Lafarge Africa’s Huge Cash, Low Debt to Influence Dividend Payout

Lafarge Africa’s Huge Cash, Low Debt to Influence Dividend Payout

After Lafarge Africa’s (NGSE:WAPCO) strategic re-organisation, the company has developed a stronger influence in the cement market amidst increasing rivalry in the segment. With improvement in cash position and a low debt seen in the first half, some equity analysts believe this could influence dividend payout in 2021.

Lafarge WAPCO had paid its shareholders N1 per share in 2020 despite being one of the top pandemic winners due to higher spending on capital expenditure by the Nigerian government.

As part of efforts to reposition the brand, its margin dilutive subsidiary was sold and the cash was reinvested following a hefty balance sheet deleveraging. Before paying off its high ticker debts, the cement company had expended huge among on finance costs due to squeezed cash position. Now, Lafarge Africa is cash-rich with the potential to deliver optimal returns, according to analysts.

The re-organisation has helped the company re-invent itself with a studier capital investment outlay to drive future earnings growth. A better cash position has also pulled back the size of its finance costs, according to the recent earnings release.

Most equity analysts see now see upside potential with a bucket of buy ratings as projection shows that the company could see earnings jump and expectation for increased dividend has however resurfaced.

Is Lafarge Africa going to pay a higher dividend in financial 2021? That could be subjected to further debate. However, it is clear that the company’s shareholders deserve a better dividend payout treat.

Some investment banking analysts have started to feed the bull.  A number of equity analysts have lifted estimates on the future earnings performance on Lafarge Africa after successful re-organisation that unfold its earnings capability and potential among Nigeria’s cement oligarchs.

Wielding strategic influence on the corporate direction, two major shareholders, Caricement BV (56.04%) and Associated International Cement Limited U.K (27.77%) own 83.81% of Lafarge Africa shares outstanding as of the first half of the financial year 2021.

As of the first half of the financial year 2021, WAPCO’s maintains a 16.19% free float in compliance with the Nigerian Exchange’s requirements for companies listed on the Premium Board.

Valued at N376.117 billion on 16.107 billion shares outstanding, the company share price closed at N23.35 on Friday from N28 at the beginning of the week following the strong rally seen in the market.

WAPCO has been developing additional capacity as demand for cement continues to rise due to heavy capital spending by Federal Government and housing developers in what appears to be trending among the competing brands in the space.

There is an upside to the share price when compare market price with equity analysts’ expectations.  WAPCO is heavily on buy recommendations with different price expectations.

Vetiva Capital sets N33.01 target price for the company’s stock with a buy rating. Meristem, ARM Securities, Atlass Portfolios among others also keep the stock in their buying order lists.

In an equity report, Cowry Asset Securities said Lafarge Africa appears to be set for strong performance in 2021 after it had gone through different business combinations and re-organisations in the past few years.

Recall the cement company disposed of its Lafarge South Africa Holdings Limited business and issued additional capital to significantly reduce its borrowings – a move that birthed stronger and higher quality balance sheet and increased profitability, according to analysts.

Speaking to the numbers, the company’s profit after tax increased by 21.40% to N28.32 billion in the first half of 2021 amid higher revenue and significant declines in finance costs.

Analysts think Lafarge Africa’s impressive performance was due to the relative ease in lockdown, amid sustained improvement in COVID-19 vaccination, especially in major states such as Lagos, Ogun, Abuja and Kano where daily consumption of cement is relatively high.

Hence, the company’s revenue increased considerably by 20.30% to N145.01 billion in H1-2021, albeit gross profit margin fell to 33.13% from 34.60% printed a year ago amid rising input costs.

Due to steep inflation rate reading, by-products and electrical energy expenses expanded in the first half of the year.

Further break down of the revenue components showed that the company’s segment revenue from cement which constituting 97.52% of the total income rose by 19.26% to N141.43 billion.

Also, segment revenue from aggregate and ready-mix concrete that comprises 2.48% of the total revenue ballooned by 83.49% to N3.59 billion in H1-2021.

