note said.
It said Lafarge Africa Plc’s rating upgrade reflects its very strong cash flows, which has resulted in consistently strong leverage metrics and a large net cash position.
However, this is tempered by increasing competitive pressures, which has led to a slight decline in the group’s market share, the rating agency noted.
According to the rating note, Lafarge Africa’s business profile is supported by its substantial installed production capacity, extensive customer base and wide distribution footprint across Nigeria.
The company is also investing in optimising operating efficiencies through the use of alternative energy and the debottlenecking of its plant operations, it noted.
However, the assessment is somewhat hampered by the recent decline in market share as measured by production capacity and revenue.
Although Lafarge Africa strategic focus remains optimising capacity utilisation over the medium term, the increasingly stiff competition could constrain future pricing flexibility and erode the group’s customer base.
Despite competitive pressures, GCR said the company’s revenue rose to a new high of NGN373.2 billion or USD881.8 million in 2022 from N293.1 billion or USD734.3 million in 2021.
Analysts said the growth was primarily driven by price increases to offset input cost inflation, but volumes were constrained by gas shortages and weaker demand due to flooding and a slow pre-election economy.
Further volume compression was reported in H1 2023 as construction activities slowed and disposable income declined ahead of the general elections.
“We have therefore capped the 2023 revenue growth forecast at 7% as against 5.9% reported in the first half of 2023, as the planned volume growth and price adjustments could be constrained by increasingly tight competition”.
The rating note showed that GCR forecasted a top-line growth of 10% in 2024 driven majorly by the ongoing capacity enhancement initiatives.
The rating agency stated that conversely, the company’s earnings before interest tax depreciation and amortisation (EBITDA) margin rebounded to 33% in H1 2023, slightly above the long-term average of around 31% after declining by 3.8% in 2022.
The recent improvement followed energy and logistics cost savings in line with the transition of some of its facilities to gas power, reducing its reliance on expensive and volatile diesel, GCR Rating said.
Analysts noted that the company’s costs were also contained by the internalization of more aspects of the packaging.
“We forecast that the margin will remain constrained at the 30%-33% range, below the peer average of 45%, over the next two years as imported inflation and market sensitivities could prevent a full pass-through of cost escalations to the customers, offsetting some of the aforementioned cost savings”.
According to the rating note, the group has maintained a net ungeared balance sheet since 2020, on the back of substantial cash accumulation, given the robust free cash flow and curtailed capital spending which has reduced the need for additional debt funding.
Consequently, operating cash flow (OCF) coverage of gross debt has been consistently reported above 250% and EBITDA coverage of net interest above 100x.
GCR Ratings expects Lafarge Africa to pay its debt totalled N38.7 billion in June 2023 to be paid down from the existing cash in 2023.
In addition, analysts’ project sustained strong free cash flow, despite the projected working absorptions and higher tax charges, following the expiration of tax incentives related to the pioneer status.
The rating note said the agency projected Lafarge Africa’s interest payment to become increasingly negligible or nil as debt reduces relative to cash holding with an expectation that the leverage and cash flow metrics would remain strong in 2023 and 2024.
The liquidity assessment is positive to the ratings underpinned by the sizable cash holding of N177.6 billion as of 30 June 2023 and expectations of continued strong operating cash flows, GCR Rating said in the update.
Analysts expressed a view that the company’s cash is sufficient to settle a maturing debt of N37.4 billion in H2 2023 and moderate capital spending and shareholders distributions. Overall the liquidity sources versus uses coverage is estimated at 1.9x over the 18-month period to 31 December 2023. Naira Devaluation Deepens Economic Crisis in Nigeria