Analysts at Cowry Asset expect WAPCO’s increased profitability to be sustained, amid increasing demand for housing infrastructure, commercial constructions and government projects which include roads and railways.

The investment firm also noted that the cost lines should boost margins, especially the declining net finance costs. “We recommended a moderate buy on WAPCO’s shares despite the “D” performance rating”

WAPCO Expanding Capacity

With cement production plants in Ewekoro and Sagamu in the South West (4.5MMT production capacity), Mfamosing in the South-South (5MMT production capacity) and Ashaka (1MMT production capacity) in the North East of Nigeria, totalling 10.5MMT, WAPCO is well positioned across the country to further increase its revenue, Cowry Asset noted in the report.

It said Lafarge Readymix Nigeria Limited, with an installed annual capacity of over 400,000 cubic meters, is one of the subsidiaries of the group and a market leader in quality concrete solutions operates in three strategic regions of the country.

Analysts said Ready Mix operations provides Mobile Plant Services which can be set up within a short lead time to support projects in remote and logistically challenging sites, anywhere in Nigeria

“Lafarge Africa’s balance sheet looks tidier and well positioned to deliver optimal returns to its shareholders”, Cowry Asset said.

WAPCO’s borrowing significantly reduced to N19.75 billion as of H1-2021 from N54.95 billion and N275.26 billion printed as at H1-2020 and H1 2019 respectively, using the proceeds from the sale of its foreign subsidiary (US$317 million).

Hence, the group’s total liability effectively fell to N139.86 billion from a high of N143.66 billion, even as its net debt position changed to net cash of N38.09 billion as at H1-2021, from net debt of N15.07 billion as of H1 2020 amid significant improvement in cash position, especially cash from operations.

Analysts said the net cash position accounted for the lower finance costs, which stood at N2.66 billion in H1-2021 from N4.43 billion in H1-2020. “We expect the company to further widen its margin amid lower interest rate environment and low debt level”, Cowry Asset said.

Interestingly, the investment said out of the total assets worth N511.72 billion, shareholder value accounted for 72.67% (N371.85 billion) while other stakeholders’ claims on the total asset were only 27.33% (N139.86 billion) – hence, passing through a chunk of the operating profit to the equity holders as the company operates on low leverage.

Consequently, shareholders value per share rose to N23.09 as at H1-2021 from N21.86 and N8.65 respectively recorded as at H1-2020 and H1 2019 respectively.

Given WAPCO’s huge cash position worth N57.84 billion and the low debt level, analysts at Cowry Asset expects Lafarge Africa to reward its shareholders by increasing dividend payout from the N1.00 it paid for 2020.

Launches a New Product Line

Recently, the company launched a new product line, Supafix Tile Adhesive in order to drive earnings amidst rising competition in the industry. Lafarge Supafix is a cementitious tile adhesive made of cement aggregates, as well as organic and inorganic additives that are specifically designed for tiling.

“With the new product line, the company would further boost its market penetration and increase its revenue going forward”.

Lafarge Africa Plc was incorporated in Nigeria on 26 February 1959 and commenced business on 10 January 1961. The Company, formerly known as Lafarge Cement WAPCO Nigeria Plc, changed its name after a special resolution was passed by the shareholders at an Annual General Meeting held on Wednesday 9 July 2014.

The change of name became effective with the acquisition of shares in Lafarge South Africa Holdings (Proprietary) Limited (LSAH), which were disposed of in 2019, United Cement Company of Nigeria Limited (UNICEM), AshakaCem Ltd (AshakaCem) and Atlas Cement Company Limited (Atlas).

Lafarge Africa is in the business of manufacturing and marketing of cement and other cementitious products such as Ready-Mix Concrete, Aggregates, Fly-Ash etc. On July 15, 2016, Lafarge S.A. France and Holcim Limited, Switzerland, two large global players, merged to form LafargeHolcim Group, based in Zurich, Switzerland.

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Consequently, Lafarge Africa is now a subsidiary company of LafargeHolcim – now Holcim Group, by virtue of a name change resolution passed by the shareholders at an Annual General Meeting held on 4 May 2021